Sustainability is a buzzword that encompasses a broad spectrum of topics. At AXA, we have very clear ideas about ESG and sustainable investments.
The term "sustainability" is on everyone's lips these days and has become well established in the financial world in recent years. In everyday use, it usually refers to protecting the environment or more specifically to dealing with climate change. In our industry, however, it has a rather broader meaning.
Besides protecting and preserving the natural world, it also includes aspects of social justice and responsible corporate governance. This is why the abbreviation "ESG" (short for environmental, social, and governance) is often used instead.
Environmental, social, and governance factors are very different in nature and sometimes require completely different approaches, but it nevertheless makes sense to view them as a whole because all three contribute to making the world healthy and livable far into the future. So how exactly are ESG requirements taken into account in investment decisions?
The first step toward a sustainable portfolio normally involves filtering out problematic investments. The lines are drawn very differently from company to company. As a rule, however, companies that generate a substantial proportion of their revenues from coal mining and those that are linked to child labor or corruption aren't tolerated. Simply excluding such firms is often seen as enough to justify using the ESG label, but in reality it's only the first step on the path to sustainability.
AXA goes a lot further than other firms in many respects, even in its screening. Some asset managers have just 10-20 companies on their blacklist, whereas we have over 720. We've already totally excluded more than 95% of companies in the oil and gas sector.
In a second step, shares of companies with positive ESG profiles can be actively sought out and added to the portfolio. These are firms that operate in particularly sustainable fields like recycling or solar panel manufacture.
The next step is actively promoting an ESG-focused mindset. The portfolio with the lowest overall carbon dioxide emissions, for instance, isn't necessarily the one with the biggest positive impact on climate change. By helping companies with high carbon dioxide emissions to move toward a more sustainable future, we can often achieve a much greater impact that we would if we restricted ourselves to those that already have a small carbon footprint.
That's why, in 2019, AXA developed a new asset class that it calls "transition bonds" to support the effective decarbonization of the economy. Shipping companies, for example, can be supported in their switch from heavy marine diesel to liquefied natural gas until they can eventually power their ships with wind or hydrogen.
Incorporating ESG factors into our investments also means avoiding financial risks
AXA also fosters active dialog with over 300 multinationals, seeking to support them in steering toward a more sustainable future.
Forward-looking approaches that deliver real-world results are also in evidence in the real estate sector in the form of less resource-intensive and more socially aware construction practices as well as more energy-efficient building operation.
It's clear that all of these measures need reliable data to make sure the right investment decisions are taken. In truth, environmental factors are easier to quantify than social or governance factors, so the availability of high-quality data is better in this area. That said, a holistic ESG approach must always focus on all three aspects.
At AXA, we factor ESG considerations into all of our investment decisions and refrain from investments that conflict with this approach. As one of the largest asset managers, we want to make an impact both globally and locally to ensure that the world is livable for future generations.
Incorporating ESG factors into our investments also means minimizing financial risks, since markets, customers, and regulators are increasingly putting pressure on companies that don't comply. As a result, taking account of sustainability criteria enables us to generate a better return over a medium- to long-term horizon. We firmly believe that responsible, sustainable use of all natural and social resources adds value over the long term.
AXA Switzerland Asset Management manages occupational pension assets for more than 40,000 Swiss companies.