AXA IM’s Gupta: “We are moving towards a more holistic definition of value creation”

• AXA IM has instituted a three-tiered framework for ESG integration
• Combines internal diversified experience and third-party data providers to determine ESG scores
• Leverages AI and data science to fill the disclosure gap

AXA Investment Managers (AXA IM) is one of Europe’s largest asset managers with about EUR815 billion ($961.6 billion) of assets under management (AUM) globally, of which 14% comes from Asia Pacific. It is one of the leading advocates of responsible investments (RI) and believes in its ability to deliver long-term value for investors and positive impacts on society.

It is aggressively incorporating environmental, social and governance (ESG) considerations into its investment decisions and offer customers a range of RI solutions and tools. About 64% of its total AUM, or EUR520 billion, are currently ESG integrated.     

The asset manager is also known for its data driven approach to investing, and is an early adopter of quantitative investing. One of its investment solutions, Rosenberg Equities, rely on artificial intelligence and machine learning technology as well as data modelling to perform investment analysis, identify investment opportunities and construction asset portfolio. It claims to be one of the first quantitative managers to fully integrate ESG considerations into all of its portfolios. 

Anubhuti Gupta, head of APAC at Rosenberg Equities believes that as ESG data improves in quality and becomes more widely available, it will help data-driven investment managers such as Rosenberg Equities, capture better fundamentals, reduce risk and improve investment outcomes for clients.

The following is the edited transcript of the interview:

Foo Boon Ping (FBP): Please provide an introduction of the ESG business strategy and framework of AXA IM. What are differences between responsible / ESG investment and traditional investments from your perspective?

Anubhuti Gupta (AG): I would use the terms ESG and responsible investment interchangeably. We have been strategically committed to RI since 1998. We believe and have evidence that it can deliver sustainable long-term value for clients and create a positive impact on the society. We have adopted a formal RI policy that applies to all investment platforms within AXA IM across all the asset classes. We also have developed our own restrictions which apply to our assets under management (AUM) centred around controversial weapons, palm oil, soft commodities and coal policies.

Instituted a three-tiered framework for ESG integration

We think about integrating ESG criteria at three levels. The first intensity level is ESG embedding, we exclude the controversial activities. We also utilise our voting rights as one of the world's largest institutional investors and targeted engagements because active ownership can be powerful.

Our portfolio managers have access to ESG scores and incorporate that with the research provided by dedicated responsible investment team and the credit analyst team when constructing and building their portfolios, 

At the second intensity level, portfolio managers integrate the criteria into their investment process more directly and have objectives and key performance indicators (KPIs) to maintain and improve ESG scores of their portfolios. And this category includes our labelled funds and funds that we manage for AXA Group.

The labelled funds, Socially Responsible Investment (SRI) label, are awarded by the French government and are a combination of several themes. It could be based on our own proprietary ESG scoring, especially in more quant driven strategies like Rosenberg Equities, and we have sector analysts who do thematic ESG research. Voting and engagement are key, and also all the supporting ecosystem. The reporting, framework and tools we use need to be easily understood by the users and our clients.

The third intensity level is about creating a measurable impact. We are not sacrificing financial returns at any point of time, because as investors that is one of our primary fiduciary responsibilities. The idea is to generate competitive financial returns, while also creating positive and measurable societal impacts. It can be used in different projects such as improving access to education and health, extending the reach of financial products to underserved populations, climate change.

When we're constructing the portfolio, it isn't just about improving the ESG score, the basic carbon, water KPIs, but there should be an emphasis on selecting assets or companies that demonstrate a positive contribution, either through quantifiable measures or through active engagement. The framework that we use is the UN Sustainable Development Goals (SDGs), aligning portfolios along the relevant themes and it provides a good way of both aligning and reporting on the impact aspect of impact investments.

FBP: What is the size and proportion of ESG assets to total assets under management? How is this spread across regions and specifically in Asia Pacific?

We are one of the largest asset managers in the world, and out of the EUR815 billion ($961.6 billion) that we manage worldwide, EUR520 billion ($612.8 billion) are actually ESG integrated. Effectively all the core asset classes like fixed income, equity, which represent a much larger proportion of our total assets are approaching 100% ESG integration. The area where we are still working on integrating in a deeper fashion are the alternative investments like structured finance. There are ways of integrating but at this point, it's not easy to do it as the other more public asset classes. So that is work in progress.

Out of this EUR520 billion ($612.8 billion) of ESG integrated AUM, about EUR15 billion ($17.6 billion) of labelled funds, SRI funds, the second degree of impact. And when it comes to impact investments, we are looking at about EUR1.3 billion ($1.5 billion) of third degree of impact related investments. We have about EUR20 billion ($23.5 billion) of green investments, which are important and on the radar of investors globally.

As far as the Rosenberg Equity platform is concerned, we are managing about EUR16 billion ($18.8 billion) globally. We have the benefit of strong data and technology heritage. We have integrated ESG at the second level of intensity across all the assets. So, 100% of the assets that we manage for the Rosenberg quantitative equity platform are ESG integrated. Within Asia Pacific, our total assets represent about 14% of the global AUM. Within equity and fixed income, we are 99% ESG integrated for Asian strategies. And for private markets, we are looking at about 75%.

