The ‘Big Bang’ has not lost its spark

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The COP21 Paris Conference in 2015 was undoubtedly climate change’s ‘big bang’.

But a certain amount of scepticism accompanied the legislation’s introduction – after all, many had questions about how firms would integrate environmental, social and governance (ESG) criteria into traditional asset management models.

Fast forward almost three years and rather than fizzle in the face of political and populist headwinds, the call for greater alignment between finance and the future well-being of the world and its inhabitants has only grown louder.

"What has been even more surprising is the speed with which impact investing is now poised to cross into mainstream investment management, alongside ESG integration."

Additionally, the success of the United Nation’s Sustainable Development Goals (SDGs) initiative has acted as a catalyst which not only transcends geography but has also helped forge a common language for clients to understand. 

Indeed, the UN’s call-to-action via the SDGs has been met with no shortage of enthusiasm in the investment space. These targets have not only supplied a logical framework for asset owners to work from but they have also provided them with the impetus to take action.  Nevertheless, the desire for further progress across the investment value chain also carries the risk of dilution - this issue comes into particular focus as impact investing moves into public markets.

We are particularly cognisant of maintaining the key tenets of impact investing as it transitions into the public realm, given our established history in responsible investing (RI), and our track record in impact investing in the private equity space. It’s a topic of hot debate and in this report we tackle these issues head-on. We also provide some practical insights to highlight how the lessons learned in our private equity function could be transferred to public impact investing.

More generally, we are seeing a transformation across asset management, one that centres around redefining the role of capital, to greater serve the needs of the long-term. Woven into this is the growing realisation that ESG, which is often risk focused, will be a requisite along with impact investing, which targets specific positive outcomes.

AXA IM’s twin focus on these two areas translates into strategies, tools and indeed thinking that anticipates future developments to help drive this metamorphosis.  

Regulation begins to bite

Over the past year we have seen regulation start to embed ESG into the financial services sector. In France, Article 173 came into force, requiring institutional investors to document ESG materiality and climate change scenario analysis in their  business activities.

In the same vein, the work of the European Commission’s High-Level Expert Group on Sustainable Finance (HLEG) reached  a critical point, and the timeline to put the recommendations into action is imminent.  Our discussion with HLEG Chair, Christian Thimann, shows these recommendations have real teeth, and given their cross border reach,  have the potential to drive significant and real change.

To cater to this more demanding regulatory backdrop, AXA IM has leveraged its award-winning1 climate change framework to study ESG impact across asset classes and is now analysing how to consider potential shifts in asset allocations over time. 

Our stewardship activities reflect our position on climate change, and our voting policy was strengthened on connecting climate issues to voting decisions at company general meetings. Our engagement initiatives focused on corporations in the most affected industries in order to encourage them to improve disclosure on their carbon risk resilience strategy as we shift to a carbon constrained world.

Responsible investing 3.0

Today we are building out the third phase of our responsible investing capability. RI 3.0 will continue to focus on the growing needs of our clients as ESG integration gathers pace and impact investing hits the mainstream. 

In addition, we are also harnessing the power of technology to work on our state of the art visualisation tools, which measure ESG traceability and impact outcomes through relevant KPIs 2.  These software tools will help our clients to more easily see how their assets are performing across a range of metrics, beyond simply financials.  The intention is to provide better transparency on the underlying ESG implications and impacts of their investments.

We are also delivering more active thematic research on a range of key issues. Ultimately many of the RI and RI-related conversations presently taking place are complex and multi-faceted - and they can often raise more questions than they answer.

But we want to continue contributing to the conversation, addressing topics around climate change, diversity, the position of workers in an automated environment and how longevity and health factors can be better understood. Our goal at AXA IM is to keep challenging conventional thought in order to prepare our clients’ assets for a future where successful management of ESG risks and impact outcomes will be the norm.

1 Prix International du Meilleur Reporting Climatique des Investisseurs from the French Environment Ministry in 2016. Past performance is not a guide to future performance. The references to league tables and awards are not an indicator of the future places in league tables or awards and such information is necessarily evolutionary.

2 KPI – key performance indicators