RI: How Will Impact Investing Measure up in the Mainstream? Introduction

RESPONSIBLE INVESTMENT ANNUAL REVIEW AND STEWARDSHIP REPORT 2017/18 Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Investors / Clients, as defined by applicable local laws and regulation. Circulation must be restricted accordingly

RI: How will impact investing measure up in the mainstream? Introduction

2 RI ANNUAL REPORT 2017/18 3 RI ANNUAL REPORT 2017/18 INTRODUCTION

Andrea Rossi ACTIVE CEO AXA Investment Managers AND RESPONSIBLE

We have seen many changes in the past year, such There are many facets to responsible investing and as challenging new regulations, an acceleration in it pervades our entire company. Across the business the digital revolution and continued innovation from we have seen our Rosenberg equities platform make ‘younger’ players in the market. Change is nothing new great strides in integrating environmental, social and and in business it is necessary to embrace it in order governance (ESG) criteria throughout their entire to achieve long-term success. While doing so, we strive investment process. It is our ambition that in time ESG to reinforce the strengths and qualities that have been analysis will be integrated into all of the portfolios we nurtured over time, adapting our approach to maintain manage for clients and we continue to take significant a competitive advantage in those areas. steps to move in this direction in 2018. We are investing further in our responsible investing (RI) expertise by We are responsible ensuring each of our investment teams has a dedicated At AXA IM responsible investing is an ethos not just RI specialist in place to progress this goal. an investment approach. We were an early mover in this space, identifying the important role that finance We are active long-term investors plays in fostering a society that supports fairness and In addition to ESG integration, we are also proactive equity, as well as an environment that can sustain us stewards of our clients’ assets. Acting in our clients’ in the future. These beliefs are core to our identity as best interests includes holding companies to account a company and we have invested time, resources and and guiding them to act responsibly on issues such as assets over many years in a bid to serve that purpose. climate change, human capital and diversity. Our role

4 RI ANNUAL REPORT 2017/18 as active investors supports this philosophy. We do framework for reporting on climate-related risks. This 2020, delivering inclusive recruitment training to not passively follow the crowd and simply accept the framework helps our clients clearly identify, measure all hiring managers and ensuring gender-balanced status quo. From innovative data modelling techniques and communicate on their efforts towards combatting hiring panels for senior executive roles. We know that to meetings with countless management teams, our climate change. We are working on ever more delivering on our gender diversity targets not only continued investment into functions that support our sophisticated tracing tools to provide our clients even creates a more enriched culture, it is also essential to thorough fundamental analysis shows that we are greater visibility and clarity on their ESG investments. the commercial success of our business. Companies committed to directing our clients’ funds into those with higher levels of gender balance and inclusive companies we believe will deliver the best performance We are investing in diversity cultures have better insights into their customers and over the longer term. Using our role as an active Being a responsible investor also means looking at market opportunities, make better decisions and manager and active steward we leverage the financial how we operate our business internally. In 2017, we perform better financially. system in the responsible way it was originally intended have notably focused our efforts on gender diversity – to direct capital to its most useful long-term need. by signing the Women in Finance charter2, and We have seen some great success across our undertaking a thorough analysis of our gender diversity business over the last year in terms of responsible We are committed to making investing easier using the world-leading EDGE3 certification tool. The investment and have continued in our commitment As the world moves towards greater responsibility and under-representation of women in the workforce, and to delivering a superior experience to our customers, accountability, regulation will continue to play a key particularly in senior and investment positions, is a while taking actions to be a responsible employer. role. There was clear evidence of this in 2017 when global challenge for the asset management industry. We have much to be proud of, and I am confident we France’s Article 173 came into effect, requiring financial We are taking concrete actions to address gender have what it takes to succeed in helping our clients to institutions to disclose how they are approaching the imbalance at AXA IM and have defined key performance make an impact through their investments. transition to a low-carbon economy. In continuing indicators (KPIs) to measure the ‘impact’ of these our efforts to make investing easier for our clients, actions, which among others include; meeting the we have developed an award-winning1 standardised target of 40% female senior executives globally by

