The science on climate change is clear: the planet is heating at an alarming rate. We’re already at risk of breaching the limits set in the 2015 Paris Agreement. Rapid action is needed to ensure net zero pledges are kept and sustainable practices are implemented across business. 

No amount of disclosure or engagement will correct the course we’re on if businesses and business leaders don’t fix the fundamental market failures that are driving climate change.

Today, Becky Willan is joined by Steve Waygood, Chief Responsible Investment Officer at Aviva Investors to discuss the financial and economic arguments for tough, fast action on the climate emergency. Steve’s been at the heart of sustainable finance since the 1990s, witnessing its growth in ambition, scale and influence every year. Working with the World Wide Fund for Nature straight out of university, Steve established their ethical investment policy, and has been with Aviva Investors for almost two decades.

Do you want to learn how to build a purpose-driven business from Given, the consultancy that’s helped some of the world's largest organisations become purposeful? Download the Insiders’ Guide to Purpose HERE. 

This is an AI transcription, apologies for any typos.

[00:00:00] Becky Willan: From given this is Purposing the podcast that lifts the lead on how to run a truly purpose-driven business. I'm Becky Willan, and with the help of leaders at some of the world's most recognized brands, I'll be demystifying this often misunderstood topic into clear, actionable advice you can use in your own business.

Today I am joined by Steve Waygood, chief Responsible Investment Officer at Aviva Investors. We'll explore why purpose and policy is a crucial alliance in any business serious about tackling climate change. Through this conversation, you'll hear about the macroeconomic context for climate action, the crucial role of policy, and the current state play and why.

Building brilliant partnerships with public affairs is so essential for impactful advocacy. Before I speak with Steve, let's take a look back at his career to find out how he ended up becoming a leading voice in the conversation about the role of finance in shaping a just and regenerative future.

Like many in the world of sustainability, Steve's inspiration came from a name we all know and love.

[00:01:10] Steve Waygood: David Attenborough's Life on Earth was in 1979. I was nearly five when it first was shown. And even then, the kind of structure would be to show you what was happening and entertain you with these beautiful wildlife pictures.

And then at the very end, often the species or the place would be endangered.

[00:01:30] Becky Willan: His love of the natural world had begun. After Steve finished secondary school, his family wanted him to pursue a reliable career, so he played it safe with his degree.

[00:01:40] Steve Waygood: My dad, he, he was of the view that you needed to kind of have a profession in life that paid well enough for you to then bring up your own family.

And his view was that botanists and biologist ologists, or even a vet that wouldn't work. I did an economics degree and that had a section on environmental economics.

[00:02:01] Becky Willan: A stone's throw from his university campus, a chance to reignite his passion for the environment presented itself.

[00:02:08] Steve Waygood: Just down the road, we had the W W F Worldwide Fund for Nature.

I found that out and decided I wanted to work there and went signed up to a temping agency and. Staffed envelopes for them for months, and then did their reception.

[00:02:24] Becky Willan: Steve, by, did his time at W W F and the Stars aligned when he got a tap on the shoulder from the organization's finance director. I must've

[00:02:33] Steve Waygood: been 2021, and he said, you eat the ft.

You did an economic degree, didn't you? You, you, you could help me with this challenge to rewrite W W SS ethical investment policy, which is very out of

[00:02:44] Becky Willan: date. This kickstarted his journey to where Steve is today working as Chief Responsible Investment Officer at Aviva Investors, a role he's held for almost two decades.

[00:02:55] Steve Waygood: This stuff takes time, a long time to to be balanced in as much as eventually the truth will prevail. But there will be times where vested interests, a bit of different nature, pushing you back. There's a huge number of commercial conflicts, and the best way of generating change is to follow the money.

Right to the source. Who are the people who've got most to win as well as most to lose?

So Steve, welcome

[00:03:22] Becky Willan: to the show.

[00:03:23] Steve Waygood: Thank you, Becky. It's great to be here. Thanks for the invitation to join you. So,

[00:03:27] Becky Willan: bit of a big question to start with, but I'm hoping you can help to set the scene. Why should every leader in every business have a really good understanding of climate science?

[00:03:38] Steve Waygood: That is a huge question and goes back decades.

So let me try and summarize probably four decades worth of science as briefly as I can. The science now is absolutely categorically clear that climate change is definitely happening. That it is, as they say, anthropogenic. In other words, it's us, it's humanity. It's clear that it has already contributed to a significant number of increased incidents of flood and fire.

The science also crucially tells us, whilst it could get a lot, lot worse, it also says it's not too late. We have five to 10 years perhaps to reposition global economic growth so that it is on a sustainable footing. And if we do allow it though to run away from us, there are some pretty grim pictures now that the science is now setting up.

