Global investors are increasingly asking for the monitoring and assessment of environmental, social and governance (ESG) risks in their portfolios according to a report published by AXA Investment Managers.
Paris-based Matt Christensen, Global Head of Responsible Investment at AXA IM, who is in Australia this week presenting at the GTQ Investing in Responsibility Conference in Sydney said: "Our clients are assigning greater importance to how ESG factors impact their returns in the long run. In the last twelve months we have worked with several European pension funds as well as AXA Group to help them take responsible practices into account more explicitly. This is a clear trend and is gaining momentum globally and in Australia."
AXA IM has responded to this demand by increasing its stewardship activities and coverage in 2013. The volume of responsible investment assets managed by AXA IM grew by 18% in 2012.
Impact investing catches attention from global and local funds
Impact investing - which is broadly defined as investments in businesses and/or funds that generate social and/or environmental benefit in return - is starting to catch the attention of sizeable funds globally and locally.
"The impact investing market is still relatively young but its growth has resulted in initiatives that enhance its credibility such as the setting up of standards such as IRIS (Impact Reporting and Investment Standards) or labels such as GIIRS (Global Impact Investing Rating System)," he said.
AXA IM is currently working with AXA Group on an impact investment fund of funds strategy.
Integrating ESG and Smart beta
According to AXA IM, another area in the investor spotlight is the compatibility of smart beta and responsible investment.
"The concepts may seem unrelated, but both approaches reflect a move by investors away from the unintentional and often uncompensated risks associated with traditional index tracking and a greater willingness by investors to make their own determinations about desired exposures, risks and expected returns. There has been little academic research on their compatibility to date, but our back- tested investment analysis shows that ESG SmartBeta has the potential to offer investors a lower total risk and higher return than index investing, along with improved diversification and strong ESG performance.
"A number of academic studies* have shown there has been no penalty for pursuing a responsible investment approach, which was a concern for some investors in the past," Christensen said. "Analysing assets according to ESG factors as well as traditional financial factors can uncover risks and opportunities that might otherwise not come to light. Responsible investment analysis is simply a good risk-aware way to manage a portfolio," Mr Christensen said.
The Responsible Investment team is also working with AXA Rosenberg, the quantitative equity expertise within AXA IM that manages SmartBeta Equity, to offer integrated ESG and Enhanced Index solutions.
Craig Hurt, Sydney-based Director of AXA Investment Managers in Australia and New Zealand,said: "Through the strength of our global RI research initiatives, we aim to offer Australian institutional investors - and their individual members and investors - a wider opportunity to invest in strategies incorporating ESG principles, a demand that we can only see increasing in the years to come."
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