Yo Takatsuki

High demand for environmental, social and governance (ESG) investment options, and an expanding investment universe, will make ESG an essential talking point in adviser-client conversations in the coming years, according to AXA Investment Managers (AXA IM).

Ahead of the launch of the Financial Adviser Guide to Responsible Investment from the Responsible Investment Association Australasia (RIAA) and AXA IM, Yo Takatsuki, Head of ESG Research and Active Ownership at AXA IM, said he expected to see an increasing array of ESG options becoming available, which advisers would need to become familiar with.

“Funds that have been established to target specific social and environmental objectives, often called impact funds, are becoming far more ambitious in their investment goals. They are attracting sophisticated investors who expect very clear and detailed reporting, both quantitative and qualitative,” Mr Takatsuki said.

“As client demand grows, advisers need to familiarise themselves with responsible investment options to ensure they are offering clients products that are value-aligned, while also achieving strong financial returns.”

Mr Takatsuki added COVID-19 had drawn attention to the need for finance to drive real-world outcomes.

“The developed world had almost started to believe infectious diseases had been overcome. However, the pandemic has highlighted that preventing and addressing such problems involves ongoing investment in entire systems – not just in the high-growth, high-return aspects,” he said.

Demand and regulation to make ESG a focus for advisers

The Financial Adviser Guide to Responsible Investment, is free and sets out to demystify responsible and ethical investment for advisers.

Simon O’Connor, Chief Executive Officer of RIAA, said RIAA had been measuring the size and growth of the responsible and ethical investment markets in Australia since 2002 and over that time the industry continued to gain momentum.

“The rapid growth in responsible investment has been driven by client demand and strong investment outcomes, with clear evidence that responsible investments deliver stronger risk-adjusted returns.

“The regulation of advice is also catching up. The new FASEA Code of Ethics requires advisers to consider the broader long-term interests of their clients, arguably requiring advisers to consider responsible and ethical investments if they are in the clients’ best interests.

“The good news is that by accessing our Guide – and educational resources from firms like AXA IM – advisers can strengthen their knowledge in this area, to deliver the best advice to clients,” Mr O’Connor said.

Responsible investment goes mainstream

In Australia, there has been significant growth in the responsible investment industry since RIAA’s last Guide was released in 2018.

RIAA research^[1] found the industry hitting new heights, with $1,149 billion now managed as responsible investments, up 17% from $980 billion in 2018. Today 37% of all professionally managed investments are managed using one or more responsible investment approaches.

However, the RI universe is significant and covers a range of different investment approaches that all consider more than traditional financial information.

“From impact investing to ESG integration to negative screening, there are many different strategies for engaging in responsible investment,” said Michelle Lacey, Head of Core Client Group, Australia, AXA Investment Managers.

“The challenge for advisers is understanding the differences between the responsible investment approaches, products, and providers available in order to provide the advice that best matches their clients’ needs.

“RIAA’s research shows Australian investors would like to increase their allocation towards impact investments more than fivefold over the next five years, so we believe this should be a particular area of attention for financial advisers,” Ms Lacey said.

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^[1] RIAA: Annual Responsible Investment Benchmark Report 2020

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Yo Takatsuki

AXA Investment Managers (AXA IM) welcomes the release of the annual Responsible Investment Benchmark Report 2020, published by the Responsible Investment Association Australasia (RIAA), and takes the opportunity to renew its call for carbon ‘footpath’ investment.

This year’s RIAA Benchmark Report shows that in 2019, Australian and multi-sector responsible investment funds outperformed mainstream funds over 1, 3, 5 and 10 year time horizons. Further analysis shows the outperformance has continued amidst the major market disruption brought on by COVID-19.

The data also shows Australia’s responsible investment market continued its upward trajectory in 2019, with $1,149 billion in assets under management, a rise of 17% from 2018. Responsible investment now represents 37% of Australia’s total $3.155 trillion in professionally managed assets.

Mr Yo Takatsuki, Head of ESG Research and Active Ownership at AXA IM, said the RIAA Benchmark Report plays an important role in providing clear and transparent data on responsible investment strategies.

