ESG Research Roundtable
Solène Danière, Fixed Income Portfolio Strategist, discusses some myths around Environmental, Social and Governance (ESG) integration, how fixed income investors can engage with issuers & what lies ahead for ESG.
Presenter: Hello, I’m here in conversation with Solène Danière, AXA IM’s Fixed Income Portfolio Strategist, to talk about fixed income and sustainability. Solène, environmental, social and governance (ESG) is becoming a hot topic with investors, what is the one myth that you keep hearing that you would like to bust today?
Solène Danière: Well it’s true that there are a number of myths around ESG integration in the fixed income space, as always with hot topics, and the one I would like to tackle is the fact that bondholders cannot lead engagement in stewardship initiatives with the companies they invest in, when we actually believe that it’s one of the key building blocks of our ESG integration process.
Presenter: I understand that but how do fixed income investors engage without having voting rights?
Solène Danière: We’re one of the biggest bondholders in the market. So, when we meet with the companies we invest in our opinion definitely matters. We also have broader engagement framework at AXA IM levels. So, we leverage on our equity investments or fixed income investment and private placements. But engagement is definitely part of our day-to-day job. So, our credit analysts, our portfolio managers, when they meet on a regular basis with the companies, they definitely raise ESG concerns when they see fit. And when you think about it, engagement is actually a much broader process than this. It’s about keeping a dialogue very much alive with all the stakeholders. So, with companies we invest in, with ESG providers, and also with our clients.
Presenter: Another question I get asked all the time is whether ESG factors limit the opportunity set of end investors, and conflict with the investor goals. Do you face that a lot?
Solène Danière: Well as long-term investors, we believe that, on the contrary, taking ESG integration into consideration helps us mitigate downside risk, and as such there’s a natural alignment between our long-term interests and the fact that companies are shifting their business model towards a sustainable one. Let’s take the example of the utilities sector. Now it’s becoming cheaper and cheaper to produce renewable energy and a lot of companies in that sector are obviously transitioning their business model towards a more sustainable one. So in the vast majority of cases there’s actually medium to long-term alignment of interests here, rather than a conflict.
Presenter: Speaking of transitions, AXA IM has been working a lot on transition bonds, but it sounds a bit like green washing to me?
Solène Danière: I don’t think that it’s true because a transition bond is designed to finance companies that are willing to initiate projects to transform their business model. So let’s take an example. Let’s take an industrial company that has very high CO2 emissions. While this company would have a very high interest in investing in carbon capture and storage projects, but these projects would definitely not fit in a green bond taxonomy. So, what we’re saying with transition bonds is that if the company is willing to transform and has a strong environmental strategy, strong commitment and very strong targets, we’re willing to help them take these intermediate steps so that one day they can also be part of the green bond market.
Presenter: So, Solène, final question. Where do you see ESG going within the wider fixed income landscape?
Solène Danière: Well seeing how fast things have changed in the past few years and how broad the ESG topic is, it is difficult to predict how things will evolve. But I have a couple of things in mind, a couple of things we’re working on at the moment to take ESG integration next steps. The first one is obviously transition bonds, we’re definitely hoping that this will be a bigger part of the fixed income market, and we’re working on a broader impact framework as well to be able to screen the entire credit universe basically based on impact metrics.
The second point is climate change. It’s a growing preoccupation for investors, for governments. It’s supported by strong initiatives in the regulation space. And we set up our climate framework back in 2018. It’s part of our day-to-day ESG integration process. But we also want to go further. And that’s what we’re currently working on. And, we’re very excited about new initiatives in that space, and new innovations regarding forward-looking metrics, portfolio temperatures and being able to run full scenario analysis on the portfolio to measure the alignment with the 2-degree scenario.
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