Sunniva Kolostyak: Welcome to Morningstar, where this week we’re talking all things sustainable investing. With me today is Andrea Carzana, co-manager of the Aviva Climate Transition Global Equity Fund.
Andrea, thank you for being with us today. I want to start by talking about the term climate transition. We come across so many different terms in sustainable investing, so what does this mean specifically?
Andrea Carzana: Thank you for letting me be here. That’s a good question because when I look at the definition and how investors think about climate investing, it’s a bit of an open field. And I think most of the problems have arisen because there is a lack of common ground. If you talk to different asset managers, they may have different definitions of what a sustainable investment is. Ultimately this caused some confusion. And as we see it at Aviva, it is very important that a sustainable investment has a strong correlation with the financial profile of the company.
If you look at 2022 or even earlier, there has been a big emphasis on just the ESG side, on the climate side, and not enough on the financial returns. This is now changing. And so it’s very important to remember that we are an asset manager, so we have a dual mandate of achieving long-term capital growth as we invest in companies that are making the transition to net-zero. But the correlation between the two is absolutely important.
Kolostyak: So how do you distinguish your fund from other climate funds?
Carzana: I think there are three main features that set us apart. The first is what we call the three-dimensional image. We see sustainability as a Greek temple with three pillars. Each pillar is equally important. And we call one pillar internal sustainability, namely governance. The second pillar is called financial sustainability, which basically means understanding a company’s competitive advantage. We look at each company according to Porter’s Five Forces framework and understand whether the competitive advantage is sustainable or not. And the third pillar is what we call external sustainability, which is basically the impact that the company achieves from a climate perspective, and is essential to really understand how the company is able to translate this external sustainability into stronger financial sustainability. So if we look at sustainability not as three different steps, but as one with a strong correlation, we really think this is a competitive advantage.
The second point is that we not only look at companies with solutions, i.e. those that offer products to reduce emissions, but also at transition companies. That means we believe climate change is already happening. So it would be unfair to only invest in companies that provide a solution, but we must also invest in companies that change their business models to tackle climate change. So companies that don’t offer a product to reduce emissions, but are already working in a net-zero environment. For investors, this means that our universe is much larger. There are entire sectors, like pharmaceuticals or financials, that are part of industries that we wouldn’t be able to invest in if we just focused on the solution side. If we also look at the transition side, we will have more and more varied options. So that is the second important distinguishing aspect.
The third is what we call micro-stewardship, i.e. involvement. What’s interesting here is that we don’t just focus on micro-engagement with the company, but we also work a lot with regulators and policy makers. For investors, this means that we are at the forefront of future changes. These three features really distinguish themselves from the competition.
Kolostyak: Let’s stay with engagement, because one of your goals, or one of the outcomes you have is to “make change happen.” Can you give us a few examples of changes that you have helped to initiate?
Carzana: Like I said, there are two sides to change: the micro and the macro. So for example in the area of ​​stewardship, the micro-stewardship, Aviva was instrumental in setting up the GFANZ (Glasgow Financial Alliance for Net Zero), which is a platform to channel financial capital to achieve net zero. By doing that, we really ensure that change happens. Before we just had a bunch of financial actors, they came with their quotes, they came with their goals, but there was no common plan to achieve that. This is where Aviva has played an important role. The team also works closely with regulators and policymakers. This is really where macro engagement meets micro engagement, because when we speak to companies, we know what companies are struggling with from a policy perspective. So companies are investing and innovating, but sometimes their innovation does not find the market because the policy is not there. So if we look at both sides, this is how we create change.
Kolostyak: Finally, I would like to ask you about the involvement of governments in driving the climate transition. We see some governments spending a lot of money and taking the lead, while others lag behind. From your perspective, are governments around the world doing enough?
Carzana: I think governments are taking their share. Now there are governments that are a little more advanced than others. They have more energetic plans than others. But I have to say that if you take a step back and look at the recent announcements in particular and what that means for the movement, I would characterize that as noise rather than a fundamental change. In any case, the companies we talk to are not scaling back their plans. And that’s because their customers ask for it. And so, yes, there may be certain sectors within the climate transition that need more subsidies. That’s not really what we focus on. We tend to focus on companies with a strong business model, a proven business model, proven technology and a proven balance sheet. And so it is useful to have more subsidies. It’s nice to have, but it’s not a must. And so we see from that perspective that what governments are doing, like the Inflation Reduction Act in the US, is accelerating some of the good products, the good innovation that the companies that we love have come up with. But even without these it might take longer, but the ten to twenty year story is still very valid.
Kolostyak: Andrea, thank you for joining us today. For Morningstar I am Sunniva Kolostyak.