Redefining activism by Matt Christensen

Why ESG is good – but no longer enough

When I was a kid, I loved to sprint – after all, who doesn’t want to finish first? Later, as a cross-country runner, I learned the value of pacing and the importance of seeing the big picture when aiming for the finish line. The further away your goal, the more important a robust methodology becomes.

True to human nature, when considering whether to take an ESG-based (Environmental, Social and Governance) approach to investing, business professionals – and, more broadly, their respective institutions – often won’t see the benefit of integrating sustainability unless they have experienced failure when focused on the short-term.

For me, that revelation came during the first major financial crisis of my career, nearly two decades ago, when the dot-com bubble burst. After riding a wave of success and rapid expansion, I was suddenly forced to shut down a business and make people redundant, including myself. My very next job provided a deep dive into the still-new field of responsible investment and it soon occurred to me that the previous failure could have been mitigated had we properly considered ESG factors as part of the business model. It forced me to consider the value of a business beyond pure shareholder-based metrics and I learned that a raft of new factors had to be considered.

In the investment world, this shift to long-term thinking is starting to happen on a broader scale. Over the last 10 years, we have witnessed the mainstreaming of sustainability across all asset classes and a growing number of investors have incorporated ESG criteria into their portfolio management toolkits. They are already convinced of the wider value of integrating these factors into their decision-making and are thus refocusing on sustainability and responsibility in their investment orientation.

Further, the market is witnessing a transition from the practice of excluding investments that don’t meet ESG criteria to an active integration of investments that do. While this is a definite sign of progress in our industry, it still isn’t enough.

Redefining activism

The next frontier must see the investment community redefine activism, and what it means to be an active manager. We must take a proactive approach to ensuring that investments seek to achieve positive impact while fulfilling our fiduciary duty. Our fiduciary duty as asset managers must be to maximize shareholder return for our clients while we better incorporate the needs of society more broadly.

The term ‘activism’ can illicit two polar responses: the first might associate the term with the activism of initiatives such as climate or social NGOs; on the other hand, one might equally associate the moniker with the short-term activism of financial services firms often not acting in the long-term interests of the company. In short, ‘activism’ is a loaded term and currently depends upon who is wielding it.

But there is an opportunity for a new role for activism in financial services that must be encouraged: activism that drives a constructive dialogue. It is this form of activism that will facilitate a less limited and more sustainable, long-term form of capitalism.

This new wave of activism is growing - driven by investor demand for the asset management industry to consider impact beyond financial returns and the need for managers to demonstrate their active approach. In private markets, we have focused our entire strategy within the equity asset class on an integrated approach which incorporates ESG due diligence with Sustainable Development Goals(SDG)-aligned investing since 2013.  This impact investing mindset is consistent with market rate returns that demonstrate long-term results with a focus on specific health, financial inclusion and climate metrics.

In Fixed Income, we see growth in sustainable active management, driven by an increase in demand for proof that loans have been used for the SDGs they set out to achieve. This also drives policy and industry-wide commitments: this summer, the International Capital Market Association (ICMA) updated its guidelines to require green bonds to have greater disclosure and transparency; and the industry is awaiting the European Commission’s publication later this year of Green Bond standards.

The Green Bond market is growing and there are many that exemplify sustainable active management. At AXA IM, we are also calling for transition bonds, where issuers in some challenged industries don’t have enough assets to come to market with a green bond but want to become greener. We see a huge opportunity to deliver real impact for companies trying to become more sustainable.

This is driving a change of mindset in the industry, but we need to see this approach taken in the public equity space as well. As pressure is mounting on active managers to differentiate and be more explicit in their ESG activity, there is likely to be a shift to more highly concentrated portfolios with high active share. This will mean more explicit correlation between voting and engagement - to hold companies to account with regards to the impact they are having on their employees, our communities, and our environment.

This evolution in ESG integration is where ESG and SDG will begin to have more overlap – it will come from a heightened sense of active ownership and long-term engagement.

Our journey to impact

In our own journey to active ownership over the last few years, we have made incremental adjustments to our voting and engagement – not just retaining an asset that ticks the ESG box but holding it to account if it’s not taking the right approaches to issues such as diversity & inclusion, climate change, biodiversity and our ambitions around SDG 13 targets.

We already have ESG standards in a high percentage of our portfolios, and the next step will be to adopt this across all of our investments – we are committed to achieving 90% ESG integration in our open-ended portfolios by the end of the year. We believe that our commitment to sustainability must extend beyond our investment approach and be truly integrated in how we manage our own business; to put our money where our mouth is.

How businesses are contributing to meeting the SDGs is fast becoming an expectation of the market. Our core ambition is to incorporate and follow ESG criteria across all aspects of our business, not just our investment teams. In the last 10 years we have committed to reducing our own carbon footprint and being a more environmentally friendly business. We are also developing specific, innovative, and pragmatic RI and impact-investment funds and policies as a key aim of our business. We strive to measure our own activity and hold ourselves accountable, and we’re working to create better tools, not just for our business but the market as a whole.

The journey to a ‘Better Tomorrow’ requires boldness and accountability. We must rethink our duty as fiduciaries and practice a new kind of activism – not just within the confines of our investments, but also within the philosophy and practices of our own businesses.  The financial services industry needs to wake up and realise that positive and negative screenings are no longer enough to ensure a healthy future for our global community and the world we live in. Slow and steady wins the race… thoughtful, long-term effort leads to success.

Matt Christensen
Head of Responsible Investment

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