Episode Summary: Steve Weger on Building a Sustainable Financial System

Podcast Information:

• Title: The Sustainability Story
• Host/Author: CFA Institute
• Episode: Steve Weger: Building a Sustainable Financial System
• Release Date: May 12, 2025

Introduction

In this compelling episode of The Sustainability Story, the CFA Institute welcomes Dr. Steve Weger, a luminary in the realm of sustainable finance. Hosted by Paul Moody, Steve delves into his extensive 25-year journey in sustainable investing, sharing invaluable insights into the evolution of the field, the intricacies of integrating sustainability into large financial institutions, and the pivotal role of public policy in shaping a sustainable financial system.

Steve Weger's Professional Journey and Early Influences

Paul Moody sets the stage by highlighting Steve Weger's illustrious career:

"Steve has worked on a range of financial, governmental, non-governmental and academic institutions on international sustainable finance issues." (00:04)

Steve recounts his initial foray into sustainable finance, inspired by contemporaries and global events:

"Tesla directly challenged me in no uncertain terms if I cared about finance and sustainability and the long term sustainability of both..." (02:05)

He reflects on the early days of sustainable investing in the UK, transitioning from negative screening based on ethical considerations to more sophisticated engagement strategies.

Evolution of Sustainable Finance: From Negative Screening to Macro Stewardship

Steve outlines the transformative phases of sustainable finance over the past few decades:

1. Negative Screening: Initially focused on excluding investments based on ethical criteria.
2. Engagement: Utilizing shareholder rights to influence company performance on sustainability issues.
3. Integration: Incorporating sustainability factors into investment analysis to identify alpha-generating opportunities.
4. Macro Stewardship: Recognizing the systemic risks posed by sustainability challenges and engaging at a broader policy level.

"From negative screening to engagement to integration, and then from the micro to the macro, that's how I would say things have changed." (04:43)

Embedding Sustainability at Aviva Investors

As the Chief Sustainable Finance Officer Advisor at Aviva Investors, Steve shares key lessons learned in integrating sustainability into a complex global financial institution:

1. Resource Allocation for Voting Policies:

   "Delivering that voting policy required significant resources... we do over 70,000 votes a year across our listed equity portfolio." (05:07)

2. Materiality of Data:

   "Data is variable globally... it's difficult to get a comprehensive data set... but it's still not finished." (06:22)

3. Predictable Catalysts:

   "It's really important to have a catalyst over an investment time horizon that you can see coming." (07:10)

4. Internalizing Externalities:

   "For an externality to be relevant to a business, it has to be internalized." (07:55)

Steve emphasizes the importance of governments in internalizing externalities through mechanisms like taxes, subsidies, and trading schemes to ensure sustainability factors are factored into financial analyses.

The Role of Insurance in Sustainability

Discussing the unique position of insurance companies like Aviva, Steve highlights the long-term investment horizons inherent to the industry:

"We're running money for individuals who will be putting it away for their pension. They might not need it for many decades." (09:25)

He elaborates on how climate change introduces both transition and physical risks:

• Transition Risk: The shift from fossil fuels to renewable energy sources may lead to rapid price corrections in sectors like oil and gas.

  "There's the transition risk, the risk of moving too fast, perhaps away from that sector... leading to a rapid price correction." (09:50)

• Physical Risk: Extreme climate events can disrupt supply chains and infrastructure, affecting investment portfolios.

  "The physical risk isn't just in itself a risk that we need to be contending with and modeling... it's going to cause geopolitical issues." (12:10)

Steve argues that these risks are not yet fully priced into markets due to the limitations of traditional financial models.

Discounted Cash Flow Models: Limitations in Addressing Long-Term Sustainability Risks

Steve critically examines the prevalent Discounted Cash Flow (DCF) models used in financial analysis:

"The modeling time horizon is normally three years and can often be five at best." (14:57)

He points out that DCF models fail to account for long-term risks associated with climate change, leading to a disconnect between financial valuations and actual sustainability risks.

"There is a tragedy of horizons where you've got this impact horizon of multiple decades... versus modeling horizons." (15:30)

Steve emphasizes the need for governments to internalize externalities to bridge this gap, ensuring that long-term sustainability risks are reflected in financial valuations.

