Why responsible investing is good for people and the planet

As the focus on envi­ron­men­tal, social and gov­er­nance (ESG) stan­dards becomes increas­ing­ly impor­tant for investors around the world, the case for sus­tain­able invest­ing has nev­er been stronger.

What once sim­ply meant invest­ing in enti­ties that were sus­tain­able over the long term and could grow their earn­ings has devel­oped to encom­pass a much broad­er def­i­n­i­tion of sus­tain­abil­i­ty in that busi­ness mod­els must be able to con­tin­ue with­out incur­ring dis­rup­tions from ESG issues, says Chris Iggo, chief invest­ment offi­cer at AXA Invest­ment Man­agers.

“A good exam­ple is a busi­ness that is a heavy car­bon emit­ter; increas­ing­ly it will be penalised for those car­bon emis­sions either through tax­a­tion or reg­u­la­tion to the point where it will become less prof­itable and there­fore the busi­ness will be unsus­tain­able,” he explains.

While there are a num­ber of ESG risks investors need to think about, it is also cre­at­ing oppor­tu­ni­ties for investors to sup­port com­pa­nies that are con­tribut­ing to a sus­tain­able future. “An exam­ple would be a renew­able ener­gy com­pa­ny, which is help­ing shift the econ­o­my to a low-car­bon world,” says Iggo.

While some insti­tu­tion­al investors, such as endow­ment, char­i­ta­ble and pen­sion funds, have long incor­po­rat­ed non-finan­cial con­sid­er­a­tions into their invest­ment poli­cies, respon­si­ble invest­ing is now becom­ing far more main­stream.

“There are two things dri­ving this,” says Iggo. “Peo­ple do want to invest in assets that are good for peo­ple and the plan­et, but there is also a sense the world is mov­ing this way and there­fore some com­pa­nies are going to be reward­ed for doing the right thing. And there are oth­er com­pa­nies that are going to be pun­ished for not doing the right thing, which will increase their cost of cap­i­tal and make it hard­er to gen­er­ate a good eco­nom­ic return.”

While ESG con­cerns are wide-rang­ing, the issue that is draw­ing the most atten­tion is cli­mate change and the poten­tial cost of not reduc­ing car­bon emis­sions. A num­ber of coun­tries have com­mit­ted to achieve net-zero car­bon emis­sions by 2050 and those gov­ern­ment com­mit­ments mean they are like­ly to pres­sure busi­ness­es to reduce car­bon emis­sions while imple­ment­ing poli­cies to tran­si­tion to a low-car­bon econ­o­my.

“Not only do gov­ern­ments have the pow­er to impose reg­u­la­tions and tax­es to help achieve that, they also have the fis­cal pow­er to sub­sidise new tech­nolo­gies and encour­age the ener­gy tran­si­tion,” says Iggo.

“It’s also very mea­sur­able. We can look at a com­pa­ny and mea­sure its car­bon foot­print today and we can assess how that’s going to look going for­ward based on the plans that com­pa­ny has to trans­form itself. The UK, US and Chi­nese gov­ern­ments all have tar­get dates when they want to achieve net-zero economies, so there’s huge pres­sure on com­pa­nies to be com­pli­ant towards those uni­ver­sal tar­gets.”

Against this back­drop, invest­ment man­agers can also play a crit­i­cal role in help­ing the world tran­si­tion to a low-car­bon future. For starters, fund man­agers can mea­sure the car­bon inten­si­ty of their invest­ment port­fo­lios by mea­sur­ing the car­bon foot­print of all the com­pa­nies a par­tic­u­lar fund invests in, enabling man­agers to adjust their port­fo­lios’ car­bon foot­prints accord­ing­ly.

For exam­ple, AXA Invest­ment Man­agers has com­mit­ted to exit all its coal invest­ments in Organ­i­sa­tion for Eco­nom­ic Co-oper­a­tion and Devel­op­ment coun­tries by the end of this decade and in the rest of the world by 2040.

“That’s a big source of cap­i­tal that coal com­pa­nies can no longer tap, which means they can’t fund their busi­ness­es as eas­i­ly as they did in the past. But equal­ly asset man­agers can also play a more ven­ture-cap­i­tal role by invest­ing in com­pa­nies that are devel­op­ing new tech­nolo­gies such as elec­tron­ic vehi­cle bat­ter­ies,” says Iggo.

In addi­tion, investors have a role to play in engag­ing with busi­ness­es and mar­shalling them in the right direc­tion on sus­tain­abil­i­ty issues, no mat­ter if they are invest­ing in equi­ties or bonds. AXA Invest­ment Man­agers’ stew­ard­ship and engage­ment strat­e­gy, for instance, seeks to pro­tect client invest­ments by hold­ing busi­ness­es to account on issues that could sig­nif­i­cant­ly impact the val­ue of that busi­ness, and there­fore investor returns, over the longer term.

