AXA IM to grow ESG framework
Applying economic, social and governance (ESG) criteria to the construction of a sovereign debt portfolio can help to minimise reputational risk, according to a new report by AXA Investment Managers.
With the group recently applying an ESG framework to its country selection process, AXA IM global head of responsible investment Matt Christensen said the issues affecting the Eurozone had influenced the growing client demand for a thorough evaluation of sovereign issuers' creditworthiness.
Chistensen said the ESG screening process is particularly useful when considering emerging market allocations, since these countries tend to score poorly on governance measures such as control of corruption compared to developed markets.
"One of AXA IM's clients asked the firm to minimise the reputational risk of their existing emerging markets sovereign portfolio holdings," he said.
"The rules-based reputational screen identified 10 sovereign issuers that presented significant reputational risk - representing 9.7 per cent of the universe's market capitalisation."
In relation to credit quality, the risk screen reduced the percentage of highly speculative debts without significantly impacting yield and duration, he said.
According to the study, the top ESG over-weights for emerging markets were Poland and Chile, while Spain topped the developed markets with a better than average ESG score.
For the under-weights in emerging markets, the Philippines, Columbia and Indonesia scored highest while Japan, United Kingdom and the Unites States were the largest for developed market under-weights, the latter two largely as a result of poor environmental indicators.
"We are already using this ESG country framework in our core responsible investment (RI) funds, but see an opportunity to expand this into our mainstream funds," AXA IM director, Australia and New Zealand Craig Hurt said.
Hurt added that AXA was currently in the process of expanding its global RI research and initiatives in order to offer Australian institutional investors a wider opportunity to invest in ESG-screened strategies.
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