Exclusive: Why one size does not fit all for AXA IM

Asset owners are at the forefront of addressing climate change and net zero challenges. As a result, this has put them in the public eye as never before.

They are in a strong position to send a firm message to companies highlighting unsustainable activities, pushing them to address material net zero risks, and encourage companies to implement best practices to steer them in their transition journey.

Many industry insiders agree the key issues are those which can have a material impact on long-term financial performance, such as climate change, net zero, biodiversity and responsible technology, as well as, of course, governance.

However, when it comes to the business of engaging with company management teams on these factors, one size does not fit all, according to Clémence Humeau, head of sustainability coordination & governance at French global management giant AXA Investment Managers, which represents hundreds of asset owners and other investors, large and small, around the world.

"I believe there is a need to better reflect the increasing ESG dialogue between portfolio managers, analysts, and investee companies," Paris-based Humeau told Net Zero Investor in an exclusive interview.

"Accordingly, we have introduced a distinction between two engagement approaches: ‘engagement with objectives’, which is led by thematic experts with an explicit goal to achieve change within a company; and ‘sustainability dialogue’, a less intensive process focused on companies where sustainability practices support profitability," she explained.

"The latter is more typically led by portfolio managers or analysts."

Policy

This approach seems to be the direction of travel that policy makers are generally pushing for as well. 

Both the PLSA and the Financial Reporting Council (FRC) have advocated for a clear distinction, and disclosure, between dialogue and engagement. 

For example, the FRC said recently: “When reporting on engagement, applicants should distinguish between interaction that has clear objectives and seeks changes and activities that seek to gather information.”

Humeau stressed this dual approach enables asset managers to reinforce the governance, resourcing and oversight of their engagement activity.

"By adapting those depending on the nature of the dialogue, importantly, it can maximise the chances of successful outcomes. It also facilitates better and more accurate reporting to clients."

Humeau's college, Virginie Derue, head of ESG research at AXA IM, also based in Paris, added that "this means we are engaging companies on sustainability matters and seeking to improve their practices with a specific objective and clear targets in mind – and with a set timeframe for achieving these."

"Yes, and we also regularly review progress and potential necessary escalation steps within a dedicated governance forum," Humeau shared with Net Zero Investor.

An example of this is a ‘three strikes and you’re out’ climate policy, where if companies do not achieve AXA IM's set objectives within a three-year time horizon, there is a commitment to the divestment from said company.

In regard to broader key themes across this type of engagement, "we saw governance continue to dominate throughout 2022, with around a quarter of our discussions covering corporate governance matters. However, as you might expect, just 15% of those meetings addressed governance alone," Derue said.

"Effective governance policies and practices are a prerequisite to ensuring environmental or social issues are handled appropriately. In some respects, governance is the gateway," she noted.

"For example, over the last year, around a third of our own climate change engagements were linked to governance."

Moreover, around half of AXA IM's human capital engagements also had that link to governance,  Derue stressed.

Humeau singled out the development of dedicated policies, the use of top management objectives and incentives, and appropriate board oversight at investee companies.

"Engagement with objectives works with a direct dialogue or through collaborative initiatives. For our part, the latter make up about 20% of all engagements of this type," she disclosed.

"Clearly, if you engage alone, the asset manager has full control and ownership – but joining efforts with other investors can improve the efficiency of the engagement process and the materiality of results, on the condition that all parties engaging share the same goals and seek the same outcome," Humeau stressed.

As more co-operative discussions and engagements take place across the investment industry, it seems clear that the debates between members of collaborative initiatives, including on the governance of the initiatives themselves, are also an illustration of their increasing importance.

Dialogue

While asset managers have been engaging with the companies they invest in for many years, the so-called idea of a sustainability dialogue has gained traction over the past years.

This approach is designed to better reflect the breadth of dialogue happening between investment teams and corporates or government-related agencies on sustainability topics.

These discussions aim to identify net zero and ESG issues in companies where the continued enhancement of sustainability practices is expected to help support the robust, long-term profitability of the company.

When the engaging investment manager identifies a weakness, a sustainability dialogue may lead to escalation or prompt a more formal “engagement with objectives", Derue said.

"Climate change continues to remain our key topic for sustainability dialogue, representing around a third of the dialogues we undertook, and it is reasonable to expect the numbers behind this percentage to increase," she noted.

"As we think about the pathway to net zero, climate and other material topics will loom ever larger in the consciousness of both the public and public policymakers."

"For the latter, we certainly believe that government action is needed to help accelerate an orderly transition to a more sustainable world," Humeau added.

"And given the dual engagement approach we have adopted and which we see as a model others can employ successfully, government action will improve the chances asset managers can deliver long-term robust performance for their clients," she concluded.