“This year’s report highlights the significant growth in responsible investment and shows investors do not need to compromise on performance to invest responsibly,” he said.

“The COVID-19 crisis has highlighted the increasing importance of active ownership and provided an opportunity to redouble our efforts as responsible investors to drive change. In the first half of 2020, AXA IM increased its engagement activities around human health, public capital, and shareholder rights, and engaged more than 180 issuers at around 4,300 shareholder meetings globally.”

Mr Takatsuki added that 2020 had also been significant from an environmental perspective, as a result of historic falls in greenhouse gas (GhG) emissions.

Australia’s GhG emissions have fallen to their lowest levels since 1998, with COVID-19 restrictions decreasing carbon ­dioxide levels by 10 million ­tonnes between April and June. While globally factory closures, lockdowns, bans on large gatherings, and transport curtailment have seen emissions drop by around 4%[1], the largest annual reduction ever recorded.

“Despite historic drops in global emissions, AXA IM’s research shows it would take a COVID-19-like event every year until 2050 to reach our commitment to a 1.5-degree world,” Mr Takatsuki said.“We have been given a glimpse of the kind of adjustments our world needs to make if we are to definitively tackle the looming threat of the climate crisis. Far from distracting us from this, COVID-19 should harden our resolve while teaching us valuable lessons.”

To do this, AXA IM believes in taking a ‘carbon footpath’ approach, rather than a decarbonisation, ‘footprint’ strategy.

“A pure divestment, decarbonisation approach can pose unintended problems for investors. These problems may arise in the form of increased active risk, reduced diversification, and can also mean investors have less leverage to use when engaging with companies. We also believe a blanket approach to divestment means companies who are evolving may not have access to enough capital to facilitate positive change,” Mr Takatsuki concluded.

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The global investment manager’s research into the global equity market shows ESG leaders outperformed ESG laggards by 16.8% in the first quarter of 2020.

AXA IM also conducted the same analysis for the bond market and found ESG leaders outperformed ESG laggards by 5.2% over the same period of time while showing lower volatility.

According to Mr Yo Takatsuki, Head of ESG Research and Active Ownership, AXA IM, COVID-19 has presented the first major test for ESG investing, the rise of which over the last decade has largely coincided with the longest stock market bull-run in history.

“The COVID-19 pandemic is the first real ‘acid test’ of ESG investment theory,” said Mr Takatsuki. “There is no surprise that the pandemic is having a huge impact on the rapid stock market decline. Some of the world’s major equity indices, such as the S&P 500 and FTSE 100, have experienced their worst quarter since 1987. The MSCI All Country World Index (MSCI ACWI), an index of equities from developed and emerging markets, fell by a third from its peak in early February to its quarterly low in late March.

“While ESG scores cannot tell the whole story, our initial analysis from the first quarter of 2020 shows that valued ESG scores can be a positive sign for quality and resilience in tumultuous stock and bond markets. Similarly, in times of market stress, higher ESG ratings show a more defensive positioning.”

At the beginning of April 2020, AXA IM conducted an analysis of how companies with different ESG ratings performed in the bear market for stocks during the first quarter.   Both asset classes were observed by AXA IM’s in-house ESG quantitative scoring methodology that investments with higher ESG ratings performed notably better and were more resilient in the quarter compared to investments with lower ESG ratings.The two portfolios were categorised by ESG rating score – leaders being high on the scale and laggards on the lower end of the scale. While both the ESG Leaders and Laggards had similar volatility over Q1, the graph below clearly identifies the ESG Leaders portfolio as outperforming.

When delving into the equities performance at a sector-level, AXA IM observed that Healthcare, Financials and Utilities had the most marked differences in returns between ESG Leaders and Laggards in the first quarter of 2020.

In a separate analysis, AXA IM looked at the impact of its firm-wide ESG investment standards and found that when these were applied to a portfolio of stocks, the portfolio outperformed the parent benchmark index by 47 basis points.

“We intend to undertake further research to understand whether ESG scoring offers similar results as the hoped-for recovery emerges,” said Mr Takatsuki.

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