Transcript of Your guide to responsible investing in three steps
12P - RI Explained_INT_HR.inddIt’s little surprise that there has
been plenty of confusion about responsible investing (RI). Much of
the terminology around the concept can be jargon heavy and as a
result, many investors could be forgiven for not fully
understanding or engaging with the opportunities presented by
RI.
After starting out with the fundamental idea of investing in ‘good’
companies and sectors and avoiding ‘bad’ ones, RI has since evolved
into a powerful way to make effective investment decisions. It can
deliver sustainable, long-term value for clients and create a
positive impact on society using insights gleaned from
environmental, social and governance (ESG) data. By incorporating
these considerations into investment solutions across all asset
classes investment managers can deliver positive measurable
outcomes that are in line with clients’ broader ESG
objectives.
This approach has built significant credibility in an age when some
firms can become winners almost overnight while seemingly powerful
corporates fall by the wayside as a result of not addressing
increasingly prominent trends such as technological
disruption.
A striking example of this is the rapid rise of electric car
manufacturer Tesla1. Although launched a century later than Ford,
Tesla has in its few short years of existence already temporarily
outstripped (in terms of market capitalisation2) what was for
generations the world’s most successful automobile producer.
The shift may seem sudden but illustrates the momentum that is
building for products that are deemed more responsible and less
harmful to the environment. And the wave of enthusiasm for creative
innovation is not limited to the heavy polluters in industrial
sectors, it is quickly moving into the financial world. Investors
increasingly
want to understand how a company is creating value. They therefore
expect and demand details of how an organisation’s activities are
impacting the wider world.
The RI revolution In the past, investors concerned about aspects of
a company or sector, such as tobacco, arms or gambling often found
that they were faced with limited investment options. The focus was
almost exclusively on public equity- oriented strategies, in what
were generally described as negative screening or ethical funds.
This also created the perception that financial returns were
limited.
But the RI universe has moved on significantly since the early days
of such negative screening. Responsible investment strategies have
grown both in number and sophistication, reflecting investors’
appetite for investment products that address and respond to ESG
issues. Through integrated and innovative fund management
techniques, RI is opening up a new world of opportunities, and
these will continue to improve as tools and measurement criteria
within RI become more nuanced. Greater scrutiny on non-financial
criteria can help asset managers to more effectively mitigate risk
and therefore potentially enhance financial returns.
Your guide to responsible
investing in three steps
1 For illustrative purposes only, no representation is made that
AXA IM has or is invested in such security.
2 Source: Bloomberg, as at 30 November 2017.
For professional clients only
2
Why we believe RI is a compelling opportunity for investors
An eff ective tool to address regulatory change COP21, the UN
Climate Change Agreement signed in 2015 by nearly every country in
the world, was a seminal moment in influencing corporate behaviour
globally. At the national level, important initiatives such as the
Energy Transition Law (Article 173) in France, which requires
investors to disclose how they manage ESG criteria, have
dramatically transformed the global investment landscape as it
relates to RI. Around the world, regulations that include specific
RI requirements are growing, as seen in pension fund legislation in
the Nordics, Canada and South Korea3.
These have been joined by a series of so-called ‘soft trends’ that
are compelling companies and investors to place greater focus on
ESG factors in their operations and communications, including the
Financial Stability Board’s
move to increase transparency on climate-related financial risks
(FSB TCFD4), and ratings agencies such as Standard & Poor’s and
Moody’s committing to ESG benchmarking and measurement.
Launched in 2016, the UN’s 17 Sustainable Development Goals (SDGs)
are quickly becoming a norm in certain geographies, for example the
Netherlands, where many Dutch pension funds have announced that
their mandated investment managers must make reference to how their
solutions will contribute to the achievement of one or several of
the SDGs while still ensuring market rate returns.
IN RECENT YEARS, THE INVESTMENT LANDSCAPE HAS WITNESSED DRAMATIC
CHANGE AS THE MULTIPLE FACTORS THAT COMPANIES MUST ADDRESS TO
DELIVER LONG-TERM VALUE AND MITIGATE RISK HAVE BEEN REDEFINED.
