RI Interview: AXA’s group CIO talks ESG pressure, controversies and impact investing

Laurent Clamagirand, Chief Investment Officer at AXA group, the global insurance and financial services giant, knows about long-term environmental, social and governance (ESG) risk. Talking to RI, he points to a previous role as head of group underwriting that involved him closely analysing ESG factors alongside the financial numbers to assess the potential pitfalls of underwriting a book of risks at one of the world’s biggest insurers: “I have no problem in making the important connection between ESG and finance issues.” he says. Given the context, AXA group’s signing of the UN-backed Principles for Responsible Investment (PRI) late last year, makes sense. Upon signing, Henri de Castries, Chair and CEO, of the company noted that as a long-term global investor AXA has “a duty” to act in the best interests of its stakeholders, which he said: “means understanding the risks and opportunities related to ESG issues in our portfolios.” De Castries added: “We believe that these factors have the potential to impact investment portfolios over time, therefore affecting risk and returns. But only collective action can produce meaningful change.” Signing the PRI at group level aligns AXA with its subsidiary signatories: Paris-based AXA Investment Managers and AXA Private Equity, and Alliance Bernstein, its US fund manager. It also signals intent. The lion’s share (about 70% in the case of AXA IM) of the assets managed by its entities is group insurance cash, with Alliance Bernstein running about 25%, and the remainder via other specialist third party managers. The Chief Investment Officers of AXA’s investment subsidiaries report to Clamagirand, who takes the strategic decisions on €400bn in assets. He says that he will be putting pressure on the subsidiaries to deliver on RI: “I will have pressure on me, so I will put pressure on them to take this seriously: it’s not their main job, but I want to make them realise that it is very important.”Clamagirand has the task of translating that intent into action. The principal vehicle for the policy implementation is the company’s Responsible Investment Committee, which includes senior professionals from all parts of the AXA group: “We want to make ESG part of the company’s DNA, having also signed the Principles for Sustainable Insurance. Therefore, we must ensure that before we communicate something we are very clear what we are talking about. Our asset managers are ahead of us on this (AXA IM, AXA Private Equity and Alliance Bernstein all signed the PRI prior to the group), especially AXA IM because they have additional client pressure, especially in the retail area.” One task for the RI Committee, he says, is to share best practice around the group. As an example, he points to AXA PE’s integration of RI in its portfolio company risk assessments and external audits. Not surprisingly for a multinational of its size, AXA has been on the receiving end of NGO campaigns which, says Clamagirand, is another key reason for getting the policy right. The company was criticised in a recent campaign by Oxfam France for investing in agricultural commodities. This was preceeded by lobbying on the issue in 2012 by BankTrack and Friends of the Earth. The group has taken a blanket decision to stop using commodities derivatives linked to food. Clamagirand says: “Our exposure to soft commodities was somewhat limited. But the question we grappled with was whether there is a right or wrong way to invest in agricultural commodities because the difference between being a fundamental investor or speculator is too difficult to finesse in discussions with NGOs. I didn’t think we could make it simple, because it’s very complex. So we’ve stopped using derivative soft commodities altogether – to the extent possible, hedge funds are less flexible – because we don’t think we are going to be able to explain any other policy
properly.” This kind of external reputation management, he noted, began with controversial weapons back in 2007: “We started with anti personnel mines and cluster bombs and then extended the policy to chemical and biological weapons. We created a framework to list those companies involved, which is not easy because some large companies have a portion of their business in these areas, and some keep a capacity under US military guidelines, etc.” He says research now aims to anticipate ESG concerns before they become an issue: “One area we have been working on is palm oil in South East Asia. It’s difficult, but we are looking at what is the right way to be involved in the sector. We need to be cautious because we can be insuring businesses in these areas as well and it’s becoming increasingly common for large financial groups to be targeted for their financing support rather than direct investment. Our core business is insurance, but we need to be consistent across the group.” The AXA CIO is very aware, however, that such ‘reactive’ RI policies do not cover the ‘risk and return’ or ‘collective action’ for ‘meaningful change’ principles outlined by De Castries in signing the PRI.
He is also conscious of the challenge this presents to sceptical investment professionals who see their job as making money rather than addressing social concerns: “I recognise that we have to give our staff something that is close to what they know when they invest money. It’s easier to interest CIOs in investment prospects than exclusions.”
He underscores the point that AXA’s signing of the PRI is a real commitment that ESG factors have a potential ‘material’ financial impact on the business and its assets: “We have made progress, if you like, and we will have to communicate this progress. We’ve put pressure on ourselves by signing up the UN PRI last year and we need to accept that and clearly define the objectives for the future.” Asked what this might mean in practice, Clamagirand suggests it could, for example, be that AXAmakes all its mandates ESG compliant by a given date. But he points out that making this work with its fund managers requires a great deal of work in examining exclusions or evolving better ESG risk assessment: “I don’t think there’s one solution to these issues in a diverse group like ours. My main task at the moment is to see with my asset managers what it means to make progress as a PRI signatory.” He notes that it is early days for the group in considering ESG performance materiality on an ex-post basis to work out how it ‘rates’ certain ESG criteria in portfolio creation, measurement and monitoring: “There are lots of academic studies on ESG and performance, and good and bad ESG risks in comparative companies are worth looking at closely. But as investors we also have to maintain a healthy scepticism, particularly in terms of whether the market prices that risk.” He says a major push on materiality research will look at debt investments due to the sheer size of AXA’s insurance-related fixed income assets: “I find it a bit strange that you see such a big focus on equities and ESG, but not so much on debt where we want to take positions that are logically sustainable. You have to take into account the ESG risk of investing in certain countries if they might have higher yields or higher risk embedded in the debt. Even if we know that it is difficult to get a consensus on government bonds we have to try.”
In February, AXA IM published a research paper on the topic called ‘Sovereign debt investing: ESG framework and applications’: Link to RI story. Clamagirand believes the group also needs to communicate much more clearly about what it does in terms of promoting the physical investments it already makes in ESG themes: “In cleantech investment we are a significant owner of wind farms via AXA PE, mainly in Europe. We are also looking to grow in this area.” He points out that in the US the insurer invests more than $100m in social housing in poorer suburbs, which he says is considered an adjunct to normal insurance business in the

States: “We also do microfinance in several countries and some social housing in France. It turns out that we have some $700m in such projects, but we have never communicated on it. That’s also “impact investing”. When I started this job I didn’t know we did that!” He says the company is also discussing what other related products it might offer in areas such as micro-insurance for microfinance projects:“It’s tough to know how much we should be investing in these kind of impact products, but I’m sure we can get into the billions of euros mixed between some internally and externally managed products. I want us to be doing much more to utilise AXA group internal research on key insurance issues like longevity, health and social issues for investment products. That is AXA’s DNA.”