As COP27 in Sharm el-Sheikh comes to a close, the actions taken by business and investors in the coming years will once again be critical to the regional and global efforts to combat climate change and make progress on other important sustainability issues – income inequality, a rise in noncommunicable diseases, the risk of communicable diseases such as COVID-19, as well as biodiversity.
This is especially important to consider in Asia where the impact of climate change is being felt sharply, as we have seen with the recent horrific floods in Pakistan and the ongoing heatwave and drought in China. The Intergovernmental Panel on Climate Change (IPCC) predicts that rising flood levels and heat waves will become more common across Asia.
As we confront these challenging realities, it will be critical to ensure that the investment community is using its influence strategically to drive sustainable behaviour towards better long-term outcomes. Investors have a range of options available to them to encourage more sustainable actions by companies – including voting at shareholder meetings, engaging with the company’s management and board, public campaigns, and in some cases, divestment. Investors can also improve outcomes by investing in sustainability opportunities such as renewable energy – in our case, as of the end of last year, AIA had invested US$1.6 billion in renewable energy.
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At first, divestment can seem to be the most effective strategy, and there have been widespread calls from activists and non-governmental organisations to divest from problematic companies and sectors. However, the divestment versus engagement debate – around whether an investor should ‘cut and run’ or stay and try to encourage positive change – is somewhat oversimplified.
In the context of climate change, there can be risks associated with immediate divestment. For one, it can be seen as offloading a ‘dirty’ asset to a less responsible investor – meanwhile, the emissions associated with that asset remain unabated in the ecosystem, without the company responsible for such emissions being held accountable. There is also the risk that it disincentivises the company in question to make change. If all sustainability-focused investors divest, forfeiting their voice and influence, and only investors who are less concerned with environmental, social and governance (ESG) issues remain, it reduces the pressure for that company to continue on a sustainability journey. Significant divestment of capital could also impact the company’s ability to invest in its transition to a more robust business model including sustainable ways of operating.
Engagement also has potential shortcomings. Investors are competing for management’s attention against other concerns and stakeholder demands. It can take a long time and constant investor engagement effortsto achieve results, and ensure that genuine progress is underway and continuously achieved in a transparent, measurable way. Danish pension fund AkademikerPension, for instance, has been engaging with Toyota for well over a year on the automaker’s lobbying efforts on climate, and as recently reported, the pension fund acknowledged that it remains unsatisfied with the company’s actions. Engagement may also be ineffective without a credible threat of divestment.
However, long-term investors with sustainability at the centre of their business model are more likely to persevere and achieve sustainable outcomes for their portfolio and the planet. Despite its challenges, we continue to see many asset owners and managers pursuing engagement. It can be successful in driving positive change and there continues to be recognition of its benefits. For example, sovereign wealth funds GIC and Temasek have said they focus on engagement and investing in green technology, while global investors like Capital Group and BlackRock have echoed the sentiment that dialogue and ongoing engagement are more impactful than exclusion or divestment, providing evidence that successful engagement can generate positive results.
AIA has used both strategies. Where engagement efforts have not produced the outcome desired, as a last resort, divestment is needed, to drive sustainable development in Asia. We have a responsibility as an insurer to match policyholder liabilities, so the outcomes of our US$250 billion investment programme must be sustainable. As a result, we are acutely aware of long-term risks. ESG risks can have the same detrimental financial consequences as credit, currency and commercial risks. AIA has embedded ESG principles in our investment approach and processes to deliver sustainable risk-adjusted returns and help create long-term stakeholder value.
Engagement can be an effective way to change behaviours and reduce these risks, enabling investee companies to transition to a more sustainable business model. For example, following our net-zero commitment, AIA has been engaging with asset management partners on their carbon reduction efforts. Outside of climate, we spoke with a number of investee companies this year about how they relate to their staff, particularly in the area of well-being, given the disruptions the Covid-19 pandemic has caused. For instance, in Malaysia our team reached out to one company in the healthcare services sector to understand the working conditions of their foreign staff and after numerous meetings with management, that company committed to increase its spending to expand and improve their workers’ accommodation. But the engagement does not stop there; as investors, it is imperative to continue speaking with that company and track its progress and the fulfilment of its commitments. We had previously engaged with companies in the palm oil industry to get a better understanding of how that industry can take action to move towards more sustainable practices, for instance through adherence to the Roundtable on Sustainable Palm Oil standards.
Divestment is very much a final option for AIA; however, we will still consider divesting where appropriate to further our objectives. One example of this is coal – in 2021, AIA announced it had completed divestment of directly managed exposures to coal mining and coal-fired power businesses seven years ahead of schedule. This was the culmination of several years of extensive research and a phased approach to address stranded asset risk specifically and manage down our investments in the most carbon-intensive sector. We had already begun restricting exposure to companies with little chance of transitioning to greener technologies several years earlier. Ultimately, we wanted to mitigate the risk of holding stranded assets – particularly in coal holdings, where we could not see an exit strategy aligned to the sustainable outcome we desired.
As the effects of climate change become increasingly prominent around the world and in this region, there is a clear urgency for greater – and faster– climate action.
Our region is facing the effects of climate change, and we need to move fast. At the same time, we need to focus on our shared global sustainability goals, and be strategic in the local actions we take to ensure the greatest positive impact. Large investors have the potential to create significant impact, and engagement is a critical part of that – while we all want urgent demonstrable action, divestment is not always the solution, or even the best available answer. We need to be flexible, strategic, and take a balanced approach. Effective climate action will require an ongoing, concerted effort to decarbonise high-emitting and hard-to-abate sectors, and strategic investment into the technologies the world needs to decarbonise if we are to be successful in transitioning to a low-carbon economy.
Mark Konyn is group chief investment officer at insurer AIA.