THESE INCLUDE HARD TRENDS SUCH AS REGULATION AS WELL AS SOFTER
TRENDS WHICH ARE SHAPING CORPORATE AND SOCIAL BEHAVIOURS, AND
EMERGING INVESTMENT OPPORTUNITIES.
for investors
3
Source: Bloomberg New Energy Finance. YTD is to 31 October
2017.
A smart approach to increasing social pressure This backdrop has
been complemented by an increasing social conscience where an
ever-rising number of consumers want to know that their purchasing
power is having a more positive, and less destructive, impact on
the world.
For example, 76%5 of millennials said they regard business as a
force for positive social change, according to a 2017 Deloitte
survey. Similarly, a global study by consultants Mercer found that
81% of asset owners and 68% of asset managers view climate change
as either a material risk or opportunity 6.
And as appetite grows for a new, sustainable approach so does
demand for new instruments to meet these expectations. New
financial instruments such as green
3 Principles for Responsible Investment (PRI) Global Guide to
Responsible Investment Regulation 2016.
4 Financial Stability Board Task Force on Climate-Related Financial
Disclosures.
5 The Deloitte Millennial Survey 2017. 6 Morgan Stanley Research 18
May 2016.
FIGURE 1: ANNUAL GREEN BOND ISSUANCE HAS GROWN IN VOLUME AND IN
GEOGRAPHIC DIVERSITY
bonds (see figure 1), green infrastructure or investment vehicles
that target gender diversity, financial inclusion or healthcare are
rapidly growing in volume and accessibility.
Supranational
Emerging
1. ESG-embedded
2. ESG-integrated
This is the first step into the world of responsible investments.
Various forms of screening create a starting point for embedding
ESG. Initially designed to avoid ESG risks by excluding exposures
that conflict with investors’ principles and values such as
controversial weapons, palm oil or coal, screening now goes much
further than simple ‘exclusionary’ or ‘negative’ filters.
A focus on ESG scoring means the portfolio can be evaluated in
terms of its exposure to both ESG risks and opportunities. Every
bond and stock can receive an ESG score that is aggregated to form
an overall ESG portfolio scorecard. This means investments can be
viewed in a broader ESG context. Alongside the screening and
scoring, an active approach towards stewardship through voting and
engagement is an important part of the assets being deemed
ESG-embedded. Active voting and engagement is an eff ective way of
encouraging companies to move towards best practice, or initiating
change on important issues at board level. ESG-embedded is where
you can also start to report on key performance indicators (KPIs),
such as carbon footprint, which form the basis of a clear ESG
measurement framework.
These investments go a step further. This approach uses ESG
analysis, including the ESG score outlined above, and incorporates
this information into investment decisions.
ESG integration is perhaps the most complex of all RI approaches.
While each company is analysed on an ESG basis, there are no
perfect companies, so it is not a simple exercise in the same way
as an exclusionary screen may appear in its bluntness.
In this case, companies are assessed on how they are positioned to
handle both short and long term ESG risks - as well as
opportunities. The expectation is that management teams taking
decisions to address and minimise ESG issues are likely to be more
competitive relative to their peers in the long term. This type of
analysis will be very diff erent depending on each company and the
industry it operates in, and therefore results in placing companies
on a sliding scale in order of preference, rather than creating a
simple binary choice.
For example, Coca-Cola6 is a company that you may not necessarily
expect to appear in an ESG-integrated portfolio. Health concerns
around obesity rates, water management and
GIVEN THE ENORMOUS SCOPE OF RI STRATEGIES, IT CAN BE A DAUNTING
TASK TO UNPACK ALL THE DETAILS AROUND THEM. THE RANGE OF
RESPONSIBLE INVESTMENT OPTIONS CAN BE BROADLY CATEGORISED INTO
THREE BUCKETS; SCREEN, INTEGRATE AND IMPACT. THESE THREE APPROACHES
COVER THE FULL INVESTMENT SPECTRUM AND ALSO REFLECT THE
INCREASINGLY REFINED INVESTMENT APPROACH EVIDENT IN RI’S ONGOING
DEVELOPMENT.
What RI approaches are available for investors?
eff iciency are all ESG issues that could aff ect the long-term
sustainability of the business. However, Coca-Cola is also an
example of a company that has responded to ESG concerns around its
core product and wider practices. Through a series of initiatives,
such as increasing low or no- calorie products and developing its
water risk management programme, it has retained trust and support
from investors.
