• AXA IM Core
  • Why COVID-19 could be a tipping point for sustainable investing

Why COVID-19 could be a tipping point for sustainable investing

  • 24 March 2021 (5 min read)

Growing demand for a more sustainable approach to investing in recent years has increasingly made environmental, social and governance - or ESG – issues a mainstream investment topic. There have been plenty of catalysts for the extraordinary momentum of ESG growth across regions and asset classes, but the COVID-19 pandemic has shone an even brighter light on the underlying issues.

We believe that the impact of COVID-19 on the real economy and financial markets has been a big wake-up call for policymakers, business owners and investors on the potentially enormous economic threats posed by non-financial risks. The current health crisis has laid bare how damaging it is to close whole sections of economies to protect lives, and a future climate crisis could see environmental risks have a similar macroeconomic impact.

This has brought into sharp focus what has often been the central question around ESG - how can we achieve economic growth alongside reaching for environmental goals and a thriving society? In 2020, forced - and dramatic - economic shutdowns drove a material decline in carbon emissions of around 7% globally1 . Of course, this was an extraordinary situation, but the crisis has clearly demonstrated that with the current economic infrastructure there is a very painful trade-off between growth and addressing the threat of climate change.

To achieve both goals of carbon reduction and economic growth, we seemingly have a long way to go in adapting our economy. However, what we are seeing is that despite all the challenges, governments are reacting to the crisis through ambitious ‘green’ spending plans. Almost every day we are hearing new announcements from policymakers around the world underlining their commitment to climate-friendly recovery initiatives in terms of how they will spend the additional stimulus being launched. For example, in December 2020 the European Union pledged that 37% of its €672bn recovery fund would be invested in projects that support climate objectives2 . In February 2021, the Biden administration announced a plan to spend $2trn over four years to significantly escalate the use of clean energy in the transportation, electricity and building sectors.  In our view, growing political will that green spending should drive the post-COVID recovery should help to accelerate existing investor appetite for ESG solutions and creates compelling investment opportunities today.

The E, S and G

We believe it is certainly possible to align the twin goals of sustainable investment and positive financial outcomes in a complementary manner. We believe that ESG provides additive economic insights that we do not find in traditional sources of financial information like company accounts. However, it is important to unbundle the E, S and G as they bring different insights to the table particularly with regard to investment horizon.

The E and S elements have fairly long-term horizons. Environmental and social data tell us things about the long-term influences driving the structural changes that are very important in investing – how we adapt to climate change, the transition to cleaner sources of power and business behaviours. The G is closer to the more traditional indicators of a company’s business practices we look at when assessing a company. In our experience, governance information really does add to and improve our insights into earnings quality. For example, we have found companies with better diversity in the boardroom are better at maintaining their profitability advantage3 .

Active management to lead the change

In its purest format passive investment in our view obstructs that role that finance must play in addressing climate change because it takes no account for sustainability information and is entirely backward looking.

ESG data is now widely and available resulting in a proliferation of EGS and climate-focused rules-based indices. While the development of passive ESG indices should be welcomed, extracting investment insight from data, and driving innovation is by definition the role of active management.

Regarding climate change, acting with conviction is critical because the level of capital flows needed to drive the change is material. Unlike passive, active management can act with conviction via combination of investment, divestment and engagement to direct more capital to good actors and deprive capital from bad actors.

At AXA IM, we believe that to fully harness the power of active management, responsibility for ESG needs to go beyond being the job only of an ESG expert or team. For us, in-depth ESG analysis as part of investment decision-making needs to be embedded in culture. For any organisation, that takes time – we have been doing it since the mid-1990s and it has taken us until relatively recently to arrive at a place where a focus on ESG is fully embedded in our organisational DNA.

A forward-looking approach to climate

Regarding climate change there are essentially four categories of companies:

  1. Those that have demonstrated little or no interest in addressing climate change - the laggards
  2. Companies that have significantly moved or already have business models that are aligned to address climate change - the leaders
  3. Companies which perform a function that is crucial to our way of life (e.g. utilities, transport) and may have a high carbon footprint but are taking climate risk seriously and are actively reducing their carbon footprint - these are the transitioning companies
  4. Companies with business models that explicitly support a low carbon economy, such as renewable energy or battery technology - the green leaders.

