How to talk to policymakers about sustainability

This is an audio transcript of the Responsible Investor podcast. This transcript is generated by AI and may contain errors.

Lucy Fitzgeorge-Parker: Hello, and welcome to the Responsible Investor podcast. My name is Lucy Fitzgeorge-Parker. I’m the editor-in-chief at Responsible Investor, and I’m your host for this episode in which I’ll be discussing policy engagement with Steve Waygood. Until the end of last year, Steve was chief sustainable finance officer at Aviva Investors, where he had led the UK asset manager’s responsible investment business for nearly 20 years.

He left to set up his own think tank, the Finance Transition Centre, and is also a visiting professor of sustainable finance at the University of Surrey. Steve, welcome to the podcast. It’s great to have you with us.

Steve Waygood: Thank you very much, Lucy. It’s great to be here.

Lucy Fitzgeorge-Parker: Before we start, a quick reminder for our listeners. To find out more about the topics covered in this podcast and much more, visit our website responsible-investor.com. We produce award-winning news and analysis on all aspects of sustainable investment, from regulation and standards to stewardship, data, and disclosure, as well as covering key themes, including climate mitigation and adaptation, transition finance, nature, and human and labour rights.

You can also find details of our global events, as well as webinars and roundtables. So Steve, one of the biggest topics of debate in responsible investment at the moment is the question of how to manage systemic risks, particularly climate change, nature loss, and increasingly, AI. There seems to be an emerging consensus on several points.

Firstly, that addressing these systemic risks can be considered a fiduciary responsibility for long-term investors. Second, that this isn’t something the finance sector can do on its own, that it has to be led by policy. And as a corollary to that, that addressing these risks requires policy engagement by investors.

And finally, that the people best placed to drive this are asset owners, as they have a clearer mandate and fewer conflicts of interest than asset managers. So we seem to have a general agreement that policy engagement is something investors should be doing, and that it’s the asset owner’s job to either do it themselves or mandate their managers to do it on their behalf.

But this in itself raises a whole raft of other questions. What exactly is policy engagement? Is it responding to consultations? Is it lobbying policymakers publicly or behind the scenes? Is it best done individually or collectively? And perhaps most important, who exactly should do it, and do they have the knowledge and skills to do it effectively?

Now, I’m not sure many people really feel they have the answers to these questions yet. But if anyone does, then Steve, I feel it should be you. You were at Aviva Investors for 20 years, and in that time, the firm became widely recognised as a pioneer in sustainable investment and in policy engagement in particular.

So I’m hoping you can give us some insights today into what effective policy engagement looks like, who should do it, and perhaps also, maybe most importantly, who can and should pay for it. So maybe a good place to start would be back at Aviva Investors. How did policy engagement work there? Where did you start, and what were your aims and objectives?

Steve Waygood: Lucy, wow, that was a really good list of questions, and I’m very much looking forward to getting stuck into them all. I think before I touch on the Aviva Investors side of things, I should just say, as you mentioned in the introduction, I used to work there, so I’m no longer an official spokesperson for them.

But I’m very, very happy to share my own lessons. And from that perspective, I completely agree with the way you framed this conversation. Yes, it’s very definitely policy engagement, part of a sensible fiduciary response, almost a defence, actually, to potential future litigation on non-execs and execs.

So we can talk about that more in due course if you wish. I also agree that it isn’t the job of investors to correct these kinds of existential market failures alone. Definitely government, it’s their role to correct them. They have their hands on the levers for change, not investors. But as you said, it’s also possible, and I think necessary, for investors to engage with the government, with the policymakers, with the politicians to support fiduciary-aligned changes to economic growth so that it is sustainable and that therefore it continues to be delivered on an ongoing basis because the kinds of market failures that you listed, and I’d add antimicrobial resistance, actually, but certainly AI and without question, climate change, the very big one.

There can be no question that the current structure of markets is not supporting their long-term growth, and therefore, it is the role of governments to change that. The one area I perhaps disagree a bit is that it’s only for asset owners to do the engagement. They definitely should be involved, and they should govern and oversee and steward and sanction and reward this area.

But I think it needs to be embedded in an investment process, and quite often, actually, the owner is, appointed external managers to do the investment analysis, to do the voting, to do the engagement. And to my mind, policy engagement needs to be embedded in that in a very holistic way, too. So we can certainly cover more in due course, but, happy to share lessons, and perhaps we could talk about how one aligns internally around this kind of process, and how we use it at Aviva. I’d be happy to share that.

Lucy Fitzgeorge-Parker: Well, several things I want to pick up on there. Obviously, there’s just so much to discuss around this. Let’s go first to the question of how things work at Aviva because this is still very much held up as an example of an asset manager that did do successful policy engagement.

