Putting the ‘S’ in ESG: PRI’s Fiona Reynolds in conversation with AXA IM

Principles for Responsible Investment (PRI) chief executive, Fiona Reynolds, joined some of AXA IM’s investment professionals to discuss the impact of the pandemic on social issues, diversity and responsible investing.

Chris Iggo, CIO Core Investments, AXA IM: How have companies responded to the impact of the pandemic?

Fiona Reynolds, chief executive, Principles for Responsible Investment: There was a recent report from Oxfam that found women have been hardest hit by pandemic - some 70% of global health and social workers are women, so are often the lowest paid and at greatest risk¹ . This is a big systemic structural issue that both the private sector and governments need to address in the longer term.

Anne Tolmunen, Portfolio Manager, AXA IM’s women empowerment strategy: Every earnings call I’ve taken part in this year has started with senior management talking about the welfare of their employees - not just safety, but also wellbeing. I hope this will remain an important topic on the agenda.

We have seen evidence of companies increasing their health benefits and there have been examples of increased compensation for front line workers, to acknowledge the importance of these often low-pay jobs. This is a step in the right direction but where we have seen the best results is where a company’s business model was already geared towards empowering employees.

Chris Iggo: Has the need for companies to focus on immediate challenges to their business models diluted the focus on issues like diversity?

Fiona Reynolds: The number of women running listed companies and on boards in major economies is still quite small. It is improving but there is still a long way to go, and the broader issues of diversity are very important as well.

Anne Tolmunen: I sense that the gender diversity agenda has taken a bit of a step back, in terms of low to mid-income women - their jobs have been more vulnerable during this crisis and they have faced more pressure. A recent survey said women’s jobs were 1.8 times more vulnerable than men’s jobs during the crisis² due to several factors – women are often more exposed to industries like retail which have been hit hard by lockdowns.

They frequently take on the main care of dependents, whether that is elderly parents or childcare, while also having to juggle work. Also, women are more often in part time employment where men are typically in managerial or senior positions, which are less likely to be cut.

Marie Fromaget, ESG Fundamental Analyst, AXA IM: As investors, we are mobilised to further drive diversity and inclusion in the companies, we are invested in. For example, AXA IM has jointly launched an investor coalition looking to engage with companies listed on France’s SBF 120 stock market index to improve female representation at executive level³ .

The target is 30% female by 2025 - the average in 2020 was around 20%. The objective is ambitious but important; 30% is seen as threshold for critical mass from which minority groups start to be heard and can really have impact on company decisions.

We also want to look at how companies develop their female talent pipeline, as women are often facing a glass ceiling – we want them to improve female representation at every level, not just executive.

Chris Iggo: When you look at companies and pick stocks to invest in, how much does the focus on social issues have an impact?

Anne Tolmunen: Part of my work is to understand the culture of the company - the talent is often the most important asset. We believe one of the ingredients of success for businesses is empowering employees and treating them fairly. Some of the things we examine in terms of key performance indicators are around diversity, safety, training, turnover and human resources policies.

It is important to put these in an industry and regional context and look at them over time to see if there is progress. But while data is an important lens, it doesn’t give you the full picture. I also look at areas like management incentives and listen to what senior management is saying on earnings calls or other forums, to assess to what extent the culture and people come up in discussions. Often that can be a differentiating factor in their business model - particularly in low wage industries.

Marie Fromaget: One of the most important metrics on gender diversity is to compare the number of women at board and executive committee level versus the number of women that are part of the company, to see if there is a glass ceiling. If a company’s workforce consists of 40% women, in an ideal world it should have 40% at a managerial level. If there is a difference, we challenge companies on why there is an imbalance at the top. But measurement around social issues is a work in progress - it is getting better but there is still a lot of work to do.

Fiona Reynolds: The European Union is putting together a new taxonomy focusing on green, and it is also going to develop a social taxonomy. I hope that will start to help develop this dialogue on the metrics and how we measure these things.

Chris Iggo: It is often easier to engage with large companies which have the resources to address challenges - how do we as investors engage with small and mid-sized companies?

Marie Fromaget: Big companies do have more resources and good communication teams, but small companies are often more willing to hear what we have to say. They sometimes lack knowledge about where to start so we have a big role to play as investors in suggesting best practice. It can also be easier for smaller companies to change than large corporations with many employees.

Chris Iggo: The new US President Joe Biden has spoken about his climate policies, have you seen anything from the new administration in the social sphere?

Fiona Reynolds: One big thing that Biden has pledged to do immediately is lift the minimum wage in the US to $15 an hour - this will have a big impact. And in a recent press release about climate policies, there were some important social elements. For example, where we see people left behind in traditional fossil fuel sectors how do we make sure there’s a just transition?

Biden also talks about the fact that when we need to create a lot of new jobs in the green sector, we need to make sure they are good jobs, as people who moved out of fossil fuel sector were traditionally higher paid with pensions and medical care. If we are not creating similar kinds of jobs in the green economy then we have only done half the job – we may have helped the environment but we have then created social issues, and it is important to get both of these right.

There is so much opportunity for us to reshape the economy to build back better, so while there are terrible things going on, there are also fantastic opportunities for us going forward, and investors are going to play a vital role.

We really are all in it together - at the end of the day what we need to do, to be successful, is to balance profit and planet. The world is starting to wake up and understand you can’t have one over the other.