Stewardship: From Micro to Macro Engagement

Transitioning to the topic of stewardship, Steve differentiates between micro and macro stewardship:

• Micro Stewardship: Engaging directly with individual companies to influence their sustainability practices.

• Macro Stewardship: Engaging with government policymakers, non-governmental organizations, and other key stakeholders to address systemic sustainability challenges.

"Macro stewardship on sustainability issues formally as financial institutions actively engaging government policymakers, non governmental organizations, academics and other key influences to correct material market failures on sustainability issues." (20:58)

Steve underscores the necessity of macro stewardship in addressing market failures that cannot be resolved through company-level engagement alone.

Shifting Stewardship Priorities Among Asset Owners and Managers

Steve observes an evolution in how asset owners and managers approach stewardship:

"The leading asset owners and their advisors are now recognizing... the market structure is rewarding no transition." (24:48)

He notes that while some asset managers are beginning to integrate macro stewardship into their strategies, it is not yet a universal practice. However, the trend is moving towards more comprehensive and visionary approaches to sustainability.

Public Policy and Advocacy: Aviva Investors' Active Engagement

Steve articulates why Aviva Investors is deeply involved in public policy and advocacy:

1. Financial Argument: Ensuring long-term client returns by mitigating sustainability risks.
2. Fiduciary Duty: Upholding responsibilities to both current and future shareholders and policyholders.
3. Market Integrity: Assisting regulators in identifying and correcting market failures related to sustainability.

"There are three driving forces... a financial, a fiduciary case to our shareholders and our clients. And then there's this long term market integrity duty." (27:41)

Steve highlights Aviva's participation in initiatives like the Transition Plan Task Force and the Task Force on Climate-Related Financial Disclosures (TCFD) as part of their advocacy efforts.

Policymaker Responsiveness and the Financial Sector's Role

When questioned about the pace at which policymakers are addressing sustainability issues, Steve expresses concern:

"I don't believe policymakers are moving quickly enough on sustainability issues, including climate." (31:53)

He advocates for greater financial sector involvement in policymaking forums to influence and accelerate effective sustainability regulations.

"One of the things that the financial sector can do to accelerate effective public policymaking is turn up at the meetings that matter..." (32:17)

Tools for Achieving Sustainable Market Incentives

Steve outlines key policy tools that policymakers can deploy to drive sustainable investments:

1. Fiscal Interventions: Taxes or subsidies to internalize externalities.
2. Trading Schemes: Tradable permits like the EU Emissions Trading Scheme (ETS).
3. Standards and Regulations: Establishing clear guidelines for sustainable practices.
4. Consumer Information Devices: Enhancing transparency to influence consumer behavior.

"These are enabling different consumer purchasing behavior... it will then change the present value of the security." (34:21)

He emphasizes the importance of making these incentives material over investment time horizons to ensure they effectively influence financial valuations.

Conclusion

In this enlightening episode, Steve Weger provides a comprehensive overview of the challenges and opportunities in building a sustainable financial system. From critiquing traditional financial models to advocating for systemic policy changes, his insights underscore the critical role that the financial sector must play in steering the global economy towards sustainability. Listeners gain a deeper understanding of the intricate interplay between finance, policy, and sustainability, and the imperative for collaborative efforts to address the pressing environmental challenges of our time.

Notable Quotes:

• "From negative screening to engagement to integration, and then from the micro to the macro, that's how I would say things have changed." (04:43)
• "For an externality to be relevant to a business, it has to be internalized." (07:55)
• "The tragedy of horizons where you've got this impact horizon of multiple decades... versus modeling horizons." (15:30)
• "Macro stewardship on sustainability issues formally as financial institutions actively engaging government policymakers..." (20:58)
• "I don't believe policymakers are moving quickly enough on sustainability issues, including climate." (31:53)

This episode serves as an essential listen for professionals and enthusiasts in the fields of sustainable finance and ESG investing, offering a roadmap for integrating sustainability into financial systems and advocating for policies that support long-term economic and environmental resilience.