And I think there are not very many asset managers. In fact, when I ask people for an examples of asset managers who’ve been good at this, it’s usually only the one name, which is Aviva. So I’m really interested to hear from you on how that worked and how it came to be the case that Aviva acquired that name for effective policy engagement.

Steve Waygood: Thank you, Lucy. So, few internal lessons and then a few external ones. On the internal side, as I was saying, it absolutely has to be grounded in the investment process. Alongside, if not by those that are doing the valuation and the modelling work, and pricing, if you like, whether the issue is material.

And if it’s an important issue and it isn’t material over investment time horizons, then it is a market failure, and governments need to change that fact to make it material for, particularly if it’s an existential market failure, to reward long-term growth. So it needs to be grounded in a quantified analysis, obviously with a quantitative overlay. But it, the view, the investment view, and how one then prices the market failure and internalises the externality in the economic jargon or makes the polluter pay in normal human language, that really, really matters. So ground it in the investment process, one.

Two, have it alongside a holistic approach to engagement across sectors, across a value chain, embedded in an investment policy which also uses the voting asset at AGMs to kind of encourage better practice. And sometimes that practice will be companies disclosing what they need from government so that the economic incentives reward rather than penalise the transition. There can be any number of examples of companies that have been penalised for trying to be net zero. And that’s not their fault. That’s now the fault of the system, and that government is in charge of that.

Third, once you have a debate within government about how they will correct the market failure, it’s crucial that you have the information flowing back to the fund managers and the analysts, if it’s not even them doing the engagement. But they then need to take a view on how to reposition portfolios on an ongoing basis such that when the market is corrected, it’s an information advantage that lets them price the security better and secure alpha. In this way, rather than it being divestment that’s based on morals and ethics, important though that might be, it’s actually grounded in an investment approach and a market-based ongoing transition that rewards this kind of activity, rewards these investment insights.

And all of that needs to be really well-governed, and that’ll be the fourth point from an internal perspective. It needs to be transparent to the owners, accountable to them, aligned with their fiduciary duties. And I recall David Atkin’s article recently in RI, where he makes a very similar point about the importance of this not being seen as some kind of crusade, but being embedded in an investment process and well governed by those whose money it is. Which kind of is the point you made earlier in the framing around the importance of asset owners here.

Externally, we need to understand that civil servants themselves tend to have very little visibility on how financial markets are structured, what the practices are, who does what. And so having a conversation with us, I always felt the civil servants were testing their ideas about what would work and trying to build coalitions, perhaps, of support in the market for their ideas. It wasn’t just us going to them, it was quite often the other way around, and we would then help them understand how the market would react and therefore perhaps how to make sure that it was a restructuring that was effective and did change the cash flows so that then the valuation would change and the capital would be allocated differently. It’s a much more sophisticated conversation than perhaps most people realise.

And then the final point I’d say from the external operating environment, what’s called the Overton window, or also known as the window of discourse, that changes all the time. And of course, in different environments, the national, multilateral, international environments, different conversations can be had at different times with different arguments and in different ways.

And being alive to how the, if you like, norms shift. It can sometimes literally change with the weather, how the norms shift in this kind of world and what kind of opportunity exists because of perhaps some kind of catastrophe or a new report or the changing person at the head of the government could have their own personal sensibilities, their own interests, which you then need to reframe. So there’s a huge amount within that, I know, but all of that is essentially very, very similar to corporate engagement but writ large, so that the techniques are similar but you need policy understanding and advice too.

Lucy Fitzgeorge-Parker: Okay, great. So again, yeah, loads and loads of questions. First of all, maybe a simple one to say that’s the theory. Could you give us an example of the practice of anything, sort of anything you were particularly proud of that you achieved while you were at Aviva?

Steve Waygood: With pleasure. I will try and constrain myself to a few, but we helped create the EU High-Level Expert Group for Sustainable Finance, then I served on it. The same can be said of the Task Force on Climate-related Financial Disclosures. I was very, very proud to be part of that. But perhaps the thing I’m proudest of, because it was originated by us, and then alongside the Index Initiative, a gentleman called Gerbrand Haverkamp, was the way we created the World Benchmarking Alliance, which was called for by our chief executive in 2015 at the UN General Assembly, and his speech called for five things to happen, all of which we were then able to play a part in driving forwards.

And one of those five things was the World Benchmarking Alliance. And Aviva, at the time, made a multimillion-pound donation to the WBA to get that up and running, and a decade later, it’s still running. And I think creating a brand-new institution that does big work from scratch, it was difficult, but it was hugely rewarding.

And being in the UN when the SDGs were signed, and the hall just erupted in applause, and having your chief exec follow the Pope in an intervention, that was just an incredible experience, and I absolutely loved it. I could go on and on and on, but that hopefully answers your question and brings the theory alive in practice.

