Pros: The fund has understandable criteria for investment and offers you a fund that is more flexible than some stricter ESG or impact funds. The identification of ‘solution’ and ‘transition’ firms also helps with transparency.
Cons: This is a transition fund rather than an impact fund. This means the investment strategy is to identify firms that will make money through the climate crisis rather than act to mitigate it. The fund is also extremely new (launched 8th June 2020) so there is little performance data available.
Overall: Aviva Investors Climate Transition Global Equity Fund does not deliver the positive impacts you would desire as an impact investor. The ‘transition’ criteria allows for extremely unethical firms to be included if they have ‘sound climate governance’, which any large firm can invest in. Furthermore, the tangible positive impacts of the companies are limited to an unknown number of ‘solution’ firms at the low revenue threshold of 20%. Unfortunately, this will be the case for many Transition Funds as they are prioritising those companies that will offer strong returns through the climate crisis rather than producing returns by combatting it.
Aviva Investors Climate Transition Global Equity Fund contains £121.2 million in assets across 45 holdings as of 26th February 2021. This specialist fund invests at least 90% of capital in global companies responding to climate change. The global nature of equity holdings and the illiquidity risks puts it at a risk rating of 6/7.
The top 10 holdings have an overall weighted ESG score of 23.2, leading to an overall medium ESG risk. Immediately we can see a glaring problem in the investment in Volkswagen. Volkswagen has a severe ESG risk which I have never seen before in any climate related portfolio. It is also rated worst in class in the automobile sectors which is unsurprising due to the emissions scandal of 2015. This scandal entailed VW rigging the emissions testing of 11 million cars resulting in an extra 1 million tonnes of C02 emissions per year. Union Pacific is another controversial holding as they are the biggest US freight operator. Although freight emits 75% less carbon than truck transport, there are better options if you want to invest your money for impact. Overall, this selection does not show much promise for sustainability with the holdings I have mentioned alongside Unilever and Comcast. I struggle to identify what positive contribution these holdings make to environmental issues.
The investment criteria for this fund sounds impressive but it is lacking transparency in how their criteria omits the most polluting firms. Firms must meet Aviva’s ‘solution’ or ‘transition’ criteria. For a firm to meet the ‘solution’ criteria they must derive at least 20% of their revenues from providing solutions to mitigate climate change or help communities adapt to the adverse impact of climate change. This includes companies involved in renewables, energy efficiency and forestry. Ideally, the whole fund would be made up of these companies, but this 20% threshold seems extremely low and opens the fund manager’s scope to invest in companies with diverse revenue streams. Furthermore, there is no information as to the proportion of the fund that is made of these solution firms.
The transition criteria are where I find the most issues. A company is eligible if they are positively aligning their business models to be resilient in a warmer climate and low carbon economy. This could be anyone! All firms should be identifying climate risks and investing in high quality climate change governance. This explains why a company like Volkswagen can meet the criteria as after the emissions scandal they have rebranded themselves as a leader in the electric vehicle sector yet still pollute. This shows how the criterion does not consider the material impact of a company, it rather looks at those companies that are in good hands to move through the climate transition. Similarly, another holding Trane Technologies is a leader in heating, ventilation, and air conditioning (HVAC). This investment shows how ineffectively the transition criteria performs from a sustainability standpoint; Trane Technologies will indeed make more money from ‘a warmer climate’ but in doing so will pollute immensely.
The fund is managed by James Ramos Martin who created the fund in 2020. He has had a long career in equities but has had minimal experience in environmental funds. He works alongside climate change specialist Risk Stathers. Stathers developed the propriety methodology for defining climate investment risk and has 20 years of experience in responsible investing, making him and James a good match for the fund.
Aviva Investors Fund Management was founded in 1971 and is a subsidiary of the Aviva group. Aviva investors was a founding signatory of the UNPRI in 2006 and scored A+ and A across all categories in 2020. They have a strong responsible investing team and proxy voting engagement strategies. In March 2021 they have also published a pathway to becoming net-zero by 2040. Unfortunately, they still invest in fossil fuel companies across a wide range of other funds.