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Trends within the trend for ESG investing
(Pictured: Matt Christensen)
There has been a strong trend to incorporate environmental, social and governance considerations in investment processes in the past 10 years. But what of the next 10 years and what are the trends within the trend? AXA Investment Managers has produced an interesting analysis.
In a series of briefings, including participation at last week’s AIST Australian Superannuation Investments Conference on the Gold Coast, Matt Christensen, Paris-based global head of responsible investing for AXA IM, said “impact investing” was a strong trend within the overall trend. He predicted it would grow to cover about US$500 billion in assets by 2019, from almost nothing a few years ago.
“ESG has been firmly on the investment agenda for the past decade and is one of the fastest growing global investment trends. We feel it’s time to forecast the next ten years to ensure we have the right tools in place to support demand for ‘ESG 2020’,” he said.
Impact investing, which is also scheduled to be discussed at the SuperRatings Day of Confrontation conference in Melbourne next month, is generally defined as investments in businesses or funds that generate social or environmental benefit in addition to financial return.
Christensen says 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),” he said.
Supporting another trend, AXA IM recently developed a strategy that applies 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,” 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 funds but we also see an opportunity to expand this to mainstream funds over the coming years.”
On the governance front, the manager predicts there will be an increasing focus on board diversity. “Despite some of the largest European and Australian corporations being truly international enterprises, the impacts of globalization remain to be fully seen at the board level,” he said. “(We) believe 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.
“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.”
