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Investment managers say environmental, social and governance issues now key
AXA Investment Managers (AXA IM) are not only reacting to a public demand for environmental, social and governance (ESG) considerations as drivers for investment decisions, they are increasingly pro-active in its promotion. As a result, AXA IM has recently developed a system which measures a country's sovereign debt creditworthiness, based on these principles.
An evaluation of investment trends by AXA IM has revealed the biggest drivers of ESG in the near future will be what is known as 'impact investing' along with board diversity strategies. These areas will fuel increasing demand for ESG factors across broader ranges of asset classes including sovereign debt, according to AXA IM.
Paris-based Matt Christensen, the global head of Responsible Investment for AXA IM, made these observations while in Australia, this week, addressing the Australian Superannuation Investment Conference on the future of ESG.
"ESG has been firmly on the investment agenda for the past decade and is one of the fastest growing global investment trends," Mr Christensen said.
"We feel it's time to forecast the next 10 years to ensure we have the right tools in place to support demand for ‘ESG 2020'."
Impact investing -- which describes investments in funds and businesses that generate social and environmental benefit -- is starting to catch the attention of sizeable funds both globally and in Australia, he said.
Mr Christensen said AXA IM believes this is only set to increase with the impact investing market predicted to grow to US$500 billion by 2019, covering about one percent of global assets.
"Broadly speaking, impact investing is defined as investments in businesses and/or funds that generate social and/or environmental benefit in addition to financial return -- it can be viewed as a complement to the limits of traditional philanthropy and government programs.
"The market is still young but its growth has resulted in initiatives that enhance its credibility such as the setting up of standards such as IRIS (Impact Reporting and Investment Standards) or labels such as GIIRS (Global Impact Investing Rating System)," Mr Christensen said.
He said AXA IM recently developed its strategy in applying ESG metrics to assess countries' creditworthiness, risks and opportunities in sovereign debt portfolios.
"Until a few years ago it was rare for investors to consider ESG factors for asset classes beyond equity and corporate fixed income," Mr Christensen said.
"We're seeing increasing interest in ESG analysis being applied to asset classes such as sovereign debt. This attention to ESG has only been amplified by the Euro zone crisis, which brought the evaluation of sovereign issuers' creditworthiness to the fore.
"We are already using this ESG country framework in our core RI (responsible investment) funds but we also see an opportunity to expand this to mainstream funds over the coming years," Mr Christensen said.
Another trend AXA IM predicts will grow rapidly in coming years is board diversity. Despite some of the largest European and Australian corporations being truly international enterprises, the impacts of globalisation remain to be fully seen at the board level.
"AXA IM believes the rapid rise of emerging economies will continue to springboard diversity at the forefront of the corporate governance agenda, both now and in the future," Mr Christensen said.
"Up to the present time, diversity has largely been focused on gender balance as research points a link between gender diversity at a board level and a company's financial performance. However we believe, and research now shows, that other aspects such as nationality can also increasingly be seen as a means to bring a broader range of views and experiences to bear within the leadership of companies across the globe.
"We recently analysed board diversity among the largest 50 European companies by market cap. The results suggest companies need to bolster senior management boards by shaping their composition in a way that better improves their readiness for success in emerging markets - I imagine this would have a similar outcome among ASX listed companies," he said.
A responsible investor since 2001, he said, AXA IM's goal is to integrate ESG factors across the spectrum of its A$703 billion multi-asset investment capabilities. Over the next 10 years the firm plans to further expand its global RI research capabilities.
Sydney-based director of AXA Investment Managers in Australia and New Zealand, Craig Hurt said, "Through the ongoing expansion of our global RI research and initiatives, we aim to offer Australian institutional investors - and their individual members and investors - a wider opportunity to invest in strategies incorporating ESG principles."
He said AXA IM has the ambition to become a leader in responsible investment and in 2001 it created a department dedicated to RI research, today composed of 10 experts under Matt Christensen's responsibility.
Its strategy, called RI Inside, "aims to integrate ESG factors to each of its expertises and the team implemented in 2007 the RI Search tool, allowing AXA IM fund managers to integrate ESG criteria in their investment processes.
In parallel, AXA IM continues to promote pure RI innovative products and mandates, with assets totalling more than 3 billion euros by the end of 2011.
AXA IM has signed the Principles for Responsible Investment and is a member of Eurosif. Today AXA IM is one of the largest European-based asset managers with A$703 billion in assets under management as of end-2012.
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