Spotlight on climate change
The Paris Agreement was a decisive step towards dramatically curbing global emissions and achieving carbon neutrality by the second half of this century.
However, countries’ climate pledges still fall short of keeping the rise in global temperature ‘well below’ 2˚C compared with pre-industrial levels. Traditional financial systems fail to factor in climate change impacts, which skews risk and return assessments. Regulatory developments are accelerating in response. Asset owners and managers need to move quickly to keep up.
Our work across our business - both regulatory and our own initiatives - is a result of our continued efforts to address climate change.
Managing our exposure to climate risks
We have a number of levers that are working together with the aim of reducing the impact of climate change. From our environmental, social and governance (ESG) analysis through to our scoring and reporting, and our voting and engagement, we are committed to pushing companies to be more responsible at every stage of the investment process.
On the surface climate issues may appear straight forward, but in reality there are grey areas that require careful consideration. We have developed a range of tools and policies that help us factor climate risks and opportunities into our investment decisions.
- Integrating climate risk within our analysis:
Our ESG analysis is based on a framework that allows us to assess the risks and opportunities likely to disrupt sectors and business models. The resulting ESG score, that is calculated for more than 6,000 companies, is used to help portfolio managers make more informed investment decisions. In addition, we are developing more sophisticated tools to assess carbon risks in sectors that are subject to the most critical transition risks.
- Carbon measurement and mitigation:
Carbon footprinting is a crucial step to assess and monitor carbon risks. We are supportive of the evolution of impact reporting. Over the year we have been testing metrics that track and monitor climate transition risks. We have tested a range of KPIs1 such as a business’ technology mix, exposure to fossil fuels, capex structure and fossil fuel reserves. From this we carve out the contribution to carbon footprint (compared with the appropriate benchmark) from individual companies and sectors. This has proved a valuable tool in illustrating how portfolios can materially lower their carbon footprint through selective stock picking, without excluding whole sectors.
The figure shows this tool in action. It shows the breakdown of an example fund’s carbon footprint against a comparable benchmark, and where the most significant exposures are concentrated.
While carbon footprinting is crucial, it is not sufficient in itself. We continue to push for enhanced climate disclosure to satisfy Article 173 in France and to take account of recommendations from the Financial Stability Board Task Force on Climate-related Financial Disclosure (TCFD).
- Reducing our exposure to fossil fuels:
Coal-related assets face the risk of becoming stranded assets due to more stringent regulation and a shift towards cleaner sources. When investing in energy companies, it is vital to pay attention to their revenue mix and to the assets they have on their balance sheet, because the ability to monetise these assets will support future revenue streams and growth.
Last year AXA IM decided to divest from companies whose exposure to coal activities was deemed too high in terms of carbon impact and climate risk. Divestment from coal must be considered carefully; it can be the only option when carbon risks are too high but it can appear a simplistic solution to a complicated issue and suppress hope for improvement through engagement.
- Contributing to the energy transition by investing in green assets and monitoring green share:
Through our green bond framework we continue to drive investments towards authentic green projects. Our process is articulated around four pillars: The ESG quality of the issuer, the project type, the management of proceeds and traceability of impacts. Using this core selection approach we are able to discriminate between green projects and direct our investments accordingly.
Beyond the green bond market, we have been working on measuring the ‘green share’ of our portfolios. This is the average percentage of an issuers’ business mix i.e. its composition of products and services, which make a positive contribution to the energy transition.
- Voting and engagement:
We engage directly with companies, and as part of a coalition of investors, to encourage improved disclosure on carbon risk resilience. Over the year our engagement included 36 companies in four sectors – oil and gas, utilities, mining and automotive.
Filing shareholder resolutions supports engagement by using the decision-making powers of shareholders to accelerate strategic planning on climate change. AXA IM revised its corporate governance policy to highlight the importance of companies managing the critical issue of climate change. Our policy states that we will support relevant resolutions at general meetings. However, we do not only wait for shareholder resolutions to make our voice heard, we may use other resolutions to reflect concerns about the management of climate risks.
Our voting record is consistent with our climate policy across the firm. This is in contrast to some of our peers. A Financial Times article on climate change resolutions at 15 key US oil and gas and electric utility companies during 2017 revealed that AXA IM voted in favour of resolutions at all these companies. However, a number of other asset managers only voted in support of these resolutions at two companies and voted against at the other 13 company meetings. There were only two other European-based asset managers to consistently vote in support of all resolutions and declare their votes alongside AXA IM.
- Collaboration: Our stewardship plans on climate change are set to increase and will focus on collaborative activities with like-minded investors as we believe that climate change is an area where collective influence will bear greater results. Our activities will include:
Participation in the GlobalClimate 100+, a five-year initiative to target and engage with the top 100 largest greenhouse gas emitters, representing 85% of annual greenhouse emissions and US$5.5 trillion. Engagement objectives include curbing emissions, strengthening climate-related financial disclosures and improving governance on climate change risks. It aligns with the recommendations of the TCFD and builds on work we are already doing with the International Investors Group on Climate Change (IIGCC) where we are leading engagement with companies in the utilities and auto sectors.
- We continue to review opportunities to engage with companies using the TCFD framework that broadens climate stewardship beyond emitters to other sectors where climate change poses a financial risk.
- We will continue to use our voting rights to provoke more responsible corporate behaviour. Where companies are not responding adequately to climate issues we will move beyond shareholder resolutions to vote against a range of resolutions including the annual report and accounts, director elections and remuneration.
The transition to a low-carbon world generates a number of opportunities as new technologies and the continuous search for efficiency redefine the way we produce and consume. As a large investor, we strongly believe we have to play our part in the low-carbon transition. Our policies, research, and most importantly, our actions have supported these endeavours over the year.