In this way, ESG integration is a world away from viewing companies
in just black and white and is perhaps better considered as seeing
investments in colour.
Used in conjunction with financial analysis, it aims to create a
clearer, longer-term picture of a company’s future prospects. The
ultimate aim of employing this approach is to create a portfolio of
strong ESG holdings which are more likely to outperform their peers
with lower ESG scores operating in the same industry. Using MSCI
World Index as a basis, our research suggests that companies with
better ESG scores generate a higher return on equity and lower
stock-specific risk, see figures 2 and 3.
APPROACHES TO RI INVESTING
three
6 For illustrative purposes only, no representation is made that
AXA IM has or is invested in such security.
5
The most recent phase in RI’s evolution is impact investing. This
takes the latest RI techniques and refines them to specifically
target positive change. The approach should not be confused with
philanthropy – rather, it has two clear objectives. Impact
investments simultaneously seek to deliver competitive financial
returns while at the same time producing positive societal impacts.
Importantly, positive impacts must be measurable and quantifiable.
In this way it seeks to harness the power of finance and direct it
to solve complex social and environmental problems.
Impact investments can be used in a range of diff erent projects,
such as improving access to education and healthcare, expanding the
reach of financial products to underserved populations, or reducing
the eff ects of climate change. These are all examples of positive
change that can be achieved - in conjunction with financial returns
- through impact investing.
In order to deliver on both financial and societal criteria, target
outcomes from these investments should be clearly identified from
the outset and be specific and measurable.
Because of this strict criteria, the traditional area for impact
investing has been in alternatives, like private equity. However
demand is building for publically listed equities to play a role.
In order to maintain integrity around impact investing, products
and services should be considered that go beyond a simple analysis
of a carbon footprint compared to a benchmark. Listed equity or
fixed income portfolios will need to be constructed with a focus on
holdings which can demonstrate that they are making a positive
contribution either through quantifiable metrics or active
engagement.
Ultimately, impact is the most forward looking segment of
responsible investing. It seeks to create an investment virtuous
circle by financing projects that promote a better society, in an
environment where companies and industries, delivering long-term
and sustainable value creation, can flourish.
3. Impact
Sources: AXA IM - Rosenberg Equities, AXA IM RI Team, MSCI. For
illustrative purposes only, hypothetical portfolios described are
not actual Rosenberg Equities portfolios. Starting universe is the
MSCI World Index. Stocks on MSCI World Index were ranked, as at
January 2016, according to AXA IM’s internal ESG criteria. From
this ranking, hypothetical portfolios of the top 20% and bottom 20%
of the stocks were created. Hypothetical portfolios were then
backtested to February 2008. So as to remove much of the influence
of very large cap stocks, the hypothetical portfolios were square
root of market cap weighted and rebalanced monthly, preserving rank
order. “Stock Specific Risk” is measured by the volatility of the
share price of the individual stocks making up the hypothetical
portfolios. The ESG data was not available in real-time during most
of the timeframe shown. For more details, please refer to the
backtest disclosures in «Important Information». The simulations
above are not a guarantee of future results.
ESG IS A FUNDAMENTAL DRIVER OF RISK AND RETURN
10%
15%
20%
25%
30%
FIGURE 2: RETURN ON EQUITY FIGURE 3: STOCK-SPECIFIC RISK
MSCI World Index Top 20% ESG Bottom 20% ESG
2008 2009 2010 2011 2012 2013 2014 2015 2016 2008 2009 2010 2011
2012 2013 2014 2015 2016
APPROACHES TO RI INVESTING
6
7
In time, an ever increasing amount of ESG data will become
available, which will demystify the sector even further. But for
this to happen, improved consistency and a greater adoption of
standardisation of ESG measurements is needed so it becomes an
accepted financial analysis criteria.
Addressing the demand for disclosure and standardisation on metrics
such as carbon footprint, water sustainability and gender diversity
will set clearer targets for companies to reach.
At portfolio level, greater consistency on ESG standards will
enable investment managers to be compared on a consistent basis so
that regulation can be applied to asset owners and investors more
systematically.
In essence a powerful measurement framework will provide the proof
that including ESG criteria in financial decisions is adding
value.