Combines internal diversified experience and third-party data providers to determine ESG scores

FBP: Corporate governance - degree of disclosure, reporting and transparency of investments. Are executive KPI’s linked to ESG?

AG: What you can measure, you can manage. Including measurements into reporting is extremely key. There are many providers and everyone is coming up with its own flavor, it can get confounding. A dedicated RI team with diversified experience in different fields allows us to have a holistic handle on how to determine ESG scores for companies.

The data quality has improved in the last five to 10 years. There has been such an exponential improvement in disclosure, quality and consistency of the data that we see.

We take a best of breed providers approach; which provider is strong in which field and dimension. We take the data and overlay it with our qualitative expertise and sector analysts’ assessment of what is material.

We use MSCI ESG Ratings scores, they are strong on the ESG dimension, but somewhat lacking on the social front. We use another provider, Vigeo Eiris, to give us a more detailed view on the social aspect of the companies. We also look at controversies because those are tail risks. Companies which are experiencing controversies like Volkswagen or Luckin Coffee, they can blow up. We are using Sustainalytics data to analyse controversies and exclude or divest from them as needed.

The framework that we have built for the corporate and sovereigns, is around the three key pillars of E, S and G. At the corporate level, we are covering more than 1500 issuers worldwide, which represent 93% of the MSCI World index, almost 93% of the equity issuers are covered by us. For the fixed income side, it's about 92% of the Bloomberg Barclays Global Aggregate Corporate Total Return Index. And on the sovereign framework front, we are covering more than one hundred countries representing 98% of the JP Morgan Global Aggregate Bond Index.

For the corporate framework, on the E dimension, we are looking at climate change, resources and ecosystem. Similarly, on the social front, we organise our research around human capital and social relations. On the governance front, the two broad pillars under business ethics and corporate governance.

We do try to incorporate the idea of materiality and significance and make it relative to a company, the country or the sector, because it's not fair to apply the same standard to a company in an emerging market country versus a developed European country. So, definitely one size does not fit all. And we try to reflect that in the way we are coming up with the final scores and ESG ratings for the issuers

We have a common reporting framework and the aim to provide our clients with the maximum transparency on their investments. We have dedicated resources to produce ESG impact reports, featuring components such as the relative portfolio performance along a number of specific ESG KPIs. It would include the ESG overall score for the portfolio. If the benchmark is relevant for that strategy, then you will also see the overall ESG score for the benchmark.

We also show it at the holdings level, because we are committed to providing as much transparency as possible on our investments. We will report on the top 10 holdings’ ESG scores and carbon footprints. And if there is a desire to see more, more information is available on all our holdings on request to the clients. So, we will provide that full level of disclosure. And we regularly publish our stewardship reports, which talk about how we are voting and engaging them, on I think half yearly basis.

The industry is evolving, we do see the inclusion of non-financial, ESG related, KPIs alongside the standard performance objectives and this will be a natural progression. We are not exempt. We are firstly a signatory of the United Nations Principles of Responsible Investing (UN PRI). And we are always striving to keep ahead in terms of ESG reporting and ESG integration. We provide information on the companies that we invested in as well as provide adequate disclosure on where AXA IM stands on those important positions. AXA Group and AXA IM are part of the working groups looking to define the right methodology to align investment portfolios to the below two degrees climate change goal.

ESG related KPIs are an explicit component of our target letters. ESG related KPIs which play an important part in determining how each investment platform and how overall AXA IM is delivering on the ESG funds. And that has an impact on a lot of things including the remuneration.  And then on voting policy, it takes into account our views on corporate governance. And it provides a robust framework for the proper governance of the companies that we invest in. We are cognizant of the fact that companies are dynamic, and we cannot apply a one size fits all approach.

Our preferred approach is to resolve any issues of concern through dialogue and engagement; individually and collectively. We expect our investee companies to align their policies and practices with the principles of the UN Global Compact on human rights, labour and ethical behaviour. We support the adoption of an integrated reporting approach which takes into account the full ecosystem of a company, its strategy, performance, prospects, and governance, in the context of its external environment that it is operating in, which effectively leads to value creation for all the stakeholders over different horizons. And we also encourage companies to participate in the disclosure programmes of various authority of various organisations, like the Carbon Disclosure Project and other initiatives.

Leverages AI and data science to fill the disclosure gap

FBP: Innovation and the use of alternative data – How does AXA IM measure impact and validate ESG ratings?

AG: Disclosure remains a problem. The big companies have gotten very good at disclosing more. It is still a work in progress, there are still challenges, especially for the smaller companies, because it comes with a financial implication, more reporting means more financial burden. It will be a while before we can get to the level where there is an adequate level of disclosure and there is standardised reporting.

This is where we can actually utilise some of the more modern innovative techniques around artificial intelligence, data science to fill that gap. We have been doing a lot of work in artificial intelligence and natural language processing (NLP). We have developed our own NLP framework that allows us flexibility in how we deploy that for different objectives, to better understand a company's ESG profile, above and beyond the weightings and data that's provided by different data providers.

