Aviva Investors have joined the ranks of asset managers encouraging increased sustainability from the companies they invest in, promising further scrutiny, incentives, and sanctions on business leaders around their social and environmental impact. This article takes a look at Aviva’s letter and what these financial pressures to operate more sustainably mean for procurement and the wider business.
Asset manager Aviva Investors is upping the pressure it places on corporations to put sustainability at the centre of business strategy. In a recent annual letter to 1,500 firms across 30 countries, Aviva set out its expectations for the measures business leaders must take to demonstrate that sustainability is a top priority for their organisation. Aviva Investors – who had £357bn in assets under management as of mid-year 2021 – will place greater scrutiny on the impact that firms are having on environmental and social elements of sustainability, seeking increased clarity around targets and better explanations of how organisations plan to meet them.
The intentions stated in this letter from the UK asset manager are reminiscent of recent moves made by other leading investment firms. Last year, for example, BlackRock ordered the 1000 largest polluters within their portfolio to publicly disclose emissions data for their businesses alongside sweeping reductions targets and detailed decarbonisation strategies.
Paris pledges fail to spur progress
Aviva’s annual letter arrived just weeks after COP26 wrapped up in November. The climate conference saw world leaders, businesses, and activists gather to accelerate action towards the goal established in the Paris Agreement: keeping the increase in global average temperatures ‘well below’ 2°C above pre-industrial levels.
Prior to the Paris Agreement, the world was on track for a catastrophic 4°C of warming by the end of the century. Thanks to advances in the last 8 years, current policies and technology have put us on track for 3°C over pre-industrial levels. If honoured, the pledges made as of late 2021 further improve this outlook, and are predicted to limit warming to between 2 and 2.4 degrees celsius by 2100. This signals some progress, but is still not sufficient to meet the goals outlined in the agreement.
As Aviva well knows, failure to go further and make meaningful change when it comes to our climate will spell disaster for businesses. In 2013 the World Bank predicted ‘droughts, flooding, and ferocious storms, sowing financial chaos and upending small shops and international conglomerates alike’ in the event that warming reaches 4°C. More recently, a 2021 study from scientists at Cambridge, UCL, and Imperial predicted that the effects of the climate crisis will wipe 37% from global GDP in this century alone.
Aviva’s carrot and stick incentivisation
In line with this financial urgency, Aviva Investors have called for business leaders to be rewarded for stepping up their efforts, with proposed compensation plans that financially incentivise improvement on sustainability targets and KPIs. However, the firm also warns that failure to take action and demonstrate a pace of change that reflects the true urgency of these goals could result in investors voting against business leaders, seeking their dismissal, or potentially withdrawing investments.
In a recent panel debate hosted by Vizibl, panelist Cesare Guarini, Director of Sustainability Procurement at Philip Morris reminded the audience “What gets measured gets managed, what gets rewarded gets done well.”
He’s right: for too long sustainability targets and KPIs have not been incentivised in compensation plans and performance targets. Sustainability, while declared a business priority, has frequently fallen by the wayside as a result, becoming the victim of the time and resource limitations on business leaders which encourage rampant growth and cut throat efficiencies.
Holistic compensation plans that reward progress in sustainability will be necessary for building crucial momentum over the coming years, motivating executives to re-allocate resources in line with their new personal priorities, and in doing so to focus their energy on initiatives that encourage sustainable business transformation.
Sustainable procurement gains momentum
Given that the majority of a large business’s environmental and social impact on the planet sits in its upstream value chain, procurement and supply chain functions will have an enormous role to play in this transformation.
For leaders of these functions, poorly aligned compensation plans, challenges around data and technology, and the complexity of managing strategic supplier relationships have hampered progress in building more sustainable supply chains. As a result, the status quo of prioritising operational efficiency above all other goals has lingered. But with carrot and stick approaches towards sustainability being leveraged by large investment firms such as Aviva, inertia is no longer an option in the supply chain – the area where a business has the most room for improvement.
Aviva’s emphasis on the importance of clear sustainability improvement plans signals that simply focusing on improvements in measurement and reporting will not be enough to satisfy investor expectations. Procurement and supply chain leaders must develop value chain strategies to begin driving measurable progress toward their sustainability goals, and quickly.
Luckily, as the interface between the business and its suppliers, procurement and supply chain functions are perfectly placed to leverage their supplier relationships in pursuit of the sustainability agenda.
Sustainable procurement looks towards collaboration and innovation
The challenge now for boards and directors is to co-ordinate their ESG programmes across complex global organisations, gaining visibility on actions and progress, and driving insight into what is and isn’t contributing to their stated goals.
There exists potential for enormous impact at the fingertips of business leaders. To begin driving progress in sustainability, whilst continuing to give adequate focus to key priorities like risk, digital transformation, innovation, and – of course – cost savings, procurement & supply chain functions must begin working closer and more collaboratively with their suppliers.
By implementing supplier collaboration strategies centred on sustainability, and aligning these with overall business priorities, procurement leaders can leverage the potential of the supply chain to drive meaningful progress towards sustainability goals, and effectively balance resources across the priorities of their function and of the broader business.
Ask yourself and your colleagues one simple question: When an investor asks for examples of how our organisation is working with major suppliers to meet your ESG targets, what would you tell them?
World-leading procurement organisations are already deploying programs to drive greater value from key supplier relationships and deliver on ambitious, urgent sustainability commitments.