Lucy Fitzgeorge-Parker: Well, and it also gives me a nice setup for another question I really wanted to ask, which was about who within organisations can effectively do policy engagement, and obviously, it depends what sort of policy engagement we’re talking about. But one thing, if it is talking to policymakers, trying to persuade them to change course, and we can get back into the question of exactly, you know, how you pick your battles in that sense.

But one thing that several people have said to me within the industry and outside the industry is it’s all very well having sustainability people going to talk to policymakers, but to be honest, generally, policymakers won’t listen unless it’s the finance people in the room, so the CFO, the CIO, or the CEO.

And obviously in the example you were giving there, that was something that was clearly, you know, you were working on, but was also backed by the CEO, and the CEO was very involved in. Is it fair that if people just send the responsible investment team, then it’s not going to carry the weight that it would if you actually send the CEO or someone from the finance side?

Steve Waygood: So I could be a little bit blunt here and just say I think that even when they say that to you, to my mind it’s such a trivial point to make that it suggests they’re not really thinking about what they’re doing and haven’t been doing it themselves at all very much. Because that’s the accusation that’s been made at micro engagement for a long time. You know, are you sending the right people in to talk to the chief executive of the company you own?

In this case, it depends on who you’re talking to in government. If you’re talking to a head of state, a secretary of state, the Pope, you obviously want the very top people in your organisation speaking to them. So having the chief exec support it, the chairman, the non-execs perhaps from time to time have also participated in debates, I’m well aware of that. That will be absolutely appropriate when you’re talking to the most senior people.

However, you would expect those individuals to be incredibly closely supported by the experts, well briefed, the meeting itself set up so that the sequence of questions is coming in, in the right kind of order and that people aren’t left embarrassed not being able to answer questions. And so that then requires a level of background work in the rooms before that meeting with the individuals that are briefing those heads of state, and that requires a different kind of individual to be part of it. So we’ve had portfolio managers, analysts, mainstream, or sustainability in the right room at the right time. And so it’s horses for courses. A much more sophisticated approach I think than just one or the other. It’s all of them.

Lucy Fitzgeorge-Parker: I suppose what people are getting at with that question partly is there is a feeling, and clearly not at some institutions, but there’s a feeling that perhaps at some institutions, the sustainability people are put up to talk to a sustainability line, but that it isn’t really aligned with the rest of the firm.

And I suppose that’s kind of what people are getting at with that, is that sometimes there is that feeling that you need to be sure that the sustainability or responsible investment teams do actually have the full backing of the senior management and alignment across the firm.

Steve Waygood: Yeah. So if, of course, the individuals who are raising this concern are worried that their sustainability analysts might be acting in an ungoverned, unaccountable, unapproved way, and if that’s the case, they’ve got a much bigger problem than just fielding the wrong person at the wrong time. They need to look at their internal governance processes and policy and practice. That goes without saying.

But yes, you’re absolutely right. The individual at the receiving end, particularly if they’re a senior government minister, they want to know that this is supported by the chief executive. And should there be a public change that the minister endorses, they want to know that the chief exec will be publicly supportive of it, not critical. And that is a really important fact to know before you go into that meeting because, as you suggest, I’ve had that question levelled at me many times. And you just need to have a very good answer and be 100 percent certain you’re right.

Lucy Fitzgeorge-Parker: Okay, great. Going back to the things that you were doing at Aviva. Give us some great examples of things that you were proud of, some great achievements. Is there anything that you would do differently if you were starting again today?

Steve Waygood: Wow. Okay. So I gave you an internal and an external view earlier, and I think internally it’s embedded within their approach. I’m not party to the details now, but still excellent people who I loved working with, still there delivering. So I don’t think I’d change anything internally. I learnt a great deal, and I hope others did too.

Externally, the ecosystem supporting this work isn’t yet there. It reminds me of 2000 to 2005 period, where we didn’t have asset owners calling on the managers to deliver micro-stewardship voting engagement in an effective or efficient way. And that then obviously gave birth to things like the PRI, which then in turn got the investment consultants really analysing that stewardship area. And I feel like we’re in that phase here with macro-stewardship.

There are a few investment consultants, Lane Clark & Peacock would be one, Mercer’s another. I think LCP has been doing more. They form a detailed view on what’s been done and what good practice looks like. But there is absolutely no question that there is a classic economic free-rider problem in this space, and the system is weaker, the finance system is weaker because the majority are free riding off the good work of the minority.

And that classic market failure itself would be supported by government changing stewardship codes, fiduciary guidance, the FCA updating their rules for market integrity guidance. They started to with the DP23/1 a few years ago, where they were talking about the duties around of asset managers, not owners, asset managers to help the regulators maintain the structural integrity of markets and sustainability, no question can collapse that. So yeah, that debate didn’t really fall on fertile ground because of the political shift subsequently.

