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Your guide to responsible investing

It’s little surprise that there has been plenty of confusion about Responsible Investing (RI). Much of the terminology around the concept can be jargon heavy and as a result, many investors could be forgiven for not fully understanding or engaging with the opportunities presented by RI.

After starting out with the fundamental idea of investing in ‘good’ companies and sectors and avoiding ‘bad’ ones, RI has since evolved into a powerful way to make effective investment decisions. It can deliver sustainable, long-term value for clients and create a positive impact on society using insights gleaned from environmental, social and governance (ESG) data.  By incorporating these considerations into investment solutions across all asset classes investment managers can deliver positive measurable outcomes that are in line with clients’ broader ESG objectives.

This approach has built significant credibility in an age when some firms can become winners almost overnight while seemingly powerful corporates fall by the wayside as a result of not addressing increasingly prominent trends such as technological disruption.

A striking example of this is the rapid rise of electric car manufacturer Tesla1. Although launched a century later than Ford, Tesla has in its few short years of existence already temporarily outstripped (in terms of market capitalisation2) what was for generations the world’s most successful automobile producer.

The shift may seem sudden but illustrates the momentum that is building for products that are deemed more responsible and less harmful to the environment. And the wave of enthusiasm for creative innovation is not limited to the heavy polluters in industrial sectors, it is quickly moving into the financial world. Investors increasingly want to understand how a company is creating value. They therefore expect and demand details of how an organisation’s activities are impacting the wider world.

The RI revolution

In the past, investors concerned about aspects of a company or sector, such as tobacco, arms or gambling often found that they were faced with limited investment options. The focus was almost exclusively on public equity- oriented strategies, in what were generally described as negative screening or ethical funds. This also created the perception that financial returns were limited.

But the RI universe has moved on significantly since the early days of such negative screening. Responsible investment strategies have grown both in number and sophistication, reflecting investors’ appetite for investment products that address and respond to ESG issues. Through integrated and innovative fund management techniques, RI is opening up a new world of opportunities, and these will continue to improve as tools and measurement criteria within RI become more nuanced. Greater scrutiny on non-financial criteria can help asset managers to more effectively mitigate risk and therefore potentially enhance financial returns.

Why we believe RI is a compelling opportunity for investors

In recent years; the investment landscape has witnessed dramatic change as the multiple factors that companies must address to deliver long-term value and mitigate risk have been redefined. There include hard trends such as regulation as well as softer trends which are shaping corporate and social behaviours, and emerging investment opportunities.

An effective tool to address regulatory change

COP21, the UN Climate Change Agreement signed in 2015 by nearly every country in the world, was a seminal moment in influencing corporate behaviour globally. At the national level, important initiatives such as the Energy Transition Law (Article 173) in France, which requires investors to disclose how they manage ESG criteria, have dramatically transformed the global investment landscape as it relates to RI. Around the world, regulations that include specific RI requirements are growing, as seen in pension fund legislation in the Nordics, Canada and South Korea3.

These have been joined by a series of so-called ‘soft trends’ that are compelling companies and investors to place greater focus on ESG factors in their operations and communications, including the Financial Stability Board’s move to increase transparency on climate-related financial risks (FSB TCFD4), and ratings agencies such as Standard & Poor’s and Moody’s committing to ESG benchmarking and measurement.

Launched in 2016, the UN’s 17 Sustainable Development Goals (SDGs) are quickly becoming a norm in certain geographies, for example the Netherlands, where many Dutch pension funds have announced that their mandated investment managers must make reference to how their solutions will contribute to the achievement of one or several of the SDGs while still ensuring market rate returns.

1 For illustrative purposes only, no representation is made that AXA IM has or is invested in such security.

2 Source: Bloomberg, as at 30 November 2017