AIA uses carrot and stick approach in ESG push
The insurance group AIA is pushing from all sides to achieve sustainability and environmental, social, and governance (ESG) progress in its investment portfolio. While the threat of divestment or exclusion has strong merits as a “stick” for driving change, active ownership in companies requiring improvement is gaining more traction.
“The journey towards responsible and sustainable investments starts with exclusions, and we then quickly get on the front foot and start to look for opportunities for active investments with influence on creating incentives and change,” Mark Konyn, group CIO at AIA, told AsianInvestor.
While AIA is using both strategies, divestment is still useful as a last resort when engagement efforts have not produced the desired outcome of driving sustainable developments. This relates to the insurer’s responsibility to match policyholder liabilities and reduce long-term risks, creating an imperative for the outcomes of its investment programme to be sustainable, Konyn pointed out.
ESG risks can have the same damaging financial consequences as credit, currency and commercial risks, and AIA has embedded ESG principles in its investment approach and processes. The firm aims for sustainable risk-adjusted returns, according to Konyn.
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In December 2021, for instance, AIA completed its divestment of directly managed, listed equity and fixed-income exposure to coal mining and coal-fired power businesses, seven years ahead of schedule.
The sector was then added to AIA’s list of exclusions that also includes tobacco and cluster munition, a form of air-dropped or ground-launched explosive weapon that releases or ejects smaller submunitions.
Hong Kong-based AIA is a major insurer in Asia, with $268.5 billion in total investments at the end of 2023. It has a presence in 18 markets across the Asia-Pacific region.
DIVESTMENT DILEMMA
Engagement 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 effort is required to achieve results in transparent and measurable ways, and to ensure that genuine progress is underway and continuous, according to Konyn.
Long-term investors with sustainability at the centre of their business model are more likely to persevere and achieve sustainable outcomes, the CIO added. Despite its challenges, Konyn has seen many other asset owners and managers pursuing engagement, and collectively such efforts make AIA’s own active push more impactful.
“We work with our investee companies, whether they are energy producers, oil and gas companies, or innovative technology companies, to give them the encouragement to come to the market with investment opportunities where we can participate. And we particularly want to be involved in projects and initiatives that throw off long-dated opportunities to mitigate climate change,” Konyn said.
Also read: AIA sees investor-led push driving Asia's energy transition
Amid widespread calls from activists and non-governmental organisations for asset owners to divest from problematic companies and sectors, Konyn believes that withholding funds from companies that need to change is counterproductive.
“There's a big argument about the exclusion because if you exclude, it denies capital for those companies that really need the capital to help them with the transition. Another argument is if you pull out, it just forces up the cost of funding, and creates an investment opportunity for someone out there who doesn't care about the transition. These are complex issues that are worth understanding,” Konyn said.
The divestment versus engagement debate around whether an investor should pull out or stay and try to encourage positive change is somewhat oversimplified, the CIO pointed out.
If all sustainability-focused investors gave up their voice and influence, only investors who are less concerned with ESG issues would remain, he said. This reduces the pressure for companies to continue on a sustainability journey. Significant divestment of capital could also impact the company’s ability to transition to more sustainable ways of operating.
FAREWELL SHELL
While active ownership and dialogue with companies are creating results, engagement may also be ineffective without a credible threat of divestment, Konyn pointed out. It therefore makes sense to keep divestment in the toolbox as the harsher stick approach.
Many asset owners are indeed shifting capital out of companies that don’t show the wanted efforts to change their businesses.
In April, the Danish pension fund manager PFA sold all its shares in the British multinational oil and gas company Shell, after the company appeared to deviate too far from its climate targets.
“Shell has become less ambitious about their 2030 goals; they have not had clarity about their capital allocation to green technology. Our view is that we can get more influence overall if we put our active ownership efforts into use in some other companies,” said Rasmus Bessing, COO and head of ESG at PFA Asset Management.
Also read: AIA sees scope to finance sustainable energy in Asia
At the end of 2023, PFA’s Shell shares were valued at 1.2 billion Danish kroner ($173.3 million). PFA’s total AUM was $112.4 billion as of end-2023.
Back in 2022, PFA more than doubled its investment in Shell due to an underweighted exposure to the oil and gas industry. In March, Shell lowered its expected reductions of carbon emissions before 2030.
The company’s goal is now a reduction in the range between 15% and 20% against a previous target of 20%. With the lowered emission targets, it was time for PFA to divest, Bessing said, pointing out that the Shell investment has created good returns for PFA.
“We still believe strongly in active ownership, but scenarios can always emerge where enough is enough – also in regard to other companies,” Bessing said.