How ESG can help build resilience in Buy and Maintain credit strategies
Responsible investment has always been about the long term. Equity investors want to know a company isn’t vulnerable to global shifts around environmental or social issues and fixed income investors, looking to more distant horizons, might need to ensure a business can be part of a resilient strategy for the next 20 years.
For asset managers seeking to build such strategies, it’s all about culture. At AXA IM, we believe our Buy & Maintain business benefits from credit analysis that puts environmental, social and governance (ESG) factors at its heart. It’s not for show – the integration of ESG decisively shapes allocations. We believe this can help deliver long-term performance enhancement for institutional investors.
The reason is simple. Companies that can’t adapt to new realities have never made for great investments, and as the world responds to climate and social change, this is becoming more important. So how do we make sure our strategies are prepared?
Scores and more
ESG scores are a very useful part of our process, but they are the starting point, not the destination. Our proprietary system1 uses raw data covering more than 7,200 companies and 100 countries to deliver a simple score from 0-10. This is the first hurdle. We will not buy a bond from a company that scores below a 2, or which falls foul of baseline exclusions.
An ESG score, however, only reveals its true value when combined with a full qualitative assessment. It is, for example, hugely important to track scores through time. Where we see a company heading up or down the scale, the real investment driver is knowing what lies behind the trajectory.
Companies with an ESG score above 2 still face detailed scrutiny from our credit analysts who take care to factor in ESG risks, working closely with our equity analysts. The goal is sustainability and resilience – and the results are tangible, not aspirational.
Exclusions based on ESG quality have allowed us to avoid exposure to ratings downgrades and bankruptcy and we expect the effects of such examples will be seen in performance over time. We believe the impact of ESG can be magnified as downgrades and defaults emerge over the years. We want to lend to companies that will be thriving, and delivering cashflows, 15 years from now.
This isn’t only about strategic allocations, it’s also about staying relevant in changing fixed income markets. Our view is that asset managers who take ESG seriously have better prospects for allocations when debt comes to market.
At AXA IM we have seen more and more evidence that allocations are affected by responsible investment characteristics. Our experience is that banks will allocate more to what they see as real, active, long-term money – to asset managers who are “seen as green”. A reputation as a major player in this space can therefore offer a hard-earned edge and influence the nature of issuance. The market is also moving towards standardisation of how ESG is reflected (most obviously in Green and Social bonds) and those with strong systems have a potential advantage.
Once we secure an allocation from a company, there is more value to be gained from active engagement with management. In 2019, alongside intense activity in equity markets, we engaged with close to 40 debt-only issuers2 . A nuanced understanding of a company’s ESG progress allows us to build a strategy that is sustainable from all angles.
Our pension fund and insurance clients need to see how we are addressing ESG concerns with companies and so we have enhanced reporting of milestones and results. Clients can receive a line-by-line report, with a timeline of engagement steps and themes where we are seeking improvement. Our team is always on hand to give deeper insights, and our twice-yearly Stewardship report gives details of every engagement we make.
One example has been to push oil companies to make ‘net-zero’ commitments on emissions as we seek to protect the long-term interests of clients by influencing the future of the energy industry.
AXA IM lends to one oil major on the basis of a 2050 net-zero commitment. Deviation from that path could prompt a refusal to participate in new issuance. Among carmakers, we favour those trying to transition ahead of the regulatory imperative. One global name gained an allocation, not simply because it issued a Green Bond, but because it specifically earmarked funds for sales leasing on hybrids. This kind of verifiable data encourages us to invest.
New markets have amplified the role of responsible investment. We have sought a leading role in the growth of Green and Social3 bonds – debt designed to directly address ESG issues, and which is often anchored in the UN Sustainable Development Goals (SDGs).
The SDGs give issuers a useful way to pitch debt to responsible investors. But they do not remove the need for scrutiny – in fact, engagement can be more intense to meet technical and disclosure requirements. It is crucial to avoid ‘greenwashing’, where companies pay lip service to targets, and as a proud active investor our focus is on tracking how money is actually used.
Again, reputation matters. AXA IM’s leadership in Green bonds4 helps shape the sector. This includes membership of the Green Bonds Principles Executive Committee where we have helped provide industry guidelines to improve transparency.
Our role in the development of Transition bonds highlights our thirst for practical innovation. Our own guidelines5 allowed for a €100m issue of this new type of debt, which allows carbon-intensive companies to finance decarbonisation projects. We are now leading industry efforts to ramp up this asset class.6 We also have more than £2bn of exposure to social housing where we selectively lend to Housing Associations with clear social development strategies.
When you take ESG seriously in fixed income, opportunities can emerge. As the market adapts to the realities of climate change and other ESG challenges, we believe it pays for asset managers to embed true responsible investment techniques in their allocation process. Just as we seek out companies that stay ahead of the curve, so asset managers have a duty to be at the leading edge as the investment industry evolves.
- AXA IM: Our Scoring Methodology
- AXA IM 2019 Stewardship report
- Rise in Covid-19 bond issuance fans fears over ‘social washing’ Financial Times, 30 June, 2020
- AXA IM: Our Green Bond framework
- IPE, 12 June 2019: AXA IM calls for ‘transition bonds’ to help companies go green
- ICMA Working Group on Climate Transition Finance