One of the world’s largest asset management companies, UK-based Aviva Investors, recently announced it will divest from oil, gas, mining, and utilities companies that do not meet its expectations on tackling climate change.
Divesting – the act of moving money away instead of investing – is nothing new. Fossil fuel divestments have been used as a means to exert economic pressure on companies with a large carbon footprint for at least a decade.
However, seeing asset management companies like Aviva Investors publicly stating they will divest from companies that don’t act on climate is not something you read every day.
By investing the pooled funds from its clients, Aviva Investors and other asset management companies (AMCs) wield a lot of economic power. Often, these so-called mega fund managers can own two percent or more of a company, which may not sound like much but actually means they are very influential shareholders. Divestments by AMCs can be an important push towards a more sustainable future simply due to the sheer amount of money these companies control.
Usually, AMCs are ranked based on the size of the assets under management. Aviva has 486 billion dollars in assets under management. The world’s largest AMC, BlackRock, has 7318 billion dollars.
The threat of these kinds of investors leaving your company by divesting is obviously something to be concerned about. Financial investors thus have a big impact on the strategic decisions of companies.
Divesting in companies that manufacture toxic chemicals
Aviva’s intention to divest only covers climate change, at least for now. But even though chemicals aren’t mentioned, we know that Aviva has a very good understanding of the financial risks that the production of toxic chemicals implies.
The investment firm was closely involved when ChemSec developed the ChemScore sustainability ranking system, which scores the world’s largest chemical companies on their efforts to reduce their chemical footprints. Aviva has also repeatedly cited the lack of transparency surrounding the production of chemicals as a major problem for the industry.
We’ve also seen proof time and time again of how Aviva’s researchers and fund managers take toxic chemicals into consideration when making investment decisions, for example through its socially responsible investment (SRI) fund, the Stewardship Fund, which exclude companies involved in the production of certain toxic chemicals.
Production of chemicals is connected to climate change
It’s also worth noting that the chemical industry has a very close connection to climate change, as it is one of the largest drivers of the world’s oil demand. Clothing, packaging, electronics and other everyday items are made from petrochemicals, which account for 12% of global oil demand. Adding the energy for the production process tells you the challenge the industry is facing. And in the next 20 years it is set to demand even more.
One factor that weighs against the possibility of divesting from certain industries, like the chemical industry, is that pension funds are required by law to maximise returns for their shareholders. Most investors interpret this as not being legally allowed to avoid entire sectors. Obviously, a divestment strategy does not have to mean that you actively reject a whole industry – you could simply avoid the bad apples and then cherry-pick the chemical companies that are working towards a sustainable future.
But so far, most companies in the chemical industry seem to have been flying under the radar of most investors and divestment campaigns, at least in regard to toxic chemicals. Let’s see for how much longer.