But that kind of change, promoting this kind of systemic response and promoting therefore not just accountability, but sanction and reward for doing this well, is exactly the kind of reason why I decided to set up the Finance Transition Centre, because it’s only when the market fundamentals are aligned with sustainability that capital will flow in the right direction at the levels of roughly $10 trillion per annum that it is said that we need.

We need a vision of what transition governance looks like and how you transition the finance system itself so that it supports those corporates with transition capital, with transition finance. And I think it’s not just asset owners and managers that have a role there, but credit rating agencies, stock exchanges, investment banks, the entire ecosystem of the supply chain, if you like, of capital to companies, and companies themselves.

So the paradigm that we seek to change with the Finance Transition Centre is the paradigm that this is all about investor-company dialogue. It’s definitely part of the conversation, but it much more importantly now requires governments to take action and investors to support long-term sustainable action that promotes structural integrity of markets and keeps them stable so that markets continue to work. It’s that big now.

Lucy Fitzgeorge-Parker: I think that’s quite a nice lead into the question about who should do this in terms of the institutions rather than the individuals within the institutions. And so obviously, the reason why people are saying that maybe this is more on the asset owners is because for the asset managers, they are finding in a more polarised environment that they are being pulled in different directions.

They have clients with differing priorities and differing requirements. And I mean, I did speak to one asset manager who I have to say was not really at the top level of, you know, in terms of sustainability and has since mainly dropped their sustainability team and commitments. And I asked them, “How do you manage when you have, you know, some clients who really want you to be talking to companies about climate and some companies who really want the opposite?” And they just said blithely, “Oh, well, we go in one day wearing one hat, and then we go in another day wearing another hat. It’s fine.” Which obviously, I mean, you can see the weakness of that approach.

It is clearly an issue for asset managers. It’s not as simple as it was when it looked like everything was going in one direction and when the policy trajectory was supporting all of this. If it’s not just for asset owners, how can asset managers do this in a way that will both be effective and not expose them to some of the pushback that we’ve seen on both sides of the Atlantic, to be fair?

Steve Waygood: You’re alluding to a really, really important point, which I’m very happy to kind of call out, which is over the last three decades that I’ve worked in this area, the different culture in the United States administration, the different nature of who’s been leading it, has really affected what can be done by the managers, by the owners, by the market.

And the current administration is the most extreme version of a pendulum that has swung many times. I think it was Bill Clinton who was in power when I first started in the mid-’90s, and we had W. Bush, and Obama, and then we had Trump one, and then Biden, and then Trump two. And each time, perhaps the best bellwether of whether the times within the markets were changing was the guidance on ERISA, the US employee retirement and savings scheme guidance, the fiduciary guidance. And under one president, it would be required that you had to integrate ESG and engage on ESG. Under another, it would be not required and perhaps precluded under the current administration.

So the changing political times do change what can be done at the corporate level, and there can be no question that under the current administration, the scale of change that we need to see globally within the entire international financial architecture will require the US administration to back it.

So when I’m doing our strategic planning within the Finance Transition Centre, I’m thinking it’s just over 800 days now to the next US election. You know, what can we imagine doing with the, what could be a really important 100 days for the transition team in a few years from now that could see the pendulum swing back, and what, how do we prepare for that moment so that the reaction to the destruction that we see with these international institutions is to, to use a very hackneyed phrase, build back much, much better than that which is being destabilised and destroyed?

How do we build back an approach to multilateralism, to world peace and stability and financial stability that’s actually functional, which is in the interests of asset owners, asset managers, and helps protect the structure integrity of markets? Because at the moment, let’s call it out, the current approach of the US administration is going against all the science.

And the research that we’ve seen recently, stuff coming out of Chatham House, stuff coming out of… I saw Adam Smith International relatively recently publish a study commissioned by dozens in the UK and the Foreign Office, FCDO. And they were very clear that the economic response by the global central banks to climate change is nowhere near enough to actually govern a stable long-term growth trajectory.

And I remember there was a line in the report that talked about the estimates that they could find of the GDP hits range from 2 percent to more than 50 percent from implied temperature rise figures of three degrees or more. So, you know, having worked in the markets a long time, I’ve seen massive improvements, really, really progressive change, but not in the last couple of years.

And we are definitely headed away from a trajectory that looks likely to govern this issue in a way that will then protect the market integrity going forward. So I try not to get too lost in the noise of the social media machine and what it is that comes up every morning on my screen. Because the noise clouds the signal of where we need to be heading, and what we need to be doing is pretty much one over Trump two.

Lucy Fitzgeorge-Parker: The idea of where we might be going in 800 days is super interesting. But I guess even if the environment improves, there is still the question that if it comes to policy engagement, now asset managers will have different constituencies among their clients, unless they’re particularly specialist asset managers.

