Redefining activism: why ESG is good – but no longer enough
The market shifting away from the practice of excluding investments that don’t meet ESG criteria, to an active integration of investments that do. While this is a definite sign of progress, it still isn’t enough.
When I was a kid, I loved to sprint. But later, as a cross-country runner, I learned the value of pacing and the importance of seeing the big picture when aiming for the finish line. The further away your goal, the more important a robust methodology becomes. True to human nature, when considering whether to take an Environmental, Social and Governance (ESG) approach to investing, business professionals – and more broadly their respective institutions – often won’t see the benefit of integrating sustainability unless they have experienced failure when focused on the short-term.
For me, that revelation came when the dot-com bubble burst. After riding a wave of success and rapid expansion, I was suddenly forced to shut down a business and make people redundant, including myself. My next job provided a deep dive into the still new field of responsible investment. It soon occurred to me that the previous failure could have been mitigated had we properly considered ESG factors as part of the business model. It forced me to consider the value of a business beyond pure shareholder-based metrics.
In the investment world, this shift to long-term thinking is starting to happen on a broader scale. Over the past decade, we have witnessed a growing number of investors who are incorporating ESG criteria into portfolio management. Furthermore, the market shifting away from the practice of excluding investments that don’t meet ESG criteria, to an active integration of investments that do. While this is a definite sign of progress, it still isn’t enough.
The next frontier must see the investment community redefine activism, and what it means to be an active manager. We must be proactive to ensure that investments seek to achieve positive impact while fulfilling our fiduciary duty, which as asset managers must be to maximise returns for our clients.
The term ‘activism’ can elicit two polar responses. The first might associate the term with the activism of initiatives such as climate or social NGOs. On the other hand, one might equally associate the moniker with the short-term activism of financial services firms often acting not in the long-term interests of the company. In short, ‘activism’ is a loaded term and currently depends upon who is wielding it. But there is an opportunity for a new role for activism in financial services that must be encouraged - activism that drives a constructive dialogue. It is this form of activism that will facilitate a less limited and more sustainable, long-term form of capitalism.
This new wave of activism is growing - driven by investor demand for the asset management industry to consider impact beyond financial returns and the need for managers to demonstrate their active approach. In private markets, we have focused our entire strategy within the equity asset class on an integrated approach which incorporates ESG due diligence with Sustainable Development Goals (SDG) aligned investing. This impact investing mindset is consistent with market rate returns that demonstrate long-term results with a focus on specific health, financial inclusion and climate metrics.
Across fixed income, we see growth in sustainable active management, driven by an increase in demand for proof that loans have been used for the SDGs they set out to achieve. This also drives policy and industry-wide commitments. In the summer of 2019, the International Capital Market Association updated its guidelines to require green bonds to have greater disclosure and transparency and the industry is awaiting the European Commission’s publication of its green bond standards.
Our journey to impact
In our own journey to active ownership, we have made incremental adjustments to our voting and engagement. Our strategy is not just about retaining an asset that ticks an ESG box but hold it to account if it’s not taking the right approaches to issues such as diversity and inclusion, climate change, biodiversity and our ambitions around SDG 13 targets. We already have ESG standards in a high percentage of our portfolios, and the next step will be to adopt this across all of our investments – we are committed to achieving 90% ESG integration in our open-ended portfolios by the end 2019. We believe that our commitment to sustainability must extend beyond our investment approach and be truly integrated in how we manage our own business - to put our money where our mouth is.
We are committed to achieving 90% ESG integration in our open-ended portfolios by the end 2019
How companies are contributing to meeting the SDGs is fast becoming an expectation of the market. Our core ambition is to incorporate and follow ESG criteria across all aspects of our business, not just our investment teams. Over the last 10 years we have committed to reducing our own carbon footprint and being more environmentally friendly. We are also developing innovative and pragmatic impact-investment funds and policies. We strive to measure our own activity and hold ourselves accountable, and we’re working to create better tools, not just for our business but the market overall.
Matt joined AXA IM in 2011 and as Global Head of Responsible Investment is responsible for directing, implementing and overseeing the development of an impact investment programme and the integration of ESG criteria across asset classes and multiasset solutions. Matt has been a leading voice in the field of responsible investment and was a member of the European commission’s coordination committee to explore the future of sustainability policy and legislation in the EU, a position he held until joining AXA IM. Matt was a Founding Director at Eurosif and has held Board positions with impact funds in the alternatives arena.