1 Prix International du Meilleur Reporting Climatique des Investisseurs from the French Environment Ministry in 2016. Past performance is not a guide to future performance. The references to league tables and awards are not an indicator of the future places in league tables or awards and such information is necessarily evolutionary. 2 Signatories of the Women in Finance charter publicly pledge their goal to increase female representation within their senior executive population. AXA IM set itself a target of 40% female senior executives globally by 2020. 3 Economic Dividends for Gender Equality

5 RI ANNUAL REPORT 2017/18 FOREWORD Matt Christensen Global Head of Responsible Investment investment value chain also carries the risk of dilution - this issue comes THE ‘BIG BANG’ into particular focus as impact investing moves into public markets. We are particularly HAS NOT LOST cognisant of maintaining the key tenets of impact investing as it transitions into the public realm, ITS SPARK given our established history in responsible investing (RI), and our The COP21 Paris headwinds, the call not only transcends track record in impact Conference in 2015 was for greater alignment geography but has also investing in the private undoubtedly climate between finance and the helped forge a common equity space. It’s a topic change’s ‘big bang’. future well-being of the language for clients to of hot debate and in this world and its inhabitants understand. report we tackle these But a certain amount of has only grown louder. issues head-on. We also scepticism accompanied Indeed, the UN’s call- provide some practical the legislation’s What has been even to-action via the SDGs insights to highlight how introduction – after all, more surprising is has been met with no the lessons learned in our many had questions the speed with which shortage of enthusiasm private equity function about how firms would impact investing is now in the investment space. could be transferred to integrate environmental, poised to cross into These targets have not public impact investing. social and governance mainstream investment only supplied a logical (ESG) criteria into management, alongside framework for asset More generally, we are traditional asset ESG integration. owners to work from but seeing a transformation management models. Additionally, the success they have also provided across asset management, Fast forward almost of the United Nation’s them with the impetus to one that centres around three years and rather Sustainable Development take action. Nevertheless, redefining the role of than fizzle in the face of Goals (SDGs) initiative has the desire for further capital, to greater serve political and populist acted as a catalyst which progress across the the needs of the long-

6 RI ANNUAL REPORT 2017/18 term. Woven into this is the growing realisation that To cater to this more demanding regulatory backdrop, Responsible investing 3.0 ESG, which is often risk focused, will be a requisite along AXA IM has leveraged its award-winning1 climate Today we are building out the third phase of our with impact investing, which targets specific positive change framework to study ESG impact across responsible investing capability. RI 3.0 will continue outcomes. asset classes and is now analysing how to consider to focus on the growing needs of our clients as ESG potential shifts in asset allocations over time. integration gathers pace and impact investing hits AXA IM’s twin focus on these two areas translates the mainstream. into strategies, tools and indeed thinking that Our stewardship activities reflect our position anticipates future developments to help drive this on climate change, and our voting policy was In addition, we are also harnessing the power metamorphosis. strengthened on connecting climate issues to voting of technology to work on our state of the art decisions at company general meetings. visualisation tools, which measure ESG traceability Regulation begins to bite and impact outcomes through relevant KPIs2. These Over the past year we have seen regulation Our engagement initiatives focused on corporations in software tools will help our clients to more easily start to embed ESG into the financial services sector. the most affected industries in order to encourage them see how their assets are performing – across a range In France, Article 173 came into force, requiring to improve disclosure on their carbon risk resilience of metrics, beyond simply financials. The intention institutional investors to document ESG materiality strategy as we shift to a carbon constrained world. is to provide better transparency on the underlying and climate change scenario analysis in their business ESG implications and impacts of their investments. activities. The successful Exxon Mobil AGM result was particularly gratifying. After a number of years of We are also delivering more active thematic research In the same vein, the work of the European active voting and collaborative engagement on this on a range of key issues. Ultimately many of the RI and Commission’s High-Level Expert Group on Sustainable topic, shareholders voted in favour of more open RI-related conversations presently taking place are Finance (HLEG) reached a critical point, and the and detailed accounting in terms of how climate complex and multi-faceted - and they can often raise timeline to put the recommendations into action is change may impact Exxon’s business going forward. more questions than they answer. imminent. Our discussion with HLEG Chair, Christian It is notably one of the few occasions that a climate- Thimann, shows these recommendations have real related resolution had been approved at the general But we want to continue contributing to the teeth, and given their cross border reach, have the meeting of a US company. conversation, addressing topics around climate potential to drive significant and real change. change, diversity, the position of workers in an automated environment and how longevity and health factors can be better understood. Our goal at AXA IM is to keep challenging conventional thought in order to prepare our clients’ assets for a future 1 Prix International du Meilleur Reporting Climatique des Investisseurs from the French Environment Ministry in 2016. Past where successful management of ESG risks and performance is not a guide to future performance. The references to league tables and awards are not an indicator of the future impact outcomes will be the norm. places in league tables or awards and such information is necessarily evolutionary. 2 KPI – key performance indicators