So larger asset managers in particular. How do they manage that tension? Or how can they manage that tension when it is a case of policy engagement?

Steve Waygood: A really, really important point. I firmly believe that we have an ecosystem two, three decades in the creation of, of institutions that can still play a really, really important role. The Carbon Disclosure Project, I remember when that was created, or CDP as it now is. And I was there at the first meeting in 2001. They play a really important role still. The PRI, the ecosystem of stewardship, they definitely… And David Atkin, again, I mentioned him earlier. His article as the outgoing CEO of PRI is very, very clear, and their strategy is very clear about the importance of policy engagement.

All of the GFANZ and affiliated organisations, all of the members in the organisations, in each of the commitments they have signed say that we sign this commitment subject to an assumption that governments will actually change policy. So whilst I understand that the corporates are now thinking twice before being very public in speeches at, for example, COP31 about this kind of stuff, and I can understand that.

The trade associations that were created for moments like this, the SIFs, the PRIs, the individual sectoral trade bodies, they need to be speaking clearly and loudly about the long-term vision of what we could do to kind of correct this. And highlight actually the incredible short-termism in the analyses that suggest that actually it’s a better thing to drill, baby, drill. It really isn’t for the long-term growth of markets. That’s exactly the opposite of what we need to be doing over the decades ahead of us.

So I could play along, but I think the trade associations exist for this reason, for this moment, and then they need the support of the managers and the owners and the members privately behind the scenes in the important rooms when those meetings are coming together. And they need to defend themselves too by making sure that they’re always acting within the accepted practices of how managers and analysts need to collaborate when you come together to engage on these topics. So I can see how we need those organisations now more than ever before.

Lucy Fitzgeorge-Parker: Okay. Really interesting. Well, a couple of questions from that, and one is I’ve always wondered whether, you know, policy engagement is one of those irregular verbs. You know, I do policy engagement, you lobby, they exercise undue influence. What exactly is the difference between policy engagement and lobbying? I mean, is there a difference?

Steve Waygood: I think semantically people can dance on a pinhead here. I mean, the lobbying word comes from just where you stood when you spoke to the ministers. You know, obviously in the Palace of Westminster, you stood in the lobby as they passed you. So it’s an archaic word itself. Things have evolved, and it has a kind of, if you like, a questionable brand. Some people would say, you know, corporate lobbying can be done for their own interests, and of course that’s true.

So where does, if you like, systemic stewardship or macro-stewardship part from lobbying in one individual corporate’s short-term interests? Well, it parts company when it’s accountable to the people whose money it is, when it’s based on a good long-term analysis of where the market failure exists, where it has a recommendation for how you would close that market failure, that’s not just in the interest of that company, that shareholder, that portfolio, but is in the long-term common good too, and that can be demonstrated.

And that ideally, when it’s possible, that that is also disclosed in net zero transition plans. That we would love to see a day, Finance Transition Centre is advocating for a day in which every company in their sustainability report has a section which sets out what government policy do they need to promote the transition, what standards, what regulations, what fiscal measures, tax subsidy, what price does the emission trading scheme need to be trading at for the company to be rewarded for the transition. So that it isn’t just a kind of private lobbying, private, you know, what used to be smoke-filled room, having a chat. But this whole discourse is done much, much more in the public domain.

After all, I reckon there’s about 12,000 person years spent globally. That’s based on some analysis. 12,000 person years spent globally by companies and investors producing their sustainability reports, which let’s be honest, probably 1,000 hours is spent reading them, if that, at best. But we could take that resource and that discourse and use it to equip governments with transition policies that they can implement to sustain regular annual drumbeats of change that drive the economy in the direction it needs to be heading, with a vision of a just transition at the heart of it.

So lobbying privately, you know, publicly or smoke-filled rooms, let’s try and put that behind us. For this to become depoliticised, and for it to move away from this ideology that people are accusing others of having, it needs to be done much more publicly by all, so that a few leaders can’t be picked off and then the rest follow. That, I think, has to be the future of our industry, and it’s going to take a few years to get there, and at least 800 odd days before it’s possible. But to my mind, if you don’t have a view on government policy to correct these existential market failures, then we don’t deserve to use the phrase sustainable and responsible investor in any of your products or at all associated with your brand.

Lucy Fitzgeorge-Parker: But so I guess the question I was also getting at with the question about lobbying is obviously lobbying is something that is in itself a profession and a skill. And it’s a skill that isn’t that widespread within the investment industry. So is this something that, particularly asset owners who tend to be less well-resourced than asset managers, can they do this all in-house?

Can they develop those skills? Is this something they should look to outsource? Obviously, you say you’ve had direct experience of this. How much upskilling is there required to do this effectively?

