Jane Wadia, head of investment specialists at AXA Investment Managers, has said ESG is now part of “every conversation” the French asset manager has with clients, however, sustainability needs are alongside financial returns, not in lieu of.
Sustainable investing returns have been under pressure over the past 18 months as geopolitical events have dragged on performance, but contrary to prior market cycles where ESG has come to the fore and then been shunned, this time it remains key.
Increasingly, institutional clients are making commitments to decarbonise their portfolios and distributors are building sustainable offers for their discretionary and advisory clients.
Wadia said AXA IM has been catering to clients’ needs in this area with the launch of its Euro and US Credit PAB exposures, noting the role that active ETFs can play in boosting returns. She added several emerging themes are seeing increasing popularity, such as biodiversity and the growing role of fixed income ESG in portfolios.
What are clients trying to achieve with their ESG investments?
In Europe, we are seeing investors evolve their investment approach to allocate capital that not only delivers a financial return but that also supports the transition to a lower carbon economy. ‘Net zero’ investing is one good example of this with clients making commitments to decarbonise their investment portfolio.
Others are looking for building blocks to create a sustainable range for their end clients. And where we fit in is by designing concrete investment solutions to help them achieve this, such as developing PAB ETFs.
Which themes are clients most interested in?
Of the three letters in ESG, the ‘E’ - the environmental pillar – is of most interest to our clients, particularly around the themes of biodiversity and decarbonisation. Clients are interested in decarbonising their investment portfolio and we work closely with them across credit and equities to achieve this.
Euro credit, which is a significant allocation or building block in the portfolios of our continental European clients, is a great example. We recently launched a Euro Credit PAB UCITS ETF in July and our US Credit PAB UCITS ETF in November, precisely for clients looking to decarbonise their port-folios while achieving a return on their investment.
The other area we see an investment case for is biodiversity. One of our convictions at AXA IM is that we cannot address climate change without simultaneously addressing biodiversity loss.
For example, agriculture is responsible for 80% of deforestation as well as circa 24% of global greenhouse gas emissions. Similarly, higher temperatures and more extreme, less predictable weather conditions are projected to affect the availability and distribution of rainfall and further deteriorate land quality and crop yields.
While biodiversity is still a relatively new theme within listed equities, conversations with clients have increased substantially over the past 12-18 months.
How do you capture these themes at AXA IM?
We have developed biodiversity and climate list-ed equity investment solutions, including ETFs, which are managed in line with our convictions:
A significant and rapid impact on biodiversity can be achieved by listed companies which can provide scalability and are supported by capital markets
Sustainable Development Goals (SDGs) data available now offers the ability to define a credible biodiversity investment universe
Listed companies can tackle biodiversity loss either through innovative products and services(P&S) and/or reducing biodiversity footprint through operational activities
We have identified four SDGs that address biodiversity loss (see Figure 1)
Figure 1: Four SDGs that address biodiversity loss
The use of the SDG logo, including the colour wheel, and icons does not imply the endorsement by the United Nations of AXA Investment Managers, its products or services, or of its planned activities and does not constitute, explicitly or implicitly, a recommendation for an investment strategy.
In terms of net zero investing and supporting the transition to a lower carbon economy, AXA IM is one of the founding members of the Net Zero Asset Managers (NZAM) initiative which commits us to net zero by 2050.
As part of that, we have pledged to reduce the carbon intensity of our corporate assets by 25% by 2025.
To help us implement this, we have built our own framework which is a combination of qualitative research and quantitative data to map companies across the carbon transition spectrum – from climate leaders to climate laggards.
What advantages do active ETFs have when investing in ESG?
We are constantly trying to combine areas where there is an investment case, where we have conviction, and where we can meet client demand. Being active allows our portfolio managers a little bit more flexibility to provide potentially better financial returns. One key advantage we have is that we have been doing active management for decades.
Our actively managed ETF ESG offering can add value by allowing our portfolio managers more flexibility to find investment opportunities or equally to minimise the investment risks. It is not a binary active or passive discussion though.
It is whether the exposure we are looking for can be met through an actively managed approach, something completely passive, or something in the middle that has a tilt to active but limits the tracking error, and combining that with the demand we see from clients.
How will ESG fit into clients’ asset allocation going forward?
We will continue to see the ‘E’ dominate for the foreseeable future. We see clients looking to allocate across their portfolios through regional building blocks as well as through global strategies in both equities and fixed income.
Sometimes it is used as an allocation building block, in which case, they may want something more regionally focused. In other cases, they are looking for more transitionary exposure to the market.
The ETF landscape is growing fast and has mainly been an equity story so far but we are seeing increased demand for fixed income ETFs and particularly innovative ESG solutions in the fixed income space, that can combine the aspects of sustainability and financial performance clients are seeking.
This article first appeared in ETF Insider, ETF Stream's monthly ETF magazine for professional investors in Europe. To read the full edition, click here.
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