For example, they suggest that roughly three quarters of the world's population wouldn't be able to live where they do today without huge mitigation measures. If we do allow the climate to get to north of three degrees by the end of the century. And then the final thing that I think it's really important for every leader in every business to understand is that the current implied temperature change of global markets is 3.4 degrees, not one and a half to two degrees, which is the Paris Agreements threshold.

And that's a threshold for a reason. So it's supposed to not allow climate change to run away from us, but actually well into the region where climate change is running away and we can't. Stop it anymore. So it's big. It's important. We must take action at speed right now, and can

[00:05:16] Becky Willan: you paint a picture of what that action looks like?

What are some of the big systemic shifts that we need to see in order to stay within that safe limit?

[00:05:27] Steve Waygood: The first thing to say is for policy makers and governments around the world to understand how to make the transition they need to recognize it's the world's biggest market failure. People have been saying that now for over two decades, but this is a market failure.

In other words, the current structure of the market, I. Is leading to suboptimal outcomes for society. That's, that's the economic term. Free markets aren't actually helping at the moment. That's one, a different way of putting it. So we need to correct the market failure. Those that correct, the market failure as governments.

And the way they do that is by, in the jargon, internalizing the externality or actually to put it in more human language, to make the polluter pay. And you can do that in all sorts of ways. You can have a carbon tax go, an emissions trading scheme, you can have directives, uh, regulations. You, you can create consumer awareness information so consumers can then choose what they want to see.

Uh, so there are a huge number of ways that you can internalize the externalities, and those are the kinds of actions that governments need to take. Now, we as investors have significant influence over governments and that influence can be used, I think, in a. Very concerted way to support and encourage and challenge action.

So

[00:06:42] Becky Willan: I guess there's a thread here. So I think the, the role of government within this is, is clear. You've painted a, um, a, a, a clear picture of that, and that's something I would like to dive into in a bit more detail. But people are increasingly looking to business alongside government. Where do you see the biggest role for business in really accelerating the shift to a low carbon future?

[00:07:06] Steve Waygood: Huge number of things. The most important thing to start with is the creation within capitalism, the innovation, the research and development that, so, Creating the right kinds of products and services that help drive that transition, that disrupt the market commercially and bring in solutions that both meet the Paris Agreement at the same time as driving shareholder value if it's listed or driving profit, if it's, if it's privately owned.

So innovation, research and development F first for, for businesses. But very shortly thereafter, we need to inform policy makers and governments about how they can then harness markets, harness the profit, motive, support, that kind of research and development support, that kind of innovation, that creative capitalism.

Sometimes that needs subsidy, sometimes it needs the bad things to be taxed more heavily, could need an emissions trading scheme. So it does come back to this being a market failure and for as long as it is. And until governments correct it, they can't just delegate to companies on mass to deliver the Paris Agreement by just asking them to, mm-hmm.

Mm-hmm. They need to make it matter in markets. So where

[00:08:18] Becky Willan: does Aviva Investors fit into that bigger picture? I'm interested to understand how your purpose with you today for a better Tomorrow really helps shape the corporate response to

[00:08:31] Steve Waygood: that. It's a great purpose, isn't it, with you today for a better tomorrow.

It, it, it speaks to me as an employee of Aviva and Aviva Investors. Uh, I know it speaks to colleagues too. Uh, it reminds us that we're here for a reason, policy holders and to help shape the future they wish to retire into it. We, we actually had exactly that said to us by a, a policy holder nearly 10 years ago.

She, she sort of came in quite young, wanted to understand how pensions were run. Let's be honest. The vast majority of people don't understand that it's not in the national curriculum and, and in fact, even politicians and policy makers, most of them that I speak to don't really understand how a pension works or markets more generally.

But once we sort of went through that with her and showed her how her pension was investing in various companies, various governments through sovereign debt, country debt, and the other kinds of investments that she would be exposed to, for example, real assets property. Homes. And then she said, well, I really want my pension to help shape the future I wish to retire into.

And in that nugget, being with her today for a better tomorrow really helped shape what we do. Yeah,

[00:09:38] Becky Willan: I think it's such an interesting point. I think so many people assume that money is neutral, you know? And actually the way that we spend, the way that we save, the way that we invest can be a force for change and that.

Change can be positive or it can be destructive. And I think more people are beginning to understand that I think through great campaigns like Make My Money Matter. But what are some of the things that Aviva Investors has therefore sort of done differently as, as a result of that commitment to, I guess, tackling climate change and shaping a future that people can really look forward to retiring

[00:10:15] Steve Waygood: into?