Our approach to embedding climate considerations into an equity portfolio aims to avoid laggards and invest in the leaders. However, we also aim to invest in transitioning companies and green leaders.  

One surprisingly underdiscussed topic is that there is often a trade-off in some areas of the market with respect to current carbon reduction versus the broad market index and investing in transitioning companies and some green leaders.

For example, company A in the table below has significant green revenues because it is generating energy based on wind and solar power. It has both a good track record of carbon intensity reduction and a low carbon intensity level relative to its peer group (this is often referred to as avoided emissions) but it still has a high current carbon intensity. Most of the world’s carbon intensity comes from the top 5% of polluters such as company A, but company A is also contributing positively to the mitigation of climate change through its revenues – this illustrates the trade-off between a current absolute intensity objective and investing in the transition.

Trade-off between a current absolute intensity objective and investing in the transition

When working with clients who wish to address climate change through their investments, we have come across a common challenge that an ambitious carbon intensity target may limit exposure to transitioning companies and some green leaders.  

By combining divestment and investment allocation decisions investors are potentially able to reduce portfolio carbon intensity whilst actively investing in companies that are committed to a path of improvement or contributing to the mitigation of climate change through their ‘green’ revenues. We think of this as a ‘carbon footpath’ rather than ‘carbon footprint’ approach. This sort of forward-looking approach is critical in any type of investing.

The COVID-19 crisis has sharpened the importance of active ownership, particularly around issues such as public health, human capital and shareholder rights and we have doubled down on engagement activities around these topics during this period. As active managers we understand that our job is to strive to deliver sustainable investment while also aiming to provide the outcomes needed to reach investment goals. We believe these elements are very much aligned and allows us to commit clear investment principles.

  • aHR0cHM6Ly93d3cuY2FyYm9uYnJpZWYub3JnL2dsb2JhbC1jYXJib24tcHJvamVjdC1jb3JvbmF2aXJ1cy1jYXVzZXMtcmVjb3JkLWZhbGwtaW4tZm9zc2lsLWZ1ZWwtZW1pc3Npb25zLWluLTIwMjA=
  • aHR0cHM6Ly9lYy5ldXJvcGEuZXUvaW5mby9idXNpbmVzcy1lY29ub215LWV1cm8vcmVjb3ZlcnktY29yb25hdmlydXMvcmVjb3ZlcnktYW5kLXJlc2lsaWVuY2UtZmFjaWxpdHlfZW4=
  • RG9lcyBkaXZlcnNpdHkgcHJvdmlkZSBhIHByb2ZpdGFiaWxpdHkgbW9hdD8gLSBBWEEgSU0gR2xvYmFsIChheGEtaW0uY29tKSwgSnVuZSAyMDE4
Responsible Investing

Our responsible investing approach

We actively invest for the long-term prosperity of our clients and to secure a sustainable future for the planet

Find out more

Have our latest insights delivered straight to your inbox

Subscribe to updates.

Related Articles

Sustainable diets: A new theme on the menu for investors?

  • by Amanda O’Toole
  • 23 March 2021 (5 min read)
Asset Class Views

US high yield: Broader financing options softens impact of higher rates

  • by Jack Stephenson
  • 19 June 2024 (7 min read)
Market Alerts

China reaction: Industrial output disappoints; consumers surprise

  • by Yingrui Wang
  • 17 June 2024 (3 min read)