7 RI ANNUAL REPORT 2017/18 2017/18 AXA IM: Active and responsible Responsible Highlights of 2017/2018 Became a member of the 30% Adoption of new coal policy Club, committing to actively Investment 1 RI and a climate risk policy for RI strategies 30% promote gender balance Launched the EDGE gender Full ESG2 integration diversity assessment tool to ESG across investment platforms EDGE critically evaluate our current status

additional certifications Signed the 3 Women 25 obtained for direct property assets . in Finance charter of our direct property assets under management4 were certified with an internationally-recognised 5 6 7 sustainability label: BREEAM , LEED or local certifications such as HQE in France or 8 38% Minergie in Switzerland.

8 RI ANNUAL REPORT 2017/18 2017/18 AXA IM: Active and responsible Responsible Highlights of 2017/2018 Became a member of the 30% Adoption of new coal policy Club, committing to actively Investment 1 RI and a climate risk policy for RI strategies 30% promote gender balance Launched the EDGE gender Full ESG2 integration diversity assessment tool to ESG across investment platforms EDGE critically evaluate our current status

1 RI: responsible investing 2 ESG: environmental, social and governance 3 Certification labels obtained between 1 September 2016 and 31 August 2017 4 Source: AXA IM - Real Assets. Assets under management at 30 June 2017 5 BREEAM: an international scheme that provides independent third party certification of the assessment of the sustainability performance of individual buildings, communities and infrastructure projects. 6 LEED: Leadership in Energy and Environmental Design is a ratings system devised by The US Green Building Council to evaluate the environmental performance of a building. LEED certification is a globally recognised symbol of sustainability achievement. 7 HQE is the French certification awarded to building construction and management as well as urban planning projects. 8 Minergie is a registered quality label for new and refurbished low-energy consumption buildings. The label is mutually supported by the Swiss Confederation, the Swiss Canton and the Principality of Liechtenstein along with trade and industry.

9 RI ANNUAL REPORT 2017/18 10 RI ANNUAL REPORT 2017/18 1 Climate change & active management

11 RI ANNUAL REPORT 2017/18 CLIMATE CHANGE & ACTIVE MANAGEMENT

It will shift away from coal, on sustainable finance Q&A it will lower investments in in order to integrate oil and gas and it will boost sustainability into investments in energy financial policy. with Christian Thimann, efficiency, renewable Senior Adviser to the AXA Chairman and Chair of energy sources and related The Paris COP 21 technology. This requires a Agreement was a European Union’s High-Level Group on Sustainable large change in investment landmark event in that Finance patterns. it was the first time that the financial sector was Given the challenges mentioned as having a created by the global specific role in addressing financial crisis and the environmental issues. How vital is the subsequent sovereign Finance permeates role of finance in debt crisis, sustainable almost all areas of life, meeting the objectives finance could provide from the way we produce the best opportunity for goods and services, to set out in the Paris creating prosperity, while how those goods are Agreement and the also ensuring there is packaged, transported 2030 Agenda for minimal impact on the and consumed. Each Sustainable environment as a result of part of the cycle requires Development? further economic growth. capital and investment. The sector is vital in In December 2016, the terms of facilitating The role of finance is European Commission and directing capital very important. If all (EC) established a flows, which was why countries want to meet the High-Level Expert Group the French government climate and sustainable (HLEG) on Sustainable inserted financial services development goals, global Finance. Its aim was to into the agreement. investment patterns will develop an overarching change very significantly and comprehensive We need to re-orient over the next two decades. European Union strategy capital flows. Banks,