I love the work of Make My Money Matter. I, I also would add to that share action. Mm-hmm. Uh, which helps people understand how to engage with the companies they own at AGMs. And one of the things that we do differently is of even investors is, is definitely reach out to those NGOs and help them understand how the markets can.

Be made to work to help shape the future. And we, we really believe in the role of civil regulation, the role of civil society to help inform their members so that this debate is cast in an appropriate public light. That, so it's accountable. So that's one very different thing. I, I think a lot of other financial institutions might see NGOs as the enemy, the kind of people that might just glue themselves to the front door and their security team have a nightmare and.

I do understand that, but it's a very blinkered, myopic way of, of looking at the role of civil society. They're there to do good. So that's one thing. Another would be more technically for over two decades, our voting policy at corporate annual general meetings. Uh, we've set out that if companies weren't disclosing their.

Greenhouse gas emissions as it was called back then, or climate change emissions scope one, two, and three. As people now are increasingly talking about, we would vote against the report and accounts, we've then escalated that to be voting against reelection of directors, voting against board pay and so on.

We also have a had a climate strategy since 2015, which included coal. Engagement and then divestment if the coal companies weren't doing what we needed them to do, and there are now over. 200 companies globally on the stop list from that perspective, which we won't own, and we don't wear that as a badge of honor, that's a failed engagement process.

I would far rather coal companies be telling us they will be part of the transition. We won't do any new capital expenditure and new coal extraction. And that would be a better way of delivering the Paris agreement. But, um, the, the kind of attempts to do that, I think were, were always ambitious, let's put it that way.

We need to see them abating their emissions much more. And then more recently, we've been focusing on the 30 biggest oil and gas holdings that are listed globally. That includes state owned enterprises in Mexico, India, Russia, Brazil. We're everywhere in the road world, Saudi Arabia, as well as the predominantly listed businesses in places like the us.

Here in the uk, France, Spain, Italy, and so on. So we've been engaging with them in a very concerted fashion now for two years, nearly, well in fact, for decades, but in a very concerted fashion for the last two years. Saying to them, if they don't produce a transition plan, a task force, and climate related financial disclosure report, then we may well need to divest if they can't prove that they're concerned about the Paris agreement.

[00:13:08] Becky Willan: Yeah. Yeah, absolutely. We are, I guess, seeing more and more attempts to put climate on the agenda at AGMs. I guess from an outside view, the uptake of that still seems fairly low. Do you feel hopeful that those sort of initiatives can help to move the dial, or do you think there's a different kind of conversation that's really needed to make that happen?

[00:13:32] Steve Waygood: They can help move the dial, but, but the main challenge with them, and, and this is like straight to the core of theory of change now in, in kind of N G O terms, the theory of change I think is flawed in as much as if it is a market failure, no amount of engagement. By investors, we'll change the board's mind that actually there's money to be made by doing, let's say, the wrong thing from a Paris perspective.

So market failures, that's what that means. It's currently the. The existing business environment is rewarding companies to dig it out of the ground and burn it at a far greater rate than the planet can assimilate those emissions, and that's the core of the market failure. So where does that leave us? I think we have to make sure that finance ministers, central bank, governors, heads of state, are fully aware that it is their job to correct market failures.

We need to address. The profound physical risks that that climate change presents to global economic growth. Yeah. Yeah. The problem at the moment is that you've got finance ministers and central bank governors saying, oh, we've got this inflation mandate, we've got this kind of growth challenge right now.

We we're heading into recessions. We need to do everything we can to stop that. And, and that means if oil is cheap, we'll pump it, we'll burn it. But that kind of thinking dooms long-term global growth and, and it's. Directly antithetical to their core mandates on inflation and growth and so

[00:15:02] Becky Willan: forth. Yeah.

Yeah. And I guess, I mean, you've talked about this being a market failure a a couple of times, but I guess so much of policy is driven by, I guess what I might describe as a very neoclassical version of economics in which the market always knows best, and the purpose of business is to maximize profit shareholder value.

In the short term. How does what we know. Now about the science undermine that established sort of doctrine that drives so much of what policy is about e even today in most economies?

[00:15:41] Steve Waygood: Great question. Most of Neoclassical economics is said to come from Milton Friedman, who famously said The business of business is business.

In that article he talked about. Mainly corporate responsibility through the lens of philanthropy, should it be up to companies to give away shareholder funds. He was also very clear that the corporate board need to make sure that the company adheres to law and generally accepted business norms as kind of language he was using.