    This material is published for informational purposes only and is neither an offer to enter into, or a term or condition of any business or  agreement with the recipient or any other party, nor is it a solicitation for any services, securities, or funds herein, nor is it intended to provide investment, tax, or legal advice. If this material refers to funds, investments made therein are subject to the relevant fund documents. This material is not intended for distribution to persons or in jurisdictions where prohibited. No representation is made that any of the services, securities, or funds herein are suitable for any particular investor, and therefore, any prospective investor should consult their financial or other advisors about the appropriateness thereof. No representation or warranty is given as to the accuracy or completeness of this material. Investments may decrease in value and that past or backtested performance is no guide to future performance. Forward-looking or simulated data or information herein are subject to inherent limitations and are based upon assumptions that may not materialize, and may vary significantly from actual results. Investment models, research, and risk controls described  herein do not guarantee against loss of principal or that any investment objectives shown herein will be achieved. The data, projections, forecasts, anticipations, hypotheses and/or opinions herein are subjective, and are not necessarily used or followed by the firm or its affiliates who may act based on their own opinions and as independent departments or entities within the organization. This information is always subject to change and all rights are reserved thereof. Performance shown, unless otherwise stated, is gross of management fees. An investor’s actual return will be reduced by management fees and other expenses the investor may incur.

    The firm seeks to achieve its clients’ investment objectives primarily through reliance on the modelling of proprietary and 3rd party financial and non-financial data, information, and considerations, the sources, weights, and implementation of which may be subject to change and/or the discretion of the firm regardless of whether described herein or elsewhere. Although many of its investment approaches are driven by bottom-up stock selection akin to that of a traditional fundamental investor, the firm seeks to achieve its clients’ investment objectives primarily in reliance on analytical models. The goal of the firm’s systematic approach is not to replicate a perfect “model” portfolio; instead, like other long-term, fundamentally oriented investors, it seeks to create portfolios possessing ex ante those fundamental and statistically important characteristics reflecting our investment beliefs. The firm’s ability to implement its investment objectives depends on various considerations such as the models’ economic, analytical and mathematical underpinnings, the accurate encapsulation of those principles in a complex computational (including software code) environment, the quality of the models’ data inputs, changes in market conditions, and the successful expression of the models' views into the investment portfolio construction process. Many of these have subjective elements that present the possibility of human error. While the investment process principally relies on models, the firm’s process also incorporates the investment judgment of its portfolio managers who may exercise discretion in attempting to capture the intent of the models, particularly in changing market conditions. The firm’s success in implementing its investment objectives may depend on the ability of portfolio managers and others to interpret and implement the signals generated by the models. The firm has established certain systematic rules and processes for monitoring client portfolios to ensure that they are managed in accordance with their investment objectives, but there is no guarantee that these rules or processes will effectively manage the risks associated with its investment process under all market conditions. While the firm employs controls designed to assure that our models are sound in their development and appropriately adapted, calibrated and configured, analytical error, software development errors, and implementation errors are an inherent risk of complex analytical models and quantitative investment management processes.  These errors may be extremely hard to detect, and some may go undetected for long periods of time or indefinitely. The firm’s controls, including our escalation policies, are designed to ensure that certain types of errors are subject to review once discovered. However, the effect of errors on our investment process and, where relevant, performance (which can be either positive or negative) may not be fully apparent even when discovered. When the firm discovers an investment process error in one of its models, it may in good faith and in accordance with its obligations, decide not to correct the error, to delay correction of an error, or develop other methodology to address the error, if not inconsistent with the client’s interests. Also, the firm generally will not disclose to affected clients investment process errors that are not the result of a contractual or regulatory breach, or that are non-compensable, unless it otherwise determines that information regarding the error is material to its clients.

    If MSCI information appears herein, it may only be used for your internal use, it may not be reproduced or re-disseminated in any form, and it may not be used as a basis for, or a component of, any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance analysis, forecast or prediction. The MSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information.  MSCI, each of its affiliates and each other person involved in or related to compiling, computing or creating any MSCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information.  Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages. (www.mscibarra.com).

    Certain ESG data provided by and/or caclulated using Trucost data. Trucost reserves all intellectual and other proprietary rights in Trucost data.

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    Due to its simplification, this document is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee forecasts made will come to pass. Data, figures, declarations, analysis, predictions and other information in this document is provided based on our state of knowledge at the time of creation of this document. Whilst every care is taken, no representation or warranty (including liability towards third parties), express or implied, is made as to the accuracy, reliability or completeness of the information contained herein. Reliance upon information in this material is at the sole discretion of the recipient. This material does not contain sufficient information to support an investment decision.

    Back to top