Q&A: Aviva's Waygood on how to convince companies to care about the SDGs

Steve Waygood, the chief responsible investment officer at Aviva Investors, a global asset manager with more than 344 billion British pounds ($451 billion) in investments, says he has “a contention with the financial industry.” The vast majority of the company’s clients, ranging from personal pension and insurance holders to corporations, do not understand finance, Waygood believes. “People do not demand financial products that shape the world they want to retire into,” Waygood recently explained to Devex. “So, the question, ‘How do you harness markets to finance the Sustainable Development Goals’ is a pretty challenging one. People do not understand how markets work, let alone how the SDGs work. The dialogue has taken a long time to get to anything like a sophisticated level.” Waygood’s message of sustainable finance is centered on the environmental and economic damage corporations will inflict on the world if they do not act or invest with an eye on sustainability. The warning call is a departure from the frequently touted maxim of how companies can profit from investing in the SDGs, which could require $5 to 7 trillion of annual investment to finance. But the message is resonating, as Waygood has carried his research everywhere from the Vatican, to the United Nations headquarters, where he recently attended the high-level political forum on sustainable development and presented on sustainable finance. “There are millions of investors, making billions of investment decisions on trillions of assets on management, all of which ignore the one-planet bounty condition.” --— Steve Waygood, chief responsible investment officer at Aviva Investors Waygood talked with Devex in New York about why companies need to rethink the way they do business, and how a new public system, which will track how major companies measure on helping reach the SDGs, could fastrack that process. Our conversation follows below, edited for length and clarity. Aviva recently came out with a report on sustainable finance, and also supported another European Union high-level report on financing a sustainable European economy. Why has it taken so long to have this type of conversation? I think it is a new frontier of thinking. So now we are getting to the point where the world’s economy is so significant with population growth, where the standard of living we enjoy is greater, on average, than the planet can support. There are feedback loops that are starting to harm the long-term performance of the economy. You are beginning to now have businesses realize, those of us that have been around for 300 years, that we cannot be around for another 300 if the economy continues at the rate of growth it has been at. Is climate change one of the things that comes up a lot in the conversations with people you are having? It is more than the rate of growth — it is also the nature of growth. We continue to grow the economy, but we need to dematerialize, or in the case of climate change, move away from fossil fuels and towards renewables. And we move subsidies from fossil fuel firms, and put far more investment into renewables. It’s recognized that we need to create markets that are consistent. The question is, how? And how do you measure it? That is at the frontier of thinking. So, I think that now you have financial market participants, as well as civil society — not all of them, but some of them — beginning to understand that how capital markets are structured is not sustainable. So who are you trying to bring these ideas to? I have been meeting the president of the European Commission’s cabinet. In the last 18 months, I have met over 100 ambassadors, spoken to the U.N. Department of Economic and Social Affairs, the U.N. Conference on Trade and Development, and the U.N. Global Compact on numerous occasions. I have met and spoken to a few heads of state. We met with the Vatican a few months ago. It has been an incredible journey. Lots and lots of interest and enthusiasm for all of these ideas. We are starting to see these catalysts emerge and bring these thoughts together into something that is much more tangible. So, the Rockefeller Foundation has been financing some innovative finance, the Global Compact has got their innovative finance platform, the Carbon Disclosure Project has got over $100 trillion backing it. The most soundbite way of putting it is there are millions of investors, making billions of investment decisions on trillions of assets on management, all of which ignore the one-planet bounty condition. Because they assume these companies are able to grow infinitely. Is it an issue of companies just growing infinitely and not thinking about outside, environmental factors? There are biophysical limits to growth. The development community in particular is focused on foreign direct investment, because it is considered to be more patient capital. The reason why is the company does FDI by investing overseas, so if the country starts to perform less well, and they’ve invested $10 billion in a liquid natural gas bond, the FDI is only a very small part of the picture. You need to then think, how is Exxon going to get its money in the first place? It comes from here [overseas natural resources]. So the development community is beginning to realize that the portfolio firms are at least as important as FDI, if not more important. How do we use everyone's influence to make sure the company does FDI in a sustainable way? What are the standards that should be held to account? And it seems your approach is not focused just on how companies can maximize their profits and grow overall? We are ranking them against how their impact is on the SDGs and how they relate to each other. The first measure is impact and the second is focus on what is more material — a broader terms market environment is more sustainable. We are there to help companies see how they can improve, and producing that table, we show how they can close the gap and improve on the SDGs. We have some ideas. Publicly comparing Exxon and Chevron with Shell and BP, comparing them sector by sector, SDG by SDG you can map it — and start to see how they are performing, financially, on the SDGs. So you are connecting power and your concerns to your influence and benchmarks for ranking companies. It’s going to take a while to build [this mapping system] — a year and a half, but then you can say to your team, “are you accredited to this standard?” Is a part of your thought process here how companies doing this type of sustainable investment could be operating at a loss, or what sort of a return this could yield? Of course, and to see a focus on good, long-term returns. We are an insurance company. We also have half a trillion dollars in management. We are exposed as an insurance company to prime risk. If we underwrite something and it catches fire, or gets flooded because of a changing climate, we have to think about that from our own business perspective. We don’t want to invest in something that would cause risks to our own firm. While it is true you can exploit your employees, communities and the environment and make profit in the short term, that is not a very sustainable, long-term business model. We need to think not only over a few years, but a few decades, and in some cases a few centuries. What is involved with actually shifting the way businesses do work, and investing more sustainably? We are looking at more how do companies impact the issue, good or bad, versus how does the benchmark impact the company's flow? As an investor you have to think in those financial terms, but the impact and profitability are not completely disassociated. The reality is that all these goals only exist because the markets are failing to meet the needs of the people who are suffering these problems — it is a market failure and the job of governments is to correct market failures, not the investors. Read more international development news online, and subscribe to The Development Newswire to receive the latest from the world’s leading donors and decision-makers — emailed to you free every business day.