Putting ESG to work: Global Strategic Bonds
- 20 September 2021 (5 min read)
Key points
- In managing our Global Strategic Bonds strategy, we believe aligning non-financial and financial objectives allows for a more complete understanding of investment risks and opportunities
- ESG considerations are an integral element of the investment process and incorporated through a four step process
- Global Strategic Bonds is classified as Article 8 for SFDR purposes
At AXA IM, we believe investing responsibly goes hand-in-hand with our fiduciary duty to clients. Our responsible investment philosophy is grounded in two key principles: we believe it helps us make better investment decisions and can be a means by which we can help accelerate the transition to a more sustainable world.
For our investment professionals, responsible investing means incorporating the full range of potential risks and opportunities when assessing any investment. Within our Global Strategic Bonds strategy, we apply an investment framework that is intended to be simple and transparent, and our approach to integrating ESG factors into the portfolio is no different. This initially may not necessarily seem compatible with an unconstrained, total return approach to investing. However, by incorporating a clear non-financial objective within the strategy, and a reference point to assess our success in meeting that objective, we are able to demonstrate how ESG considerations move from a ‘nice-to-have’, into a fundamental part of the decision-making process.
Ultimately, we do this because we believe that analysing ESG factors allows for a more complete understanding of investment risks and opportunities, which is aligned with our financial objective to deliver attractive risk-adjusted returns for clients. Companies whose addressable market is expanding through a greater focus on clean energy, for example, may be better able to service their debt or benefit from rating upgrades. On the other hand, companies with poor governance may struggle to raise capital, which could weigh on investor sentiment and negatively impact on returns.
Thinking about ESG in Global Strategic Bonds
There are four parts to ESG integration within Global Strategic Bonds:
1. ESG data and research
2. ESG score objective
3. Engagement
4. AXA IM exclusion policies
ESG data and research
Our ESG research capabilities are organised as follows:
Our Responsible Investing (RI) Research and RI Coordination & Governance teams are responsible for our research and stewardship activities focusing on thematic research (e.g. climate, human capital, health), corporate governance and engagement. Our RI Solutions, Models and Tools team have developed and maintain a proprietary ESG scoring system for corporate and sovereign issuers relying on a common framework built around the three pillars.
ESG & Impact analysts embedded within the investment platforms conduct ESG analysis at a company level. For fixed income, our global team of fundamental credit analysts routinely incorporate ESG considerations into their research of each issuer, alongside more traditional financial analysis, to ensure that we have more holistic understanding of the long-term credit worthiness of a company.
To complement the in-house research conducted by these teams, we also leverage specialist external ESG research from the likes of MSCI, Sustainalytics and Vigeo, supported by broker research, company meetings, and participation at industry events.
The vast amounts of ESG data produced by these external providers is the bedrock of our proprietary ESG scoring framework, constructed using a methodology developed by the RI Solutions, Models and Tools team1. This is made available to investment professionals throughout the company.
To ensure a greater coverage of our asset classes and to supplement our in-house research, we use raw ESG company/country data covering more than 8,800 companies (more than 95% of the Barclays Global Aggregate Corporate Index) and 190 sovereigns (providing full coverage of the JPM Government Bond Index). We believe breadth of coverage is a particular advantage in emerging market fixed income, where ESG data is more scarce than in developed nations.
Issuers are given a score of between zero and ten, allowing us to compare issuers and understand their relative ESG benefits or challenges.
The guiding criteria for scoring are listed below in Table 1:
ESG score objective
As part of the strategy’s approach, we target a better overall ESG score than a proxy benchmark, which consists of a blend of G7 government bonds, global investment grade credit and global high yield – thereby broadly representing the strategy’s investible universe. We measure the ESG score daily, allowing us to understand our relative positioning at all times.
The ESG score will change depending on the fund’s asset allocation or the scores of the underlying issuers, whose scores are updated twice yearly. To ensure a fair comparison with the proxy benchmark over time, we run a dynamic strategic asset allocation rebalancing process on the benchmark to ensure that it is aligned with the strategy’s asset allocation evolution.
Incorporating this proxy benchmark for ESG monitoring purposes means that ESG factors need to be considered alongside more traditional metrics, such as valuation and fundamentals, in every bottom-up security selection decision made by the investment team. We will also avoid issuers with particular poor ESG credentials whereby, generally speaking, we will not own bonds where the issuer has an ESG score below two. The exception to this is when we believe the score to have fallen erroneously, for example due to a data discrepancy. Any exception is managed through written application to the ESG Score Assessment & Review Committee (ESARC), which is independent of our investment team. It is worth noting that ESARC may also downgrade the ESG score of an issuer when it is believed to be too high, ensuring constant scrutiny of the quantitative methodology.
