Environmental Audit CommitteeWritten evidence submitted by Steve Waygood, Aviva Investors

1. Aviva welcomes the opportunity to submit evidence to the Environmental Audit Committee’s Inquiry into the outcomes of the Rio+20 Earth Summit. We would also like to welcome the Committee’s ongoing interest in our work.

2. In 2011, Aviva founded the Corporate Sustainability Reporting Coalition to transform how open companies are about how they manage material environmental and social issues. In addition to this being good for sustainable development, we also believe that such disclosure is in all companies’ interests as reporting is one of the most important catalysts for changes that contribute to the long-term health of a business.

3. Our Coalition became a unique combination of pension funds, asset managers, church organisations, charities and professional bodies. Its members manage over US$2 trillion of ordinary people’s savings and include industry bodies which represent more than US$50 trillion of assets.

4. The Corporate Sustainability Reporting Coalition asked participants at the United Nations Rio+20 Earth Summit to come to a new global agreement on corporate sustainability reporting. I enclose a summary of our specific aims for a treaty.1

5. In support of this aim, Paul Abberley—the Chief Executive of Aviva Investors London—and myself attended the Rio+20 Summit as part of the British Government’s official delegation, led by the Deputy Prime Minister Nick Clegg. We were delighted and honoured to be invited to do so, and felt that this enabled us to make a real push for a treaty.

6. We enjoyed great encouragement from the Government both in the run up to and during the Rio+20 Summit, particularly from the Defra Secretary of State, Caroline Spelman. The Government showed consistent support to the initiative on corporate sustainability reporting. While the Government’s own policy fell short of our own push for a treaty, we believe that the leadership shown by Britain was key to delivering the outcome in this area. It is equally important to note that supportive interventions were made by other countries, particularly Brazil, Denmark, France, Norway, Mexico and Columbia, many of whom also demonstrated leadership on this agenda.

7. For example, Brazil’s main stock exchange now promotes integrated sustainability reporting on a “comply or explain” basis—something which the UK would do well to replicate.

8. To our knowledge, this is the first time since 1992 that the UN Conference on Sustainable Development has explicitly encouraged listed companies to integrate sustainability information into their reporting cycle. While this falls short of our aims for a treaty, it does build on the UN’s previous commitments to the Global Compact and the Global Reporting Initiative. The specific reference to integration is key, as the UK is the host for the International Integrated Reporting Council, which is doing excellent and important work that should ultimately lead to an improvement in the sustainability of the companies in which we invest.

9. We also warmly welcome Defra’s work to promote better disclosure of corporate environmental performance information, including mandatory carbon reporting from 2013 as announced by the Deputy Prime Minister. As investors, our primary role is to ensure that our clients’ portfolios benefit from the financial opportunities associated with climate change and other environmental issues, and avoid, as far as possible, the financial risks. Better disclosure should help our analysts determine the quality of a company’s response to material environmental risks, which our fund managers can then factor into their investment decisions. This will reward good corporate practices via a lower cost of capital.

10. That said, we have to admit to not being satisfied with the outcome that Paragraph 47 represents. Given the progress made to date on integrated reporting, the Rio+20 outcome was not concrete enough, and does not require any new action to be taken. But we do now have an important platform from which to continue to campaign for further, and more ambitious, international reforms, and we believe we must do so.

11. Aviva Investors believes that there are three broad potential areas of future work for the Corporate Sustainability Reporting Coalition: (i) the forthcoming EU legislative proposals on non-financial reporting; (ii) influencing the Sustainable Development Goals, and (iii) continuing to push for the international treaty that we collectively failed to deliver at Rio.

12. In the near term, the European Commission is expected to publish proposals on non-financial reporting this autumn, and we aim to inform and influence thinking in Brussels ahead of it, particularly the importance of introducing legislation to drive behaviour change.

13. Over the medium term, there are the Sustainable Development Goals (SDGs) to consider. In this area, we would like to see specific efforts focused on achieving a new set of Sustainable Development Goals under the theme of “Sustainable Capital Markets”. We believe this is an area the Prime Minister could play a vital role in, given his Co-Chairmanship of the UN Secretary-General’s “High-level Panel of Eminent Persons to advise on planning for post-2015”. One suggestion we have for how the UK could build on its success at Rio+20 would be for the Government to lead a “review” of Capital Markets and Sustainability. London would be exceptionally well placed to conduct this as it is both a leading global financial centre, and also the host of a significant number of leading responsible investment institutions. The terms of reference for the review would be to identify the many ways in which capital markets both support and undermine sustainable development, and to propose a broad set of policy measures for how the identified market failures could be corrected. These recommendations would include, but not be limited to, producing a set of Sustainable Development Goals under the theme of Sustainable Capital Markets, which could feed in to the UK-led discussions on SDGs at an appropriate time. As an example, one relevant SDG that would build on our work at Rio +20, is that by 2020 all mid cap companies and above are either integrating material sustainability issues into their Report & Accounts, or explaining why they have failed to do so.

14. Longer term, we believe that potential for a UN treaty remains and that our combined work at Rio +20 makes this future outcome somewhat more likely. We envisage a commitment by UN member states to develop regulations, codes or listing rules that encourage the integration of sustainability issues within the annual reports of all listed and large private companies (ie with a market capitalisation of in excess of $2 billion). In order for this policy to receive traction, we believe that an opt-out for companies that elect not to report on sustainability is required. However, these companies should be required to explain their reasons to their stakeholders. In other words, corporate sustainability disclosure would be on a “report or explain” basis.

In closing, we would also like to take this opportunity to recognise and welcome the interest that we have received from the Environmental Audit Committee in the work of the Corporate Sustainability Reporting Coalition. We are keen to continue to discuss with you how to move this important issue forward.

31 August 2012