Performance at the heart of Responsible Investment.

By Gilles Moëc, AXA Group Chief Economist and AXA IM Head of Research

Responsible investment is coming under attack. 

Some critics argue that investors should only care about financial returns and that ESG is a distraction. Others simply believe that anything related to ESG is, to some extent, greenwashing. 

We disagree with both points of view. 

The reason AXA IM focuses on RI is that we believe it will be beneficial from a financial standpoint, especially looking at medium to long-term horizons. There is no contradiction between non-financial commitments - contributing to mitigating climate change, for example - and generating sustainable performance. Said differently, as a diversified investor which invests in the whole economy and multiple asset classes, we believe that over the long-term financial materiality and double materiality converge. 

Indeed, we believe that in the medium to long-term, businesses which are low on carbon, socially aware and display the best governance practices are likely to overperform their peers, and help improve the risk profile of portfolios. 

There will, of course, be times when ESG funds underperform – 2022 being a notable example. But ESG  indices during that period were negatively impacted by a sectoral bias amid temporarily high energy  prices. The subsequent underperformance of the energy sector versus the MSCI Europe  Index in 2023 proved the doubters wrong. 

There will always be short-term periods of weaker returns. But over the long-term we believe the  evidence is clear: ESG works as an investment approach. 

The cost of ignoring reality

Not everyone agrees on the extent or cause of climate change. But there is a financial cost to paying  no heed to the governmental response to it.

For us, ignoring the transition to net zero is equivalent to forfeiting the impact of the billions which  governments are going to spend - and are already spending - to transform our economies, support  the decarbonisation of high emitters, and assist those companies providing solutions necessary to  the transition.

In the US, the Inflation Reduction Act, the largest piece of federal legislation ever to address climate  change, provides massive subsidies to help support the transition. Do investors really want to forego exposure to these handouts? It is, after all, free money. 

If it pays to be mindful of the benefits associated with efforts to tackle climate change, however, we  must also recognise physical and social risks will necessarily impact the financial performance of  several sectors.

Carbon taxes are already a reality in Europe and will likely extend geographically, as well as across industrial sectors. This means the usual measures of financial performance will be directly impacted by firms’ carbon intensity. With the price of carbon rising, at least in some countries, these financial  realities represent a further risk that investors simply cannot afford to ignore. This will exceed the  strict boundaries of Europe. The introduction of the carbon adjustment at EU borders will affect the price of heavily carbonated products originating from non-European producers. 

Clarity on RI principles

The central role of the financial sector in supporting an effective transition towards climate neutrality  has meant sustainable finance policies came into force in several geographies over recent years.  Often with different approaches and criteria, these brought complexity and some confusion in recent  years. A multiplicity of different metrics, targets and definitions litter the ESG landscape, and more  simplicity, comparability and inter-operability is needed. 

Against this backdrop, we want to be very clear about our policies, and about the framework which  guides our engagement with companies. 

Our ‘Three Strikes and You’re Out’ policy, for instance, makes plain to companies we deem climate  laggards that, unless they make sufficient progress within three years on emissions reduction targets  and investment in renewables, we will vote against management and ultimately divest.

Supported by our engagement within this framework, we are pleased to say that two companies  were recently removed from our Climate Laggards list, after they enhanced their strategies and met  our engagement objectives. 

Our robust engagement policy and governance is a key pillar of our ambition to remain an advanced  player in responsible investing. We are also deeply convinced that public, regular and quantified  monitoring of our ESG commitments – e.g. through our AXA IM For Progress Monitor, organised  around 8 KPIs - is key to maintaining such positioning. Consistency, clarity, and transparency guide our approach, and help us shape the investment solutions which best address the investment and  sustainability objectives of our clients.

AXA IM Stewardship Report 2023
Download Stewardship Report 2023 (5.52 MB)