12 RI ANNUAL REPORT 2017/18 To what extent will achieving too much focus on short-term value these aims require substantial extraction from instruments such as change to the way the financial equities that are in principle meant to be held a long time. But actually, the average system operates? holding of equity has fallen from over eight years two decades ago to only eight There is no doubt significant change months now. This is too short to consider and investment is needed. The EU has long-term aspects of finance. Long- recommended that the cost of implementing term investors are opening their eyes to the required changes could run to €170 billion sustainable opportunities because the a year - to make adjustments to areas such as risks of not doing so could be very costly. developing renewables, transporting goods, The economic costs of stranded assets energy efficiency and green buildings - so it’s and the risks around highly-challenged a big investment. A large part of that sectors, such as coal, are issues that are which to date uniquely placed to help commitment is making financial firms aware fundamental to long-term investment have not had their capital flow towards more of the risks but also the opportunities within decisions. AXA Group has been a leader potential contribution sustainable investments. sustainability. Previously it was an industry in divesting from stranded assets such to sustainability pretty much agnostic on these issues but this as coal that have a significant negative development realised in Embedding sustainability mind-set is changing. impact on the global climate. It is our areas like project finance into stewardship codes belief that if we want to decarbonise and specialised lending, and asset management To deliver systemic change, ESG factors - the global economy in line with the 2°C should be encouraged agreements, requiring both risks and opportunities - will need Scenario, certain divestments are needed. to boost their role in fund managers to disclose to be integrated into corporate governance, sustainability. The same how they integrate core indices, accounting standards and Policy is also very important, could be said for insurance environmental, social and credit ratings. They will also need to be understanding for example, how assets companies and pension governance (ESG) factors reflected in the role played by the European should be taxed and priced. Germany for funds - a possibility for into their strategies and supervisory authorities (ESAs), such as instance created significant subsidies for greater investment in long- how they vote on ESG through common guidelines and supervisory investing in renewables. What we want term equity assets and issues, are all part of the convergence on ESG disclosure. is for policymakers to create conditions infrastructure, provided measures that could be that can help us achieve the 2°C Scenario regulation facilitates this. pursued. AXA IM is well Today many parts of the financial system – where we can limit the average global Asset managers are advanced in this area. are very short-term oriented. There is temperature increase to that level.

13 RI ANNUAL REPORT 2017/18 The average holding of equity has fallen from over eight years two decades ago to only eight months now. This is too short to consider long-term aspects

14 RI ANNUAL REPORT 2017/18 companies on competencies to deal with sustainability decision- these issues so they can making. make informed decisions on behalf of their clients. To accelerate the We also want to introduce a ‘sustainability test’ for All of these elements are low-carbon EU financial legislation featured in the final report, transition, the HLEG’s and create ‘Sustainable published at the end of interim report made Infrastructure Europe’ January, which were taken some recommendations. to channel finance into up by the EC in its Action What should investors sustainable projects. Plan, released in March. In addition, we want to take from these? enhance the role of ESAs in It’s a very exciting assessing ESG-related risks moment. If you think and unlock investments in COP21 took place in 2015, The HLEG is energy efficiency through was ratified in 2016 and undertaking a lot of relevant accounting rules. then in 2017 and 2018 we work in this area. For put these pieces in place. example, it is developing a One of the most critical This year will be the first taxonomy of what is green points to come out of year of changing rules and what is not - this can be these developments is and investor behaviour developed into a European that financial institutions on sustainable finance, standard and label for green will consider it their duty and Europe is leading funds alongside other to factor in ESG and the way. At sector level, sustainable assets. We’re also climate considerations the insurance sector is keen for investors' fiduciary when making investment particularly concerned duty to encompass decisions and this will with long-term investment sustainability matters, to have a profound effect on and mitigating climate develop a classification financial systems in the risks, and at this sector system for sustainable assets, long term. It means asset level, AXA is leading the and create better disclosure managers will need to way. This is something we for financial institutions and equip themselves with the can be proud of.

15 RI ANNUAL REPORT 2017/18 CLIMATE CHANGE & ACTIVE MANAGEMENT

The Paris Agreement was a decisive step towards dramatically curbing global emissions and achieving carbon neutrality by the second half of this century.

Spotlight on However, countries’ climate pledges still fall short of keeping the rise in global temperature ‘well below’ 2˚C compared with pre-industrial levels. Traditional Climate Change financial systems fail to factor in climate change impacts, which skews risk and return assessments. Regulatory developments are accelerating in response. Asset owners and managers need to move quickly to keep up.