Steve Waygood: I mentioned earlier how much is similar to corporate engagement. You create your investment case, you build your arguments as well as you can. You look at the key people who can make the decision to make the change. You look at who else is influencing them. You have a kind of persistent… It has to be extremely persistent actually in the case of policy engagement. But you have a concerted strategic approach that’s well-governed and well overseen.

So all of that is essentially the same. And the skills are very similar because particularly if it comes from an investment perspective and it’s grounded in a broader approach to stewardship, it’s the same skills. The bit that’s different, and you’re absolutely right to allude to it, is knowing who to speak to when, how to get to them, where they might be. Those are all professional public policy advocacy skills.

And I was extremely lucky when I was at Aviva Investors to have the support of the Aviva public policy team under a guy called Sam White. He drove huge interaction and very positive change. And I remember seeing Martin Selmayr with him when it was the first week of Martin’s job when he was Juncker’s chief of staff. That was, you know, we had big things. It was great.

I also benefited massively, not just from that team on an ongoing basis, but also I had a few individuals in my team who were also from that background and though more focused on investment and the investment process. And together, of course, they were able to speak to each other and shape who, what, where, when, why, and how we were going to go about making the changes that we thought were necessary.

And yes, so you do need… If you haven’t got it in-house, which I had, it can be bought in. It’s not that expensive. And to be honest, if you can’t do that either, the IIGCCs, the PRIs, the SIFs exist for this reason, really significantly. And working with them to get that advice and even just supporting the work that they’re doing is important.

Not everybody needs to be at the UN General Assembly speaking after the Pope by any means. It can’t be everywhere. What we need is when leaders take a lead, they need supporters and fast followers, otherwise it becomes the bleeding edge, not the leading edge. And we need therefore an ecosystem of collaboration where people work together and have some support in some forums like the G20 and the G7 that we have coming up in the UK next year and the year after. You know, I’d expect coalitions to be forming to form a view on what those institutions could do under the current geopolitical environment. Probably mainly educational, but anyway, how do we move the system forwards?

The coalitions that need to be built do require people to sign up to others and follow. So, you know, I wouldn’t disparage anyone who’s only doing consultation responses and only doing them via, say, IIGCC. I would welcome that as a very gentle toe in the water in this area and, they need to dive in.

Lucy Fitzgeorge-Parker: Well, that’s interesting. I was going to ask that because I guess I’ve been slightly surprised by how much of what I see flagged as policy engagement is consultation responses. And yes, when we’ve looked at some of the consultation responses on particular issues, there haven’t necessarily been that many individual investors who have participated. And when we’ve asked people, they’ve said, “Well, yes, we’re a member of IIGCC,” and they’ve responded.

I mean, the collaboration is good, but you were talking earlier about the free-rider problem. You know, you do also need firms that are prepared to stand up and be counted individually.

Steve Waygood: Absolutely. Look, I completely agree with the point you make. And ideally, I mean, we talked a lot in this conversation about asset owners and asset managers. We often let investment consultants, stock exchange, and crucially investment banks, we let them off the hook, and actually, the entire ecosystem of capital supply needs to be engaging here and in a substantive way, not a kind of token gesture way. This isn’t about virtue signalling. This is about long-term global growth and financial stability and our fiduciary duty.

So definitely, I couldn’t agree with you more that whilst everyone has something they can do, we do still need the many organisations, many more organisations to take a leadership stance, and for that to happen, I think it needs stronger government backing through stewardship codes, and it needs a lot more support from the investment consultants who should be looking to the long-term performance of, after all, many pension schemes that are looking out multiple decades and perhaps in perpetuity clients like sovereign wealth funds and university and superannuation schemes. These clients need a very long-term approach, and this policy advocacy is central to that.

But also credit rating agencies have a role here. So I wouldn’t say it’s just our owners and managers. It’s the entire ecosystem that has a role. Investment banks should be offering a view themselves on where the markets are failing. They, of course, don’t because it’s such a short-term machine right now. But I think just as they’ve been told they have to say where their conflicts lie, they could also be told to support a discourse here and rewarded by the asset owners who can direct their asset managers commission more in this direction too. There are a few investment banks that have been doing really good work here. So that’s all to say, I think the system itself needs to respond to the systemic risk in a way that actually the academic frame doesn’t quite yet, hasn’t caught up with.

Lucy Fitzgeorge-Parker: Well, another point I mentioned at the beginning that we come onto the question of who pays for all this, and this seems like a nice segue there because as you were saying, I mean, asset owners need to reward their asset managers.

