For asset owners, ESG may soon reach a tipping point and there is good reason to think ESG considerations will become a regular component of investment decision making in the future. In fact ESG is already shaping investment decisions both globally and locally.
It's fair to say the post-GFC world has fuelled a revaluation of many investment assumptions.
Investors are increasingly seeking better risk management techniques to help them navigate an ever more complex environment. For example, the ongoing European sovereign debt crisis has made the asset class itself appear less 'defensive' than previously imagined.
We believe ESG criteria play an important role in this re-assessment of risk and this trend looks set to continue.
Responsible investing is one of the fastest growing global investment trends with funds invested in RI strategies tripling from US$3.6 trillion in 2006 to US$11 trillion in 2010 (Source Eurosif).
Australian investors in particular have been significant supporters of the Principles of Responsible Investing and we've seen increasing demand for ESG strategies. Compared to their global counterparts, Australian investors have also demonstrated leadership in asking their asset managers to review how ESG factors can be used to create portfolios that are constructed and tilted in a way that creates an improved risk management profile.
To address this increasing need, AXA Investment Managers recently launched the findings of a multi-year pilot study into ESG integration which illustrates a framework for approaching ESG factors.
The framework demonstrates how investors can use the scoring system to better focus on engagement with specific companies, as well as capture momentum by monitoring the changing ESG profile of companies. It is our belief that investors benefit most when their managers connect investment and stewardship functions - research, engagement and voting - in order to create tangible value.
So what does the future hold?
Australian institutional investors are concerned more than ever about investing in companies that have exemplary corporate governance and take into account social and environmental factors in the development of their activities.
In addition, to direct demand from investors other key market drivers in the coming years are likely to come from international initiatives such as UNPRI, external pressures from entities such as NGOs and unions, regulatory pressures, and demand from retail investors.
The growth of ESG strategies has been steady and consistent but there are more opportunities on the horizon as ESG considerations become more 'mainstream' in the decision making process.
We think the most important shift that will occur in the coming years will be the adoption of specific tools to better integrate ESG into fund management.
We have recently developed an 'ESG Impact' reporting tool which we are implementing across all AXA IM to provide a more holistic view of ESG impacts. This is the type of solution that will become industry standard in the coming years as a tangible means to demonstrating the ESG behaviour and profile of a fund.
It's an exciting time to be in the RI field and we are already having in-depth conversations with funds on a regular basis as interest in these solutions continues to rise.
Matt Christensen is AXA Investment Managers' Paris-based head of responsible investing
