The path to a sustainable future for private markets is full of opportunity but also complexity, as Laurence Monnier and Ed Dixon explain.
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Understanding the difference between what stakeholders say they are doing and what they are really doing is a complex business. This is particularly the case now, when governments and companies face mounting pressure to clean up their environmental act. Financiers, regulators, investors, lawyers, activists and pressure groups are all asking questions, wanting to know more about who is polluting, recycling, greenwashing and so on.
Investors in private markets, who are typically closer to the assets they hold than in public markets, have significant influence in shaping the sustainability agenda.
However, this is not as straightforward as it might appear, with little standardisation on disclosures, challenges in turning brown assets green, and fierce competition causing risk-adjusted returns to dwindle in certain sectors.
To find out more, we talked to Laurence Monnier (LM), head of quantitative research, and Ed Dixon (ED), head of ESG, from Aviva Investors' real assets team.
How should we define sustainability in real assets? Is it in the eye of the beholder?
LM: For me, sustainability is a given. As a long-term investor, everything we do has to be sustainable. If we are looking to invest for the next 20 years or 30 years and an asset is not sustainable, we should not be looking to participate.
Quite separate to that is a debate about the environmental or social impact of one asset over another. Ultimately, though, sustainability is about concentrating on assets aligned with the transition to the greener and fairer economy people want to see.
ED: It's unequivocal, and not only because it is included in the UK's Stewardship Code. We need an in-depth understanding of the risks and impacts of the assets we manage and ensure the long-term interests of clients and society are fairly represented in our investment process.
This is written into our responsible investment policy and strategy for real assets; we must understand the long-term impacts, and if the assets have impacts that undermine the stability of the industry, the economy and/or society, then they do not represent a good investment.
This runs from our investment policy and processes, to our real assets strategy, all the way to the Stewardship Code at the top of the tree.
LM: This has come to the forefront of many investors' minds in the last two years. Sustainability has always been there, but the intense focus on it is relatively recent, and there are more working groups than most people care to follow.
There is a fair amount of standardisation of disclosures around climate, and alignment is very much on the agenda for discussion by the regulators; everybody is mindful about the importance of moving towards a common view. But it is difficult because there are so many different aspects of sustainability. Different issues keep coming to the fore: biodiversity, climate risk, gender, race and ethnicity, and so on. It would be valuable to standardise, but there are so many aspects that are difficult to capture, and the landscape is changing all the time.
I don't think you will ever develop a single all-encompassing standard that neatly encapsulates what sustainability is.