'Sustainability is a Wild Open Space'

Sunniva Kolostyak: Welcome to Morningstar, where we this week are talking about everything sustainable investing. I'm joined today by Andrea Carzana, the co-manager of Aviva Global Climate Transition Equity fund.

Andrea, thank you very much for being here today. I want to start with talking about the term climate transition. We are coming across so many different terms in sustainable investing, so what does this specifically mean?

Andrea Carzana: First of all, thank you for having me. I think this is a great question because if I look at the definition and how investors think about climate investing, it is a little bit of a wild open space. And I think most of the issues have arisen because there is a lack of a common playground. So, if you talk to different asset managers, they might have different definitions of what a sustainable investment is. Ultimately, this has created a little bit of confusion. And the way we see it at Aviva is that it's very important for a sustainable investment to have a strong correlation with the financial profile of the company.

If you take a look at 2022 or even before, there has been a big emphasis just on the ESG side, on the climate side, and not enough on the financial return. This is changing now. And so, it's very important to remember that we are an asset management (firm), so we have a dual mandate over achieving a long-term capital growth while investing in companies that are transitioning towards net zero. But the correlation between the two is absolutely important.

Kolostyak: So, for your fund, how do you differentiate yourself from other climate funds?

Carzana: I think there are three key characteristics that I think differentiate us. The first one is what we call the three-dimensional view. And we think of sustainability as if it was a Greek temple with three pillars. Each pillar is equally important. And one pillar is we call the internal sustainability, which is governance. The second pillar is we call it financial sustainability, which is really understanding the competitive advantage that a company has. We look at each company under the Porter's Five Forces framework, and we understand whether or not the competitive advantage is sustainable or not. And the third pillar is what we call the external sustainability, which is really, what is the impact that the company is achieving from a climate perspective, and what is key is really to understand how the company is able to translate this external sustainability into stronger financial sustainability. So, having this approach of looking at sustainability not as three different steps, but as one with strong correlation, really, we think is a competitive advantage.

The second point is also that we don't only look at solutions companies, so companies that offer products to reduce emissions but also transition companies. Transition, what it means is that we believe that climate change is already happening. So, it would be unfair to only invest in those companies that provide a solution, but we also need to invest in those companies that are changing their business model to cope with climate change. So, companies that are not offering a product to reduce emissions, but what they're doing today in a net zero environment. And what it means for investors is that our universe is much bigger. There are complete sectors, like think about pharmaceutical sector or financial sector, also part of the industrial sectors that would be un-investable if we were only focusing on the solutions side, but looking at the transition side makes us a bit more – gives us a more diverse opportunity set. So, this is the second key differentiating aspect.

The third one is what we call micro stewardship, so engagement. What is interesting here is that we don't only focus on micro-engagement with the company, but we also engage a lot with regulators, with policymakers. What it means for investors is that we are at the forefront of future change that is happening. So those three characteristics really set as apart from the competition.

Kolostyak: So, let's stick with engagement for a bit because I know one of the goals that you have, or one of the outcomes, is to "make change happen". So, can you give us some examples of change that you've helped drive?

Carzana: Yeah. As I said, there are two sides of the change, the micro and then the macro. So, on the stewardship, the micro stewardship, for example, Aviva was instrumental to set the GFANZ (Glasgow Financial Alliance for Net Zero), which is really a platform to channel financial capital to achieve net zero. Really, by doing that, we really make the change happen. Before we only had a bunch of financial actors, they would come with their quotes, they would come with their goals, but there wasn't like a common plan on how to achieve that. This is what Aviva has been instrumental of creating. Equally, the team engage a lot with regulators and policymakers. This is really where macro-engagement meets with micro-engagement because when we speak to companies, we know where companies are struggling with from a policy perspective. So, companies are investing, are innovating, but sometimes their innovation doesn't find the market because the policy is not there. So, seeing both sides, this is how we're making change happen.

Kolostyak: Finally, I want to ask you about government involvement in driving the climate transition. Because you do see some governments spend loads and loads of money and really drive the focus on this and then there are others that are maybe backtracking or not doing as much. So, from your perspective, are governments globally doing enough?

Carzana: I think governments are doing their part. Now, there are governments that are a bit more advanced than others. They have more aggressive plans than others. But I have to say when you take a step back and you look at, especially the recent announcement, what it means for the movement, I would characterise that more as noise than as a fundamental change. If anything, the companies we talk to, they're not scaling back their plans. And that's because their customers are asking for that. And so, yes, there are maybe some certain sectors within the climate transition that require more subsidies. That's not really where we tend to focus. We tend to focus on companies that have a strong business model, proven business model, proven technology, proven balance sheet. And so, having more subsidy is helpful. It's nice to have, but it's not a must have. And so, from that perspective, we see 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 we like have come up with. But even without those, maybe it would take longer, but the 10-20 year story is still very much valid.

Kolostyak: Andrea, thank you very much for being here today. For Morningstar, I'm Sunniva Kolostyak.