Aviva Investors will increase dialogue on engagement topics such as capital expenditure in 2020 to facilitate greater change at companies.
Its focus areas in engagement will be the traditional oil and gas sector; the Task Force on Climate-related Financial Disclosures, a reporting framework; and banks.
The news comes as Lloyds Bank pledged on 20 January to cut its carbon finance by more than 50% over the next decade.
Mirza Baig, global head of governance at Aviva Investors, told a press briefing about the rising importance of banks as part of the investor’s engagement activities.
Engagement with banks
“Banks will be the next key target,” Baig said, adding that Barclays “will be the big shareholder proposal for the 2020 annual general meeting season”.
It is understood that Barclays is the first European bank to face a climate change-focussed shareholder resolution, which was filed recently.
The proposal, coordinated by NGO ShareAction and backed by shareholders, is calling on the bank to phase out financing fossil fuel companies.
“It certainly is going to create a debate about the role of banks and the financing of the climate transition,” Baig said.
To increase its impact on companies, Aviva Investors will strengthen its engagement approach from 2020 and let its equity team drive the engagement with companies.
“Investments in innovation, portfolio construction, capex changes, this is really the purview of chief executive officers,” Baig explained.
The equity team represents the “most normal” channel and dialogue for chief executive officers and chief financial officers.
“So, rather than the equity team supporting the environmental, social and governance (ESG) team on climate, we are going to flip it, and it will be the equity team that is driving climate engagement, with chief executive officers and the ESG team supporting that process,” he continued.
Cost of capital
Peter Fitzgerald, chief investment officer, multi-asset and macro and portfolio manager, at Aviva Investors, said that investors need to look beyond big oil companies such as Shell and BP to understand the effect of the energy transition on companies.
He explained that, for two years, the additional risks of energy companies to default has to be factored into the analysis.
The cost of capital “would be higher in the future relative to where it was in the past”, Fitzgerald said.
He warned that the energy sector represents a significant proportion of US high yield bonds and that some of the US smaller energy companies were especially at risk of default.
Aviva Investor’s chief investment officer, equities and head of UK equities, David Cumming believes strongly in engagement over divestment.
He commented that engagement on the corporate side to facilitate change will be key.
“You can’t just wait for the government. Waiting for the government to get the carbon pricing right, to deal with carbon emissions, might be too late.
“Our customers, our clients, our reputation, depends on being seen to be active,” he added.