Our work across our business - both regulatory and our own initiatives - is a result of our continued efforts to address climate change.

Managing our exposure to climate risks

We have a number of On the surface climate allows us to assess the to the most critical levers that are working issues may appear straight risks and opportunities transition risks. together with the aim of forward, but in reality there likely to disrupt sectors reducing the impact of are grey areas that require and business models. The  Carbon measurement climate change. From our careful consideration. We resulting ESG score, that and mitigation: Carbon environmental, social and have developed a range is calculated for more foot-printing is a crucial governance (ESG) analysis of tools and policies that than 6,000 companies, step to assess and through to our scoring help us factor climate risks is used to help portfolio monitor carbon risks. and reporting, and our and opportunities into our managers make more We are supportive of voting and engagement, investment decisions. informed investment the evolution of impact we are committed to decisions. In addition, reporting. Over the year pushing companies to be  Integrating climate we are developing more we have been testing more responsible at every risk within our analysis: sophisticated tools to metrics that track stage of the investment Our ESG analysis is based assess carbon risks in and monitor climate process. on a framework that sectors that are subject transition risks. We

16 RI ANNUAL REPORT 2017/18 Carbon footprint analysis

Example Fund Benchmark have tested a range of While carbon foot- Result Coverage Result Coverage Excess KPIs1 such as a business’ printing is crucial, it is Carbon Footprint 170 100% 224 99.4% -54 technology mix, exposure not sufficient in itself. (in CO2 Tons/$m of revenue) to fossil fuels, capex We continue to push Investments in the example fund structure and fossil fuel for enhanced climate Carbon Footprint Carbon Footprint produce 54 tons of CO2/$m reve- reserves. From this we disclosure to satisfy Example Fund contribution Benchmark contribution nue less than the benchmark carve out the contribution Article 173 in France to carbon footprint and to take account of BASIC MATERIALS 26% 41% (compared with the recommendations from 51% COMMUNICATION 2% 57% CONSUMER CYCLICAL appropriate benchmark) the Financial Stability 3% from individual Board Task Force on 18% CONSUMER NON CYCLICAL 2% ENERGY companies and sectors. Climate-related Financial 11% 2% 43% FINANCIAL This has proved a valuable Disclosure (TCFD). INDUSTRIAL 24% 4% tool in illustrating how 7% 41% TECHNOLOGY  5% UTILITIES portfolios can materially Reducing our 31% 26% lower their carbon exposure to fossil fuels: footprint through selective Coal-related assets face Carbon footprint Allocation / Selection stock picking, without the risk of becoming Weight Weight excluding whole sectors. stranded assets due to Sector Allocation Selection more stringent regulation Example Fund Benchmark The chart shows this and a shift towards Basic materials 8.5% 6.9% 7.8 -5.0 tool in action. It shows cleaner sources. When Communications 8.2% 6.0% -4.1 1.5 the breakdown of an investing in energy Consumer, cyclical 7.9% 0.0% 2.2 -2.5 example fund’s carbon companies, it is vital to Consumer non cyclical 26.7% 0.0% 1.0 -8.2 footprint against a pay attention to their Diversified 0.0% 0.1% 0.2 0.0 comparable benchmark, revenue mix and to the Energy 6.3% 7.3% -1.3 1.6 Financial 23.1% 22.2% -1.7 -3.6 and where the most assets they have on their Industrial 11.1% 11.2% -0.1 -24.7 significant exposures are balance sheet, because Technology 4.5% 4.0% -0.8 -1.2 concentrated. the ability to monetise Utilities 3.4% 3.9% -4.2 -10.4 Total: 100.0% 100.0% -1.0 -52.8

1 Excess: -54 By discriminating at stock level, the example KPI – key performance indicator fund saves 24.7 CO2 tons/$m revenue com- Source: AXA IM, Trucost. As at October 2017. pared with the benchmark in the same sector Charts and tables are for illustrative purposes only.