Growth in sus­tain­able invest­ment also means asset man­agers have to weigh ESG con­sid­er­a­tions, includ­ing cli­mate, inequal­i­ty and bio­di­ver­si­ty, along­side more tra­di­tion­al invest­ment met­rics, such as a company’s finan­cial state­ment and bal­ance sheet.
“Incor­po­rat­ing that infor­ma­tion into the invest­ment deci­sion is already hap­pen­ing and it’s becom­ing embed­ded into the tra­di­tion­al invest­ment process even for funds that don’t class them­selves as ESG,” says Iggo.

“It’s a nec­es­sary process to go through to estab­lish the val­ue of a cor­po­rate asset, because if you ignore all this then sud­den­ly that asset could get deval­ued through some kind of fine or increased tax bur­den or what­ev­er it might be and, if you’re not aware of those risks through a detailed study of the busi­ness, then as an investor you’re going to under­per­form.”

Any con­cerns investors might have that they are for­feit­ing poten­tial returns in favour of more sus­tain­able but less prof­itable invest­ments is also being con­tra­dict­ed by an increas­ing body of research show­ing incor­po­ra­tion of ESG fac­tors can lead to bet­ter invest­ment per­for­mance.

“That trade-off just doesn’t exist,” says Iggo. “Think about the auto sec­tor. Some car com­pa­nies are much fur­ther advanced in devel­op­ing new elec­tron­ic vehi­cles, for exam­ple, so you can still have the same allo­ca­tion to autos but with­in that you can pick the best-in-class com­pa­nies. They’re like­ly to be the ones that have done more in terms of chang­ing their busi­ness mod­el and this means they’re more prof­itable and the return to investors will be bet­ter as a result.”

AXA Invest­ment Man­agers is already lead­ing by exam­ple on sus­tain­abil­i­ty. It has pledged to reduce its car­bon expo­sure to net zero by 2030 across all its invest­ment port­fo­lios. And 90 per cent of its assets under man­age­ment meet the cri­te­ria set out under arti­cles 8 and 9 of the Euro­pean Union’s new Sus­tain­able Finance Dis­clo­sure Reg­u­la­tion¹.

“Our cul­ture has under­gone a mas­sive change to put sus­tain­abil­i­ty at the heart of every­thing we do, from research to our entire invest­ment process,” says Iggo. “As a respon­si­ble asset man­ag­er, we active­ly invest for the long term to help our clients pros­per and to secure a thriv­ing future for peo­ple and the plan­et.”

This pro­mo­tion­al com­mu­ni­ca­tion does not con­sti­tute on the part of AXA Invest­ment Man­agers a solic­i­ta­tion or invest­ment, legal or tax advice. This mate­r­i­al does not con­tain suf­fi­cient infor­ma­tion to sup­port an invest­ment deci­sion. The val­ue of invest­ments may fall as well as rise and you may not get back the full amount invest­ed. Due to its sim­pli­fi­ca­tion, this doc­u­ment is par­tial and opin­ions, esti­mates and fore­casts here­in are sub­jec­tive and sub­ject to change with­out notice. There is no guar­an­tee fore­casts made will come to pass. Data, fig­ures, dec­la­ra­tions, analy­sis, pre­dic­tions and oth­er infor­ma­tion in this doc­u­ment are pro­vid­ed based on our state of knowl­edge at the time of cre­ation of this doc­u­ment. While every care is tak­en, no rep­re­sen­ta­tion or war­ran­ty (includ­ing lia­bil­i­ty towards third par­ties), express or implied, is made as to the accu­ra­cy, reli­a­bil­i­ty or com­plete­ness of the infor­ma­tion con­tained here­in. Reliance upon infor­ma­tion in this mate­r­i­al is at the sole dis­cre­tion of the recip­i­ent. Issued in the UK by AXA Invest­ment Man­agers UK Lim­it­ed, which is autho­rised and reg­u­lat­ed by the Finan­cial Con­duct Author­i­ty in the UK. Reg­is­tered in Eng­land and Wales No: 01431068. Reg­is­tered Office: 22 Bish­ops­gate, Lon­don EC2N 4BQ.

¹As of 31 Decem­ber 2020, assets under man­age­ment with­in Equi­ties, Fixed Income and Mul­ti-Asset stand at €587 bil­lion out of which €460 bil­lion are applic­a­ble under the SFDR

For more infor­ma­tion please vis­it axa-im.co.uk/climate

Pro­mot­ed by AXA IM