RI is evolving fast. Soon it will be possible to harvest vast ESG
data sets for powerful insights, rivalling any other area of
financial analysis. The next generation of investors will demand
greater transparency and accountability, which will make RI the
norm in asset management.
Momentum is only building and RI will in time become a mainstream
form of investing. We see only one direction of travel – and there
is no turning back.
To learn more about AXA IM’s responsible investing capabilities,
please visit our website:
www.axa-im.com/en/responsible-investing
A clear path ahead
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‘Aiming for A’ coalition: A coalition set up in 2011 to undertake
engagement with the largest global extractive and utilities
companies. The coalition enables asset owners and managers to
support these companies in their preparations for the low-carbon
transition.
Carbon footprint: The amount of carbon dioxide released into the
atmosphere as a result of the activities of a particular
organisation, most often expressed as tonnes of CO2 emission per
USD million of revenues.
Climate Bond Initiative: An investor- focused, not-for-profit
organisation that works to mobilise bond markets for climate change
solutions. The aim is to reduce the cost of capital for climate-
related investments by developing a large and liquid market, while
providing trusted standards and certification.
Conference of the Parties (COP): COP21, COP22, COP23: A UN
conference on climate change that is held annually. The 21st
conference (COP 21) was held in Paris in December 2015. The
conference negotiated the Paris Agreement, a landmark global treaty
on the reduction of climate change. The treaty lays out a framework
to limit global warming to less than 2°C compared to pre-industrial
levels. COP22 was held in Marrakech, Morocco in November 2016. COP
23 was held in Bonn, Germany in November 2017.
Corporate governance: The system of rules, practices and processes
by which a company is directed and controlled.
Corporate Social Responsibility (CSR): Corporate responsibility
involves the search for an effective ‘fit’ between businesses and
the societies in which they operate. ‘Corporate responsibility’
refers to the actions taken by businesses to nurture and enhance
this symbiotic relationship.
Energy Transition Law (French) – Article 173: In August 2015 France
passed the Energy Transition Law, the first of its kind in Europe,
came into full effect in June 2017. France has decided to provide a
clear signal to institutional investors with this law by
encouraging them to become truly engaged on the subject of RI and
start considering how to better integrate ESG factors in their
investments. The law reinforces the role of institutional investors
in financing the transition towards a low-carbon economy and
requires more awareness of long-term issues in investment
decisions.
Engagement: The practice of shareholders entering into dialogue
with management of companies to change or influence the way in
which that company is run.
ESG: Environmental, social and governance issues that constitute
the three pillars of Responsible Investments. E, S, and G are the
three central factors in measuring the sustainability qualities of
an investment.
ESG-embedded: These investments benefit from active stewardship,
exclusion polices on controversial weapons, non-RSPO palm oil,
derivatives on food commodities. The can also receive ESG scoring
and footprint analysis.
Glossary
9
ESG integrated: The incorporation of ESG factors and analysis into
investment decisions.
EU Non-financial Reporting Directive: Large , public-interest
entities (listed companies, banks, insurers) with more than 500
employees should disclose in their management reports relevant and
useful information on the policies, main risks and outcomes
relating to at least • Environmental matters • Social and employee
aspects • Respect for human rights • Anti-corruption and bribery
issues • Diversity in the board of directors.
High Level Expert Group (HLEG) on sustainable finance: Set up by
the European Commission to develop an overarching and comprehensive
EU strategy on sustainable finance as part of the Capital Markets
Union.
Extra-financial: Elements of a company’s behaviour that may not be
immediately apparent solely from an analysis of its financial data.
Often ESG themes are associated with extra-financial factors.
Fiduciary duty: Fiduciary duties (or equivalent obligations) exist
to ensure that those who manage other people’s money act in the
interests of beneficiaries, rather than serving their own
interests. The most important of these duties are: • Loyalty:
Fiduciaries should act in
good faith in the interests of their beneficiaries, should
impartially balance the conflicting interests of the different
beneficiaries, should avoid conflicts of interest and should not
act for the
benefit of themselves or a third party. • Prudence: Fiduciaries
should act with
due care, skill and diligence, investing as an ‘ordinary prudent
person’ would do.
Source: Fiduciary Duty in the 21st Century, United Nations Global
Compact, UNEP FI, PRI and Inquiry, September 2015.
