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Henderson was a canary in the coalmine, Aviva is an explosion in the SRI business…

If asset managers are cutting SRI funds teams, will they really back ESG integration if the price signals aren’t strong?

The pending redundancies from Aviva Investor’s Sustainable and Responsible Investments (SRI) team are a serious blow; more even than the Henderson team cut in November last year, which already caused concern. Together they represent a worrying trend to cut back on specialist SRI funds teams amid concerns that SRI is not bringing in assets and making money. As we reported yesterday Link , Aviva has confirmed that 11 of its 16-person SRI team are being laid off from full-time posts under its plans for a Global Responsible Investment Team, which it said would “refocus” its ESG activities on integration, its commitments to the UN Principles for Responsible Investment and the UK Stewardship Code.
The worry is not just for those who lose jobs at Aviva, but what it means for SRI more broadly; decisions taken at fund managers are studied and mirrored by business heads at rivals, especially where commercial rationale is tested. That doesn’t augur well for the teams at other UK asset managers – and maybe even overseas – with dedicated SRI funds businesses. Furthermore, as an asset management house, Aviva, more than Henderson, was seen as a leader in the RI space, and from the top-down. Its UK Chief Executive, Paul Abberley sits on the advisory council of the United Nations Principles for Responsible Investment (UNPRI). That makes the latest announcement an uncomfortable one for Aviva and the PRI; shouldn’t signatories – especially vocal ones – be investing in their RI capabilities rather than cutting them?
In a letter to clients, Abberley said he will work to ensure ESG is integrated across all of Aviva’s portfolios by analysts and fund managers. He added: “I will expect them to be able to demonstrate engagement with these issues and will be rewarding them accordingly.”
It will be interesting to see what that internal reward for backing integration entails.Aviva’s screened funds, existing ESG integration and high-level support for RI mean it has significant influence on industry promotion, political influence (one area Aviva has said it is cutting is responses to regulatory green papers) and the business chain for sell-side research providers and ESG research houses, although the latter may profit in the short term as research and in-house projects are outsourced. One question is whether ESG integration over time is likely to command more and better external research than actual SRI portfolio management? I fear not. One major broker told RI that they had been shocked by the news: “Aviva’s commitment to responsible investment has been a major market driver for ESG integration.” Another RI professional said: “The industry had better watch where the pieces fall and then work out what can be salvaged.”
Aviva said the rationale behind the decision was to trim an un-commercial, resource-intensive business. Its chief executive, Alain Dromer – who has himself backed ESG initiatives calling on listed companies to adhere to common governance and corporate responsibility standards – told Financial News: “This is a big question for the asset management industry. We at Aviva have had a seriously important team in this field, and it is fair to say that investors want us to maintain principles of sustainability in our investments – but we don’t see the business coming in. He added: “These are themes that do not particularly generate any revenues. Funds under management in our SRI funds have been stagnant.” Put simply: asset owner clients are not putting enough assets or price signals into RI and Aviva as a business ‘agent’ is not going to underwrite the cost of leading from the front. That reality check hurts, but needs context. Funds houses are being hit by outflows from equity strategies and the reorganization at Aviva looks like costing a total

of 160 jobs (around 12% of its total global workforce) as it rationalises active European, Emerging Markets and global equities desks and shifts business focus to indexing, quantitative management, fixed income and property. It puts the SRI job losses in perspective, although in relative terms the impact on Aviva’s SRI team is immense. It’s also worth noting that the business being cut is predominantly UK retail SRI focused, not Aviva’s broader institutional commitment to ESG integration. It is ironic that at a time when ‘responsible capitalism’ is on the UK political agenda, domestic SRI teams are being cut. You would have thought there would not be a better time to market sustainably/ethically-oriented funds in the High Street? The reality, I suspect, is that the SRI funds arm in large asset managers often falls between stools. They receive little marketing budget, both because of sales levels and their sustainability tag, which suggests that other (better selling) funds within the group are, by default, less sustainable (which they mostly are). The net recent result has been flat or negative client receipts, making them a logical victim of a recessionary downturn within fund managers looking to trim costs. Alternative readings are either that investors are just not interested in sustainability, or perhaps that the funds are not SRI enough so that consumers want to support them? Should the RI world be concerned? I think it should. You could argue that this is little more than the consolidation of traditional niche SRI fund providers; the changing of a business model. It may even represent a tricky step toward the holy grail of ‘mainstreaming’ of RI that we so often covet amongst RI supporters, albeit without defining what it means in principle and in a commercial sense. Certainly, asset managers standing squarely behind responsible investment such as Generation, Sarasin and Robeco, appear to be maintaining or winning assets and performing in difficult markets, according to asset owners I talk to. And the fact that big global asset managers such as PIMCO and Blackrock are signing the PRI is a very good sign, even if driven primarily by client demand out of Europe. To some extent, the US giants may even be less encumbered by not having a legacy, dedicated SRI funds business. I’ve been impressed by the thought that appears to be going into their integration planning, although actions, of course, speak louder than words. And that is where my concerns lie.Asset owner clients that back responsible investment need to be much clearer about what they want to see from their fund managers and consider how that can be actively pushed in the ‘food chain’ (research, stock selection) of investment management. Just stipulating a requirement for PRI membership is insufficient because it is too easy at the moment to sign up and meet all the PRI ‘commitments’, which have little substance to back up their aspiration. The most important mechanism of RI influence via the UNPRI also needs to either get much tougher or more openly incentivised. I see two ways of doing this: either slack signatories are shamed (by being ejected) or good responsible fund managers and best practice is championed publicly. In an interview late last year with RI Link , Abberley himself acknowledged the dilemma, albeit half-heartedly. He said: “The PRI reporting process is, I think, starting to demonstrate what managers are actually doing, but yes, it could be that we need some form of benchmarking eventually.” He added: “Part of the success of the PRI has been that it has been quite circumspect, but you also have to recognise that there is a certain amount of evangelising with something like the PRI because you are taking a position on finance and it would be helpful making that more explicit.”
He was right on both accounts. The PRI is working to tighten this up, but it needs to go faster and with more purpose: after six years, and as it approaches the 1000 signatory mark, it must consolidate the ‘broad church’ approach that has worked well so far and ‘get religion’ by outlining what it really stands for. If not it seriously risks losing the goodwill of supporters. The job losses at Aviva point to what might happen if it doesn’t. Asset managers are financially motivated agents (although as corporates they should be under more pressure themselves to be responsible). Consequently they need to monetise what they do. They will backslide on commitments to responsible investment or ESG integration if it becomes a costly utility without tangible benefits rather than a clearly motivated, financial discipline to avoid ethical and reputation risks while identifying and supporting better performing companies and market structures that are sustainable over the long-term.