Now, they can reward their asset managers by awarding them mandates, but are they actually going to be prepared to pay the fees required for the managers to do this sort of engagement? Because it’s not free, and that’s what I’ve certainly heard a few managers saying is they’re like, “Look, our clients are all saying they want us to do this stuff.” But if we say, “Well, this will cost money,” they say, “Well, you should just be doing it anyway.” Do you see that as an issue?

Steve Waygood: Definitely. I recall principle five of the PRI which says that the asset owner needs to ensure that their managers are held to account in this area and the broader supply chain that they source, the pressure they bring to bear in the market, that each signatory of the PRI is encouraged to bring other signatories on to do this work, too. And that, if you like, was an industry response to an industry-wide problem.

We then were very lucky to have the support of a few governments in producing a stewardship code that set out micro-stewardship as good practice. We need those things to happen here to, as you say, ensure that the incentives are aligned, because this public policy engagement does cost money and, well, it costs time, and therefore money.

It also produces benefits that I think it’s really important to highlight here. If you get better market insights to where policy is likely to be heading over the coming decade, then that is gold dust to a long-term analyst and a long-term fund manager from a portfolio positioning perspective. So it’s not just a cost where society can, if you like, free ride off the benefit. It’s also a private benefit too, to a properly structured process where the managers can use the information to price securities better and generate alpha.

So yeah, I think the investment consultants have a role here, and as soon as they start embedding it routinely in their RFPs, RFIs, DDQs, just as we saw with the PRI, sorry to use so many TLAs. But as soon as we see that evolution, I believe many more managers will stop free riding off the few.

Lucy Fitzgeorge-Parker: But will the asset owners be prepared to pay the additional fees in order to enable the managers to do this?

Steve Waygood: To my mind, there is a question about whether the fees need to be raised at all, or whether it’s perhaps a reallocation of the current overall transaction costs. Because the asset owner forgets that, the typical asset owner, not all of them, forgets that it’s not just the management fee, but it’s also the fees they pay all the way down the chain to the stock exchanges, to the investment consultants, to the investment banks, where their overall performance is lower as a consequence of the transaction costs.

So I’m not sure that the price of fund management goes up to the asset owner. I think that the allocation of resources to how those assets are run could shift, should shift, and that therefore it’s a zero-sum game here. What do they then lose? But my personal view is that there is a lot of research that’s bought in by asset managers that pretends to then be used in an investment process, that pretends to then integrate ESG to generate alpha, which is mainly about pulling the wool over the eyes of the client.

So that they can see, for example, a database that’s available to an asset manager at the point of buy, sell, hold short. But the manager doesn’t really use it for any of those decisions. Now that’s a waste, and I think that should stop. So yeah, I’m being very blunt and direct with you here, Lucy. But I’m speaking from the heart and from direct knowledge of what some of the industry practices can look like. I was hugely lucky to work in such great institutions, but, you know, you speak to friends who work in other places, and the kind of smoke and mirror approach that I’ve just described is fairly common.

Lucy Fitzgeorge-Parker: Well, we do like blunt and direct on the podcast. But okay, so I, and I don’t want to keep our listeners for too long, although I could very happily continue this conversation all day. I guess one thing I was interested to ask about, moving on from the discussion about who’s doing what, is what are the most fruitful areas for policy engagement?

Now, before you say transition finance, because I’m pretty sure that’s going to come on the list. One of the reasons I ask… So there’s a twofold question, in that there’s sort of what are the most fruitful areas in terms of the broader issues? And one of the things I do think is interesting there is the way that climate adaptation has come up the agenda very fast over the past two years.

And it feels like that’s somewhere where, you know, some of those conversations are maybe a little bit easier to have, particularly after the summer that we’ve just had, with policymakers as well as with corporates. This is a relatively new topic. There are clearly financial, you know, hits being taken as a result of climate change. And so maybe that’s something that’s a sort of slightly easier conversation to have sometimes than the mitigation conversation.

But also there’s the broad picture, which broad themes you’re addressing on a day-to-day basis within those broad themes. You know, how do you pick the things where you can actually really have impact? I mean, let alone dividing climate into mitigation adaptation under each of those headings. There are so many different things that you could push for or ask for. How do you decide as an investor, and what do you think are going to be the most fruitful areas for policy engagement over the near term, shall we say?

Steve Waygood: A really brilliant question. I think there are two core halves to the answer. One is, what are the issues of the day that need to be addressed, and therefore what strategic approach you can take to those issues, what you’re recommending governments do? And then the second half is, what are the contemporary forums where those issues are under debate? And one can influence either the existing forum or create a new one like we did, for example, with the EU HLEG, which didn’t exist before we recommended it to Brussels.

So on the issue side, we’ve talked about four broad areas, antimicrobial resistance, AI, biodiversity loss, climate change in the last hour or so. All of those are potentially existential market failures. AI in ways that people are only beginning to understand. AMR has been an issue for a long time, but the profit motive rewards the wrong thing. It rewards the selling of the antibiotic prophylactically to be used by farmers to protect the wellbeing of their livestock even if they’re not ill, and then that reduces their ability to be used, but it’s critical to human need. But there isn’t really a forum for either of those two debates that I can see.