So we look at companies' financial reports and apply the NLP engine to determine ESG commitment score based on how it is talking about ESG related ideas in those reports, how that language is changing from year to year. Because you see a lot of boilerplate language and it may not be very meaningful. But what will be more meaningful is how that language has changed, even small changes can provide a lot more information.

We have created our own company ESG commitment score based on these ideas, which allow us to have an alternative and more complete view into a company's ESG profile.

Innovative data providers are deploying these techniques to understand ESG better. One example is Value Labs, they apply NLP to assess news to determine an ESG sentiment for the company. And this is very powerful, because small companies which are not providing adequate disclosure, can get better coverage. You can have a better understanding of what those companies are doing in terms of the ESG ideas and integration into their day to day processes.

One company, Thinknum, is mining data to understand a company's corporate culture and how it treats employees by looking at the reviews posted by employees on public websites. So that gives an indication of the corporate culture. They noticed that companies where employees are most satisfied, where they have posted more positive reviews, tended to go through crisis better.

We need to always take a skeptical approach about these alternative data providers when looking at applying these different techniques, because they're highly complex. And at times, it's not easy to understand why they are doing what they are doing. And it could also be that they're confusing causation and correlation. And the credibility of the data vendor is key. How reliable are they? What is their degree of integrity? Are they going to continue as a business? If you build your process around a data feed from somebody who's going to be out of business a year later, you are going to be left in the lurch. So, it's exciting, but it also needs to be used with a lot of caution and care.

ESG convictions have become more relevant during COVID-19

FBP: How has the COVID-19 pandemic affected the relative interest of sustainable and ESG-linked investments – particularly for high and ultra-high net-worth individuals (HNWIs and UHNWIs)?

AG: The virus has forced a reckoning throughout the world. One of the conclusions that we have reached, as we published our stewardship report for the first half of this year, is ESG convictions have become even more relevant during the pandemic. We have been doing a lot of work around climate change, biodiversity, human capital management, gender diversity, public health, corporate governance. And these have been adopted by the market to explore how the virus might change industries, and alter ways we might invest going forward.

This has included research on eclectic ideas like COVID bonds, carbon emissions during lockdowns, and the resilience of ESG leaders against laggards in the market downturn. So, there is a keen interest to examine from our investor base the development of new ideas that could help build resilience to the current pandemic, as well as the ones that may ensue in the future, and embed sustainable practices to futureproof investments.

And it has also sharpened the importance of active ownership, particularly around crucial issues such as public health, human capital and shareholder rights. So, the crisis has not set us back. In our experience, it has sharpened the focus on ESG in investments, which is a very good thing.

Both institutional and private wealth, what they're trying to do is preserve wealth, they are trying to generate returns to meet their financial liabilities in a low-returns world. And they are increasingly becoming aware of the societal impact of their investments. It is a trend that we have seen before and after the crises, people are looking at value creation, not just from a financial return perspective, but from a total societal impact perspective as well.

Both institutions and high net worth individuals, and even retail investors, are becoming more conscious of the impact of their investments. It's not just about what you're delivering, but how you're delivering. And everyone wants to play a part in making our environment more robust, more future proof, because we are all feeling the impact of blind capitalism.

It's painfully clear, and people tend to have this notion that emerging markets tend to fall behind. But based on different surveys and anecdotal experiences, in emerging markets, the man on the street is more acutely aware of the impact that blind pursuit of profits can have on their environment and how it hurts the long-term prospects for them, the economy and the country. China, for instance, has become one of the world's biggest green bond issuers. In India, there is an increasing awareness of the non-financial impact that companies are producing, to pursue financial return. So, it's the idea of maximising stakeholder value, not just shareholder value. We are moving towards a world where people are looking at a more holistic definition of value creation.

Strong investment rationale behind sustainability practices

FBP: What is the relative performance of sustainable and ESG-linked assets amid COVID-19?

AG: ESG delivers value to investors, we saw that play out during the crisis. ESG leader index performed much better than the standard one during the crisis. But I wouldn't read too much into it, because we should see this play out over the long term. Companies with strong ESG practices tend to have more operational resilience, because of the way they are running their businesses. And this eventually drives cash flows. This drives their financial stability, and future profitability growth, that contributes to long term investment returns. This dynamic was very clear during the crisis.

There's a lot of research that we have done internally as well as by our competitors, and in the academia, where ESG factors can potentially lead to better performance for companies and investors. The University of Oxford looked at more than 200 academic studies, industry reports and newspaper articles, etc. Among these sources, 88% indicated that companies with strong sustainability practices demonstrate better operational performance, which ultimately translate into cash flows and superior returns. And 80% showed that strong sustainability practices have a positive influence on investment performance.

It is not companies which are doing the bare minimum to meet the regulatory requirements. If you go beyond that, look at it from first principles, there is an investment rationale behind pursuing companies which have strong sustainability practices, because it's the economically right thing to do, not just socially.