There is a quiet transformation underway in financial markets as investors seek opportunities to capitalise from the transition to a sustainable economy.
A movement that started more than 20 years ago with niche efforts to screen investments that exclude high risk industries and businesses has now evolved to ESG integration to move into the mainstream. Screening and/or integration of environmental, social and governance (ESG) investment risks is now an industry baseline and the race is on to offer clients funds that deliver measurable sustainability impacts alongside leading financial returns. Matt Loose spoke to Matt Christensen, Global Head of Responsible Investment at AXA IM, one of the market leaders and pioneers, about its journey to add value to clients through responsible investing.
Why is AXA IM adopting a megatrends approach to investing? What value are you trying to create?
We have 20 years of socially responsible investment behind us. Responsible investing has changed enormously over this time, from an eligible universe approach, to best in class investing to the integration of ESG criteria – and it continues to evolve. As a global asset manager, we now have ESG integrated across all our investment platforms. The evidence shows us that ESG integration means that funds can outperform on a risk/return basis. Within the next five years, ESG integration is going to be the market norm. It’s no longer an option to have only a few funds with some specific asset classes.
Within the next five years, ESG integration is going to be the market norm. It’s no longer an option to have only a few funds with some specific asset classes.
Today we have a centralised responsible investment team that thinks about engagement, strategic trends identification, the data we need, our systems and how we integrate ESG thinking into different asset classes. We also have ESG experts working to ensure that ESG is understood within the fund management teams. This empowers investment teams to consider the ESG risk factors within their portfolios.
Looking ahead we see the significant growth in responsible investing will continue. The next phase of growth will see investors looking at impact and particularly through the lens of the Sustainable Development Goals. This means taking a strategic approach, identifying sustainability megatrends to target and seeking to deliver investment returns alongside measurable sustainability impacts. We are already being asked for this by the market, and at AXA IM, we see enormous opportunity to differentiate here.
The next phase of growth will see investors looking at impact and particularly through the lens of the Sustainable Development Goals.
Which trends are particular opportunities for AXA IM?
Our approach is informed by mega trends – like regulation, consumer interest, migration and urbanisation, that shape the investing landscape. We then look for thematic areas where we can differentiate, where we have skills and where there is opportunity across asset classes. Initially we are focused on: human capital (including gender, inequality), climate change (including the impacts on water, carbon reduction), health (including issues related to food, pharma and extending into planetary health issues like biodiversity). There will be others we think about in the future.
Our ESG research analysts play a key role in anticipating and interpreting these trends, which we then translate into investment decisions. Take climate: how do we think about climate targets as an asset management company? We might look at carbon budgets, at the emissions avoided, at the impacts of carbon pricing or regulations. We will be embedding this way of thinking into selected products across asset classes. This will in turn drive engagement and voting. For example, we’ll expect to see climate preparation in industries where we see climate is critical, and we reserve the right to vote against companies where we don’t think preparation is adequate.
What does this mean for companies that you are investing in?
Our fund managers will be asking the questions they need to judge company performance. This might for example mean asking questions around companies’ climate approaches to create dialogue on the progress that they are making.
CEOs will see in the tone of our questions that we are geared towards long-term performance – both from a shareholder perspective, but also from the perspectives of their stakeholder needs and their organisational resilience. The problems we face are generational, but we need to move hearts and minds today and this will mean a focus on a pragmatic 3-5 year horizon.
CEOs will see in the tone of our questions that we are geared towards long-term performance – both from a shareholder perspective, but also from the perspectives of their stakeholder needs and their organisational resilience.
What does this mean for the research that you need to make decisions?
We are making a shift here – we are building capacity, hiring people, building systems. We need also to think through our incentives and align remuneration of our teams to our impact on these themes.
How do you see this area developing? What’s the potential for growth in this kind of investing?
Firstly, our work on thematic investing will help us to retain assets as client demand shifts. We expect these thematic areas will perform well and present opportunities in different asset classes. We expect impact investing in private debt and equity will be the first mover. And we see strong potential for this to grow.
The primary barrier we face to this type of approach is data provisioning as well as the ability of individuals – fund managers, sales teams – to internalise the opportunities and integrate this into their thinking and work. Our challenge is to help colleagues to understand and grasp this opportunity. There remains an inertia in the shifting of money – so many different decisions are needed to develop a new investment strategy, and there are many gate keepers, from pension fund consultants, investment advisors, to trustees. We need clarity of communication and to greatly amplify the volume to cut through this inertia and build momentum.