And those norms have shifted. Laws have shifted. We've seen thousands, literally, of policies now globally in the last 20 years plus, which have changed, started to change. I. The way that markets are structured to try and make sure this enormous potentially existential crisis to civilization, that climate represents that, that we don't allow the markets to fail at that level.

So to some extent, Friedman even, I'm sure, would be saying that, well, that businesses needing to comply with these laws. There's these regulations, but the norms are now shifting so much faster and further than the regulations, particularly in younger generations. Than mine. And they are deeply concerned to the point actually that climate anxiety is now becoming a mental health challenge for large numbers of people and, and a challenge for the psychiatric profession more generally.

So it, this is, this is real in many, many ways to different people. And Friedman would recognize that markets can be short term, they can fail. Monopoly, oligopoly, duopoly. These things are market failures and the climate crisis. Is the world's biggest market failure and short-termism in markets. For example, when an analyst is doing a valuation on a company, they look out three to five years, they put the numbers in to their discount cashflow, but they then assume that institution, whatever they're valuing, will continue to grow at a mean growth rate of say, I don't know, 2%, 5% forever.

Then that analyst has assumed away externalities that have assumed everything will grow forever. And this discount rate that they apply to future returns means that at the, at the core of it, we market-wise, discount the future so that the interest of future generations become meaningless. Actually, in valuations today, I.

[00:18:05] Becky Willan: Yeah, it's fascinating when you think about how many CEOs of our biggest companies, probably a lot of their training was based on that neoclassical view of the world, and it's now business schools is starting to to, to change that and working with brilliant. You know, academics like, you know, Colin Mayer and and Alex Edmonds.

But I think a lot of that doctrine will still be very much part of the c e O mindset and a lot of complex organizations today. So I guess, what's the, what's the one thing that you'd really love to be in that c e o mindset for, you know, our world's most powerful leaders of businesses

[00:18:46] Steve Waygood: today? I would ask the chief execs of all companies, of, of all institutions, actually.

It's not just a corporate challenge all. Global leaders have a role to play in managing a just and smooth transition to net zero by 2050. That's one way of thinking of this challenge. The one thing I would ask them to do as leaders is to recognize that this is an enormous challenge. That it's not too late.

And if they don't take action, if we don't collectively take action, then those that follow us won't be able to. We are the last generation of leaders that can do anything about this challenge. People might think, oh, well look, you know, look at what happened to the financial crisis or the pandemic. We were able to spend our way outta both of those problems.

It's effectively what we did. This isn't one of those challenges. It would be literally the environment that we live in. Heating up to the point where we can't live in it anymore as a species at the, at the, certainly at the scale that we enjoy today. So we are the last generation of leaders that can stop this running away, and that's the main thing individuals need to understand.

We need to make the time to think through what we can do to stop this running away from us. Steve,

[00:19:57] Becky Willan: you've talked about the importance of advocacy and of leaders being clear with government about what they need from a policy perspective in order to create an environment that facilitates serious sort of investment behind the transition to a just and.

Regenerative future, and I know that this is something that Aviva's been really successful at doing, but I'm interested in kind of going back to the beginning of that. When did you realize that you needed to work more closely with your colleagues and the public affairs team? What was going on in the business?

What was going on in the world that made you think that that really needed to be a, uh, that there needed to be greater effort behind that?

[00:20:39] Steve Waygood: One of the most important partnerships, We've ever had within the team has been with our public policy team, our colleagues in public affairs. Uh, the, the partnership has been around for as long as I've been within Veva Investors, which is now 17 years.

Plus. Public affairs is a real skill. It's a huge. We learn, who do we need to engage with? Who are the people that really are controlling the, this business environment? We know who pretends to, but, but who is it really? Who's advising them? Uh, where are they? When can we access them? What are the big moments that are coming up geopolitically as well as nationally?

Um, how do we present our argument to.

Is huge and their skills are incredibly important to add to as, which is, if I can sort of think about what, what, what it's that we bring to that picture. It's the kind of what needs to happen and why does it need to happen? What? What's the financial reasons why we've got this problem in the first place?

What are the economic arguments behind it? Perhaps something around fiduciary. These kind of legal questions as well as financial and economic. So they would, I imagine, as the subject matter experts in that space, but the subject that they're expert in is change. How do you influence global change? So it is an incredibly important partnership and something that.

Sustainable Stock Exchange initiative. In responded call, just what could achieve limitations, call United something and then work with them while they did it. And for it then to be successful in helping move that debate forwards on corporate listing rules and disclosure standards. That, that was hugely interesting and I, I wanted to explore that much further.

And in the run up to 2012 was Rio plus 20, the 20th anniversary of the original Rio declaration. And then we were looking toward the sustainable development goals that then three years away in 2015, We possibly could to the policy makers so that the new key performance indicators of the world, which is one way of thinking of the SDGs, were informed from a financial perspective.

