RI interview: Paul Abberley, CEO, Aviva Investors: PRI should take more public policy positions

Challenge for fund managers is to show full ESG commitment, says Aviva Chief.

Paul Abberley, Chief Executive Officer of Aviva Investors, the £269bn London-based fund manager, has worked in the asset management industry for 30 years, so his support for responsible investment is measured and thoughtful. The former fixed income chief at ABN AMRO Asset Management and prior to that Lombard Odier, has become a public critic of unsustainable investment, often questioning the ‘morality’ of markets. Speaking to Responsible Investor, Abberley acknowledges that the standard school of investment thought is that self-interest and amorality bring the highest financial utility. But, he notes: “This only works in a perfect world, and we’re far from that! The classic free market model breaks down in a number of ways such as the imposition of externalities or agency issues, so it requires a corrective, ethical force to bolster it.”
In terms of fund management, he says this means that while Aviva has the job of maximising returns for clients, externalities such as environmental, social and governance risks are under increased scrutiny both commercially and in regulatory terms.
“Being properly aware of these ESG issues means a manager is better understanding risk and spotting potential problems. It also creates the potential to design products that meet a more demanding set of norms or have an overlay towards certain types of more sustainable companies.”
Moreover, Abberley says a broad appreciation of responsible, long-term investing is leading to a more intelligent conversation with clients, who, he says: “increasingly want to engage their asset manager on solutions, not just buy product.”He says increasing levels of ESG-type research are also raising social awareness on sustainability issues and influencing consumer trends, creating something of a virtuous circle: “I think part of this is also the kind of impact that asset owners themselves can make on sustainability issues within their fiduciary brief.” Given this backing, it’s little surprise that Abberley was voted on to the advisory council of the United Nations Principles for Responsible Investment (UNPRI) earlier this year. The Aviva chief says he was attracted to be part of a successful initiative: “The scale of its growth has been dramatic and we believe it could have an important impact.” He says he wants to help build on PRI’s momentum in two ways. First by helping to broaden its membership geographically and with more mainstream investors. Second, by deepening the ways that PRI signatories can effectively embed the principles. Asked about criticism of the PRI, that investors sign up because they can pay lip-service to the principles and cherry-pick what they want to do, Abberley acknowledges the danger of having a sub group of asset managers that are very aligned with the principles with others that could be termed “cynical signatories”.
“When the PRI was set up its principles were very aspirational and easy to adhere to. I think it’s moved on now to the level where we need to be able to assess and measure the level to which an asset manager is integrating ESG into investment. The challenge is to be able to see the ESG commitment through the firm so that it is real in terms of delivery. However, you must also be very careful though that you don’t discourage investors from signing up who know that it will take some time
to be able to push these issues forward within their company. I don’t have an answer to the problem, but it is something to look at carefully.” He suggests that a kite-mark of ESG standards and delivery might be one way to move forward: “Personally though, I’d rather see membership broaden than the standards become too high. 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.” In addition, he says he would ideally like to see the PRI take a higher degree of public policy positions on sustainable finance issues – Abberley has himself been a proponent of stock exchanges introducing more sustainable listing criteria – although notes there is a risk of going “off-piste” and alienating some members: “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.” On the day we speak, a major new report is published criticising excessive executive pay in the UK. Abberley says the issue encapsulates some of the short-termism in the investment industry: “The concerns are warranted and we need to look closely at whether executive pay is properly aligned with performance and over what timehorizon. Our view is to build a sustainable economic model based on free market values with environmental and social values built in: that requires long-time investment horizons. We don’t believe the pay issue should be one of quantum, but of the drivers and determinants of that pay. We also want to see more discretion given to long-term sustainability issues within pay, and we voted against pay at BP and Vedanta this year because of this.”
Looking ahead, Abberley sees potential for more sustainably-oriented investment product in real estate and infrastructure, particularly with governments looking to encourage pension fund investment in the latter. He also predicts that the classic SRI fund could, over time, start to be leapfrogged by more mainstream investment products where sustainability is “embedded”. Asked for evidence of client appetite for more ESG product, Abberley cites an interesting piece of in-house research: “We analysed all the client requests for information, request for proposals, and due diligence questionnaires that we received globally during the three-year period beginning 2008 to the end of 2010 and 89% asked ESG related questions. The average number of questions per document was 6.5. It does suggest significant market interest in the information.”