The AI one, I was impressed with what the Vatican produced a few months ago with Magnifica Humanitas. It’s well worth a read. But the two contemporary debates that are the issues that do have contemporary forums, biodiversity loss and as you say, climate change, not just mitigation, but now much more adaptation and both are crucial.

So on biodiversity loss, I think one of the pivots that a lot of managers and owners and institutions have done under the current US administration is to pretend that a lot of the work they do on climate change is actually nature and ecosystems and biodiversity and dress it up in that kind of language, and that’s fine. I think that of course they’re two halves of the same coin. We need the emissions to be sequestered. We need the carbon to be stored and biodiversity and ecosystems, the best way that we can do that and protecting them is critical. So short term, focusing on that within the next 800 days, going back to our earlier discussion, I think is useful.

It’s a little while till we have the next convention on biodiversity, but there is a framework in the previous CBD about what can be done with the international financial architecture. There’s an agenda in that that can be promoted at G20 and G7 next year, the year after. There’s also the Financing for Development Forum, which, the framework that was produced, the US withheld attendance. So actually the agreement that came from what must have been something like 194 countries was actually very good. It was about five pages on the international financial architecture that can be done through the FfD process, another UN forum.

But you said, and I think you’re absolutely right, that it’s about climate. So that brings us to the UN Framework Convention on Climate Change, the contemporary Veredas Dialogue, which came out of COP30 and Brazil’s great leadership. And that concerns me because it’s looking back to Article 2.1(c) of the Paris Agreement, which as you know, says that as well as the 2.1(a) objective of one and a half to two degrees, that 2.1(c) is about aligning all of finance flows with 2.1(a), with one and a half to two degrees.

And there is a live argument about whether the finance flows was just aid, which as you know is about a quarter today, less than it was this time last year, global aid has plummeted. Or whether it was also, as I think it has to be, aligning financial markets. And that very last dialogue really matters, and it’s kind of a bit hard to reach, a little bit opaque. I imagine most of your listeners haven’t heard of it, don’t know who’s part of it, not sure whether their trade associations are doing anything with it, and yet it really, really matters to COPs 31, 32 and 33.

And, yeah, so Turkey. Let’s go to Turkey in a couple of months and make sure that your voice is well heard, just as you did Glasgow. For those of you that were at Glasgow, it was great, but you haven’t been going since. Let’s regroup. And in the UK, the G20 and the G7 under our new Prime Minister, under Andy Burnham, with Ed Miliband now so close to the top with the helm of the Foreign Office, which obviously has the what was DEFRA under it. And with people like Katy Wright now with a senior ministerial position, I think there are big things that could be changed.

And I’d love to see another Stern Review that doesn’t just look at the economic consequences. After all, we’re now 20 years after he published his 2050 study, and it’s still one of the best that’s out there. Why don’t we update it with a 2100 study that looks at whether markets could plausibly collapse at three degrees? And I believe it’s plausible, and I know a lot of other people think it could happen, and I don’t know many central banks that are actually working out anywhere near on that timeframe. They’re looking at 2050.

So that’s what I alluded to earlier when I said the G20 and the G7 could be educational opportunities. We’re not going to get communiques that are going to address the scale of market crisis that the climate change will cause, that could potentially collapse the structural integrity of markets. That’s not going to happen because the US will of course veto anything substantive. But the conversations by the G19 at the G20 could certainly get big things happening. And having the UK lead that behind the scenes under the communique conversation, I have high hopes that that will happen. And you have to have hope, and that’s what ultimately is the fuel that motivates what we do because you can’t allow this all to feel so overwhelming that we give up. Because if we do that, then nothing will change. So I have high hope.

Lucy Fitzgeorge-Parker: Well, I think that’s a wonderful note to end on. I think that’s a wonderful call to arms and a call to Antalya, I guess. We will probably be there, and certainly it would be really good to see a really good financial sector turn out again, as you say, as there was in Glasgow.

Okay, Steve, well, so we’ve covered a lot there, some really great stuff. So just may I say, thank you very much indeed for joining me today.

Steve Waygood: Lucy, it’s been an absolute pleasure, and thank you for welcoming the areas where I was blunt, as well as those where I was very open about the experience. It’s been a huge pleasure. Thank you.

Lucy Fitzgeorge-Parker: Well, as I say, that’s it for today. Thank you all for listening. Don’t forget to check out our daily news and analysis at responsible-investor.com. And if you like this podcast, consider subscribing and rating us on your podcast platform of choice. Thanks and goodbye for now.