And we actually managed to get Gold 12.6 to be there by working with a huge number of others. But that kind of being in the room when the SDGs were signed in 2015 and executive.

Secretary Generals of the World Bank and, and the imf. It was just an incredible experience.

[00:23:35] Becky Willan: So if, if we think about the role of major intergovernmental multilateral institutions and the action that is being taken, you know, what's already in place and is anything actually working,

[00:23:48] Steve Waygood: the vast majority of government action around corporate disclosure.

The work of the task force on climate related financial disclosure has had real impact, but disclosure by itself doesn't make the issue material. And you don't manage a global economy by just asking them to disclose their way to alignment with the Paris Agreement. You need to change the market, and so disclosure is good.

It's created. Bigger, an enormous amount of interest. Now in, in the reality of the climate science and actually the vast majority of corporate leaders and investor leaders, particularly in Europe and increasingly in Asia, the vast majority of those corporate leaders recognize that the climate crisis is upon us and.

A challenge that we need to step up to?

[00:24:39] Becky Willan: Yeah, I think it's really interesting. I think I often talk about disclosure and delivery and I think disclosure is so important, but it can't come at the expense of that focus on delivering the sort of change that we need to see. And I think we're having some interesting conversations sort of related to this around purpose and to what extent corporates should be expected to produce more disclosure around.

Kind of purposes of as a broader concept, which I think is right, but not if it comes at the expense of getting on and doing the work needed to deliver impact and, and shift the way that value is created within those organizations. And then I guess the, the other thing sort of looking ahead is it strikes me that there is no single kind of intergovernmental.

Institution that's really dedicated to this sort of systemic climate action that you've been talking about. So what is the impact of that for business? And I guess within that context, what role should businesses be

[00:25:41] Steve Waygood: playing? We need a plan. In fact, we need thousands of plans. It's possibly even tens of thousands.

One institution can choreograph the whole thing for us. I, I do think there's a need for an institution to advise, particularly countries in emerging markets on what their transition plan needs to look like and how to then go about transitioning. And we've had conversations with the O E C D, which was originally created to help deliver the Marshall Plan in Europe, post-second world, be.

So the challenge now is we need a transition framework. We need global governance that meets country governance, that in turn meets corporate governance in a coherent way that manages a smooth transition over the coming decades, and we can't jump to alignment overnight.

Dorr peoples returns.

Commons common, and if Eleanor Ostrom was with us today, she would be talking about just this. How does society now govern the global commons in the direction of the Paris Agreement through economic activity by harnessing markets and the profit motive and telling this, we do that. Delivery of a just transition at all, and the economic vested interests that currently are dictating will prevail over the short term, which will then lead to, I unfortunately predict existential collapse of civilization.

Humanity will continue. Life on earth will continue, but it'll not be civilization or life as we know.

Transition. Have the blood on their hands, future generations.

It's a moral and ethical issue now, as well as one that's financial and economic too.

[00:27:56] Becky Willan: Steve, it's been such a pleasure having you on purposing. Thank you so much. You're

[00:28:00] Steve Waygood: very welcome. Thank you for having me here.

[00:28:05] Becky Willan: Thanks again to Steve. Such a powerful conversation with loads of brilliant insights. So if you want to make purpose and policy a crucial alliance in the fight against climate change, here are a few things I've taken from the conversation. Time is running out. Steve really brought home the urgency of the challenge when he said that our current leaders are the last generation who can do anything meaningful about climate change.

That means that every business leader has a responsibility to get educated about the role of their company in the climate emergency and get behind well thought out and comprehensive transition plans. Government policy creates the conditions in which businesses survive, comply, or thrive. And right now it's.

Basically set up to create a massive market failure when it comes to climate change in which companies are better off finding and burning new sources of fossil fuels than investing in the transition to net zero in any meaningful way. We need policies that drive purposeful change, not stop it, and that's why advocacy is so important.

We need brave leaders. Prepared to speak out about what policies would actually make a difference, and this should be on the agenda for every business. Your public affairs team should be the first place you seek help If you want to do advocacy well, they might have protected vested interest in the past, but in the new world where transparency, collaboration, and positive change are key, they can and should be powerful allies.

They know who's influencing who they know when and where to engage in dialogue and how to make compelling arguments, which is exactly what's needed to bring about policy change that creates the right conditions for purposeful businesses to thrive. If you'd like more practical advice on building a purpose-driven business with brilliant insights from people like Steve, download our insiders Guide to [email protected] slash insiders guide.