Financial Stability Board (FSB): An international body that
monitors and makes recommendations about the global financial
system. It was established after the 2009 G20 London summit as a
successor to the Financial Stability Forum.
Green bond: A bond that is issued to raise capital for the
development of environmentally friendly projects or assets.
Green washing: When a company, government or other group make a
unsubstantiated or misleading claim about the environmental
benefits of a fund or financial instrument.
Institutional Investor Group on Climate Change (IIGCC): A forum the
provides investors with a collaborative platform to encourage
public policies, investment practices, and corporate behaviour that
address long-term risks and opportunities associated with climate
change.
Impact investing: Focuses on financing businesses and projects that
are designed to have intentional, positive and measurable impacts
on society while simultaneously delivering financial market
returns. As the societal impact is fully embedded into the business
model, there need not be an inherent trade-off between impact
returns and financial returns.
10
ESG Key Performance Indicator (KPI): A measurable value that
demonstrates how effectively a company is achieving its ESG and
impact objectives.
Low-carbon economy: An economy based on low-carbon power sources
with minimal carbon emissions into the environment. It makes
reference to a world where the temperature increase is contained
below 2°C or 1.5°C.
2°C Scenario: An internationally agreed threshold to limit the rise
in global temperatures to below 2°C from pre-industrial
levels.
Negative screening/disinvestment: An investment approach that
excludes some companies or sectors from the investment universe
based on criteria relating to their policies, actions, products or
services. Divestment refers to the sale of stocks, bonds or
investment that conflict or are not aligned with specific ESG
objectives, values or convictions.
Principles for Responsible Investment (PRI): The UN-supported
Principles for Responsible Investment (PRI) initiative was launched
in 2006. The world’s leading proponent of responsible investment,
the PRI is an independent organisation bringing together and
supporting an international network of investors to put the six
Principles for Responsible Investment into practice.
The six Principles are to: • incorporate ESG issues into
investment
analysis and decision-making processes • be active owners and
incorporate ESG issues
into ownership policies and practices • seek appropriate disclosure
on ESG
issues from invested entities • promote acceptance and
implementation of the Principles within the investment
industry
• enhance effectiveness in implementing the Principles
• report on activities and progress towards implementing the
Principles.
AXA IM was an early signatory to the PRI in 2007.
Task Force on Climate-related Financial Disclosure (TCFD): Set up
to develop voluntary, consistent climate-related financial risk
disclosures for use by companies in providing information to
investors, lenders, insurers, and other stakeholders.
UN 2030 Agenda for Sustainable Development: An agenda made up of 17
Sustainable Development Goals adopted by world leaders in 2015. The
Goals encourage countries to establish national frameworks to end
all forms of poverty, fight inequalities and tackle climate change.
Each goal has specific targets to be achieved over the next 15
years.
United Nations Development Programme (UNDP): UNDP is the United
Nations’ global development programme. It works across 170
countries and territories, helping to achieve the eradication of
poverty, and the reduction of inequalities and exclusion.
United Nations Environment Programme (UNEP): UNEP was set up in
1972 as an agency of the United Nations to assist developing
countries in implementing environmentally sound policies and
practices. Today, UNEP is the leading global environmental
authority, setting the global environmental agenda within the
United Nations system.
UN Global Compact: An initiative to encourage businesses worldwide
to adopt sustainable and socially responsible policies and report
on their implementation.
The UN Global Compact supports companies to: • Do business
responsibly by aligning
their strategies and operations with Ten Principles on human
rights, labour, environment and anti-corruption; and
• Take strategic actions to advance broader societal goals, such as
the UN Sustainable Development Goals, with an emphasis on
collaboration and innovation.
11
UN Environmental Programme Finance Initiative (UNEP FI): An
initiative led by the UN that seeks to encourage the implementation
of sustainability principles in financial institutions through the
incorporation of ESG factors in risk analyses.
UN Guiding Principles (UNGP) on Business and Human Rights: A global
standard for preventing and addressing the risk of adverse impacts
on human rights linked to business activity.
The UNGPs encompass three pillars outlining how states and
businesses should implement the framework: • The state duty to
protect human rights • The corporate responsibility to
respect
human rights • Access to remedy for victims of
business-related abuses.
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