Since the emergence of “Modern Portfolio Theory” and the “Capital Asset Pricing Model” in the late 1960s, institutional investors have taken a quantitatively driven approach to portfolio construction, looking to create portfolio diversification and obtain better risk-adjusted returns by balancing their asset-class exposures. This journey has seen several important advancements in thinking about how to optimally achieve desired results.
Funds that want to take the total portfolio approach first need to get the total portfolio view. To do that they not only need data – and lots of it – but a rock-solid understanding of exactly how they’re going to use it.
AXA IM doubles down on impact: ‘tomorrow starts today’
AXA Investment Managers, which has been in the sustainable investment space for many years, is ramping up its impact investing – the pointy end of ‘sustainable’ – which aims to make a difference to society while still turning a good profit. AXA IM has put its money where its mouth is with its fourth global impact fund, raising $500 million, early this year.
The firm held a webinar last week (June 16), at which Lise Moret, the Paris-based global head of climate strategy, and Matt Christensen, the also Paris-based head of impact and responsible investments, who is well known to Australian institutional investors, spoke. They said, words to the effect, sustainable investing has come of age. There is no longer any doubt that it adds to investor returns.
Craig Hurt, AXA IM’s head of Australia and New Zealand, said that the new fund would focus on “emerging markets in health and wealth”. Five per cent of AXA IM’s fees will be donated back to the not-for-profit organisations involved in the investments.
“We recognised that impact investing would be an important part of the industry quite a while ago,” he said. “We have been in the impact space for about 10 years. We think there’s an opportunity there to be more vocal. The journey we’ve been on is about how to mobilise the available capital and how to be good stewards of it.”
Lise Moret, AXA IM’s Head of Climate Strategy, said the Coronavirus outbreak had forced global economies to make rapid changes to limit the pandemic, resulting in significantly lower emissions, but that more needed to be done.
“To achieve our commitment to the ‘Paris Agreement’, and limit global warming to 1.5 degrees centigrade in temperature rise, it would take a COVID-19-like event every year until 2050,” Moret said. Figures from specialist publisher Carbon Brief estimate that carbon emissions in China fell by 25 per cent in February alone, while the EU could face a drop of 25 per cent in 2020 when compared to 2019 levels, Overall, it is estimated the global emission impact of Coronavirus will be minus 5.5 per cent, the largest annual reduction since records began,” she said.
“While, globally, we have significantly reduced our impact during the height of the pandemic, the question now is whether the world can use this moment to find a ‘new normal’ and build a less carbon-intensive economic model – a model that could put the temperature goals of the Paris Agreement tantalisingly within reach,” Moret said.
“One clear point about the hit to global GDP is it is likely to be temporary, and that means that the drop in emissions will likely be temporary, too. For all our progress over the years, we have not yet successfully decoupled economic growth from carbon emissions. We believe the Coronavirus outbreak should harden policy thinking and investment around climate change and the need for decisive and collaborative action to tackle global, existential threats.” She wrote a recent note for clients: ‘COVID-19, Greening the Recovery’.
In an environment where regulators are de-prioritising green projects, Moret said, there was currently a clear opportunity for policymakers to deploy green stimulus by conditioning support for businesses on decarbonisation criteria. This could include continuing to incentivise oil and gas companies to decarbonise and providing incentives for utility companies to transition away from coal and into renewables.
Matt Christensen said that according to AXA IM’s 2019 ‘Global Stewardship Report’, climate change accounted for more than 40 per cent of the investment manager’s total engagement with companies. In a 12-month period, AXA IM engaged with 217 issuers, voted at 6,016 general meetings, and 64,439 proposed company resolutions were voted in. This was an increase of engagement by 74 per cent from 2018 levels. He said climate change would remain a key focus area for AXA IM’s stewardship team, along with biodiversity loss, diversity and public health.
“As an industry, we are moving away from the narrow definition of fiduciary duty – a transition that we at AXA IM firmly support,” Christensen said. “The next decade will be defined by our ability as an investment and corporate community to turn our thoughts and ambitions into tangible action to solve global issues. This will create long-term value for shareholders, stakeholders, and society… Today we are at the starting line. The road ahead requires both imagination and pragmatism to meet a daunting set of challenges. As we move into a decade of transition, active investing will require a more activist approach that incorporates sustainability into its DNA. We are committed to a better tomorrow, and tomorrow starts today.”
– G.B.