Engagement
As responsible owners of the assets held in our portfolio, we deliver robust and measurable stewardship and engagement. Engagement with bond issuers is an important aspect of our active ownership programme as we are long-term investors and often hold bonds to maturity. Our dialogue on ESG issues allows us to actively monitor our investments and is a critical way to ensure we manage the value of our bond investments over time.
Through engagement we aim to ensure that our clients continue to derive value from their holdings by dealing effectively with concerns which may impact performance. Using a research-driven approach, we strive to proactively engage companies on ESG issues before concerns materialise. We focus our engagement where we believe it can have the greatest impact. Through voting we aim to influence companies to adopt the highest corporate governance standards. We vote against company management where required and may decline future issuance should they fail to provide a satisfactory response to our ESG concerns.
CASE STUDY: British Oil Company – 2015 TO PRESENT
An example of an issuer held in our portfolio with whom we have engaged with significantly at the corporate level over the last five years. We are cognisant of the fact that this and other oil companies have a critical role to play in the transition to net zero. In parallel to our collaborative engagements through the Climate Action 100+ Coalition, we regularly meet with the company to discuss the implementation pathway of their carbon transition strategy in a constructive manner.
We voted against the shareholder resolution seeking tougher climate change targets at the 2021 AGM, in recognition of the progress registered by the company and recently announced commitments. However, we will follow-up on these commitments via our voting and individual/collaborative engagement with the company.
The AXA IM exclusion policy
AXA IM applies two levels of exclusions in its products. Across all of our investments, we operate exclusions around controversial weapons, coal and oil sand activities, ecosystem protection and deforestation, as well as soft commodities2. As an ESG-integrated strategy, Global Strategic Bonds also has separate exclusion policies around white phosphorous weapons, the tobacco industry, companies with an ESG score below two, and severe controversies, as outlined with the example below.
CASE STUDY: Russian mining company – 2020
A Russian mining company and one of the largest producers of nickel, platinum and copper globally. We had favoured the company for some time given its low debt, solid fundamentals and decision to cut its dividend. Following a fuel spill into the Arctic river system, however, Sustainalytics updated its profile of the company to include a Category 5 controversy – the highest possible.
We decided to sell the bond as a result, though our ESG research has highlighted reasons to be constructive on the company’s longer-term ESG profile.
Developing our lead in ESG
We believe that embedding ESG research into our investment process can help us to deliver attractive risk-adjusted returns for clients and are committed to expanding our RI capabilities and the role of ESG research. We have already started reporting on the carbon and water intensity of the Global Strategic Bonds strategy and its proxy ESG benchmark, and hope to continue our leading role as a responsible fixed income investor.
Beyond ESG integration, Global Strategic Bonds is part of AXA IM’s wider commitment to delivering net zero on our investments by 2050 at the latest. We believe the direction of travel for the asset management industry has been firmly set and are committed to playing a leading role in the development of ESG and responsible investment more widely.
Specific Risks
Counterparty Risk: Risk of bankruptcy, insolvency, or payment or delivery failure of any of the Sub-Fund's counterparties, leading to a payment or delivery default.
Geopolitical Risk: investments in securities issued or listed in different countries may imply the application of different standards and regulations. Investments may be affected by movements of foreign exchange rates, changes in laws or restrictions applicable to such investments, changes in exchange control regulations or price volatility.
Currency Risk: the Fund holds investments denominated in currencies other than the base currency of the Fund. As a result, exchange rate movements may cause the value of investments (and any income received from them) to fall or rise affecting the Fund's value.
Operational Risk: Risk that operational processes, including those related to the safekeeping of assets may fail, resulting in losses.
Liquidity Risk: risk of low liquidity level in certain market conditions that might lead the Sub-Fund to face difficulties valuing, purchasing or selling all/part of its assets and resulting in potential impact on its net asset value.
Credit Risk: Risk that issuers of debt securities held in the Sub-Fund may default on their obligations or have their credit rating downgraded, resulting in a decrease in the Net Asset Value.
Impact of any techniques such as derivatives: Certain management strategies involve specific risks, such as liquidity risk, credit risk, counterparty risk, legal risk, valuation risk, operational risk and risks related to the underlying assets.
The use of such strategies may also involve leverage, which may increase the effect of market movements on the Sub-Fund and may result in significant risk of losses
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