AXA Investment Managers on financing the net-zero transition

Investors have a key role to play to drive the transition to net zero, says AXA IM’s Virginie Derue.

This article is sponsored by AXA Investment Managers.

Over recent years, discussions around global efforts to combat climate change have tended to centre on the fossil fuel industry. Yet, the energy transition is a matter of both supply and demand, and all sectors need to be involved to achieve net zero, argues Virginie Derue, AXA Investment Managers’ head of responsible investment research. 

Ahead of COP28, Derue outlines the implications of COP28’s global stocktake and what it means for investors. She also highlights some of AXA IM’s investment strategies that finance solutions to the complex climate transition. 

What are your expectations for COP28?

Virginie Derue

Overall, our expectations are limited due to the lack of consensus on mitigation and adaptation priorities. The extent of the changes that are required mean that all stakeholders need to act to support systems transformations. That includes governments and policy makers, which are essential to ensure that adaptation efforts don’t remain fragmented.  

But political commitment is lacking in key countries, and effective follow-through policies are missing. There is a mix of reasons for this, including financial and budget constraints and, more recently, energy security concerns.

The increasing multipolarity of the world is a further hurdle that is slowing government action and international collaboration. 

More positively, we could see progress around financial support for developing economies. The first avenue to drive this is reforms to multilateral and development banks, including the IMF and the World Bank, which reportedly could free up hundreds of billions of dollars. 

The second would be to reallocate governments’ current subsidies to the fossil fuel, agriculture and fishing sectors. 

I don’t underestimate the challenges that exist in the field of financial transfers, which has been illustrated very recently by stalling discussions around operationalising COP27’s Loss and Damage Fund, but I think that action through these two main avenues can be activated more easily.

What are the likely implications of the global stocktake?

The stocktake will highlight the need for systems transformation across all sectors – not only on the supply side of the energy transition, but also on the demand side. This might move the needle away from the hyper-focus on oil and gas towards other sectors that often receive less attention from civil society and investors. All sectors must contribute to the transformational changes needed to achieve the Paris Agreement goals, and it entails society itself through its consumption habits.

Interestingly, in contrast to coal, the stocktake is not prescriptive in requiring a reduction of oil and gas production by the end of this decade. It takes a holistic approach that goes far beyond renewables and tackles investments in adaptation for developing countries, and extends the focus to areas such as deforestation, cities and health.

The implications for investors therefore span all sectors and areas, from energy to nature and biodiversity, but also health and the most vulnerable people. These are really transformational changes that need to be financed, and investors have a key role to play, as the window for limiting global warming to well below 2C is closing rapidly.

What role can asset managers play in financing the energy transition?

At AXA IM, we have several strategies aimed at supporting the transition across our investment platforms. In fixed income, we have green bond funds, which finance projects in renewable energy, energy efficiency, green buildings, low carbon transport and so on. The need to finance adaptation in developing countries is important, so we have also fixed income emerging markets funds such as a short duration low carbon fund, while our People and Planet emerging market bonds fund targets the UN Sustainable Development Goals.

On the equity side, our clean economy fund finances solutions in low carbon transportation, smart energy, agriculture, sustainable food and natural resource preservation. We have recently launched a biodiversity fund, focusing on land and animal preservation, water ecosystems, sustainable materials, and waste and recycling.

These strategies cover the various dimensions highlighted by the global stocktake.

What are the prospects of greater co-ordination between governments and investors on climate priorities?

There are areas where some collaboration can occur. First, investors and public advocacy can push governments to enact policies to drive the transition, and participating in governments’ consultation is another lever to influence government action.

Investors can also contribute through the transfer of knowledge, capacity building and innovation sharing through their engagement with companies and their participation in collaborative initiatives that gather both the private sector and governments’ representatives.

Importantly, co-ordination can also occur in the field of green and sustainable bonds. As investors, we have a role to play in encouraging governments to put in place measures to facilitate the issuance of green, social and sustainable bonds, encouraging best practice in terms of frameworks. This is not exactly direct co-ordination, but it supports progress involving both government and investors, especially in developing countries, where the need for support is greatest.

Are investors likely to come under pressure to change their investment strategies as a result of COP28? If so, how?

The pressure is really on adaptation financing, which must at least triple to achieve transition targets. Investment in adaptations spans all areas of economic activities, from cities and buildings to public transportation systems, and waste and recycling.

Investors who are looking at the energy transition often underestimate the need for infrastructure. It is essential to the energy transition, from grids and connectivity, to transport and storage. Investors have to integrate those aspects in their investment decisions.

Importantly, the development of infrastructure will be a key lever to enable developing countries to move forwards and to monetise their green potential in wind and solar instead of their fossil fuel resources. Supporting the transition of developing countries entails the development and the financing of the required infrastructure. 

Additionally, hydrogen and carbon capture are among the priorities at COP28, but these technologies are not silver bullets. They need specific and complex infrastructure, notably in the field of transport and storage for hydrogen, meaning that in a lot of cases direct electrification is a superior alternative to decarbonisation.

As for carbon capture, the cost of the technology is still to be reduced, so enabling scale is important. Putting in place industrial hubs facilitates this, but social acceptance is an issue, like it is with hydrogen. At the end of the day, carbon capture should be a valid option only in a very few sectors but definitely not across the board.