17 RI ANNUAL REPORT 2017/18 CLIMATE CHANGE & ACTIVE MANAGEMENT

portfolios. This is the policy to highlight the average percentage of importance of companies an issuers’ business mix managing the critical i.e. its composition of issue of climate change. products and services, Our policy states that which make a positive we will support relevant contribution to the resolutions at general energy transition. meetings. However, we do not only wait for  Voting and shareholder resolutions to engagement: make our voice heard, we We engage directly with may use other resolutions companies, and as part to reflect concerns about of a coalition of investors, the management of to encourage improved climate risks. disclosure on carbon these assets will support solution to a complicated around four pillars: risk resilience. Over the Our voting record is future revenue streams issue and suppress hope The ESG quality of the year our engagement consistent with our and growth. for improvement through issuer, the project type, included 36 companies climate policy across the engagement. the management of in four sectors – oil and firm. This is in contrast Last year AXA IM decided proceeds and traceability gas, utilities, mining and to some of our peers. A to divest from companies  Contributing to the of impacts. Using this core automotive. Financial Times article whose exposure to coal energy transition by selection approach we on climate change activities was deemed too investing in green are able to discriminate Filing shareholder resolutions at 15 key US high in terms of carbon assets and monitoring between green resolutions supports oil and gas and electric impact and climate risk. green share: projects and direct our engagement by using utility companies during Divestment from coal Through our green investments accordingly. the decision-making 2017 revealed that AXA must be considered bond framework we powers of shareholders IM voted in favour of carefully; it can be the continue to drive Beyond the green bond to accelerate strategic resolutions at all these only option when carbon investments towards market, we have been planning on climate companies. However, a risks are too high but it authentic green projects. working on measuring change. AXA IM revised number of other asset can appear a simplistic Our process is articulated the ‘green share’ of our its corporate governance managers only voted in

18 RI ANNUAL REPORT 2017/18 support of these resolutions at two companies and Alongside AXA IM, only two voted against at the other 13 company meetings. There were only two other European-based asset managers other European-based asset to consistently vote in support of all resolutions and declare their votes alongside AXA IM. managers consistently voted in  Collaboration: Our stewardship plans on support of all climate change climate change are set to increase and will focus on collaborative activities with like-minded investors resolutions at 15 US oil, gas and as we believe that climate change is an area where collective influence will bear greater results. Our electric utility companies in 2017 activities will include:

I. Participation in the GlobalClimate 100+, a five-year initiative to target and engage with the top 100 largest greenhouse gas emitters, III. We will continue to use our voting rights to representing 85% of annual greenhouse emissions provoke more responsible corporate behaviour. and US$5.5 trillion. Engagement objectives include Where companies are not responding adequately curbing emissions, strengthening climate-related to climate issues we will move beyond financial disclosures and improving governance shareholder resolutions to vote against a range on climate change risks. It aligns with the of resolutions including the annual report and recommendations of the TCFD and builds on accounts, director elections and remuneration. work we are already doing with the International Investors Group on Climate Change (IIGCC) where we are leading engagement with companies in The transition to a low-carbon world generates a the utilities and auto sectors. number of opportunities as new technologies and the continuous search for efficiency redefine the II. We continue to review opportunities to engage way we produce and consume. As a large investor, with companies using the TCFD framework that we strongly believe we have to play our part in the broadens climate stewardship beyond emitters low-carbon transition. Our policies, research, and to other sectors where climate change poses a most importantly, our actions have supported these financial risk. endeavours over the year.

19 RI ANNUAL REPORT 2017/18 20 RI ANNUAL REPORT 2017/18 2 Impact investing and UN SDG alignment

21 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

Can the UN Sustainable The UN Sustainable Development Goals (SDGs) agreed in September 2015 are causing a stir in the world of responsible investment. Here we examine how Development Goals the UN SDGs might be changing the playing field in impact investing. open the door towards more What are the UN Sustainable impact investing? Development Goals? The 17 SDGs are part inequality in all its guises businesses and civil of the 2030 Agenda for and protect and preserve society, with the United Sustainable Development the natural environment Nations, are working that was agreed by world including combating together to put in place leaders to mobilise efforts climate change. While specific frameworks for to end poverty, fight the goals are not legally their achievement. binding, governments, The 17 goals are shown below:

22 RI ANNUAL REPORT 2017/18 What are the implications for How easily can the UN SDGs be implemented? asset owners and investors? What are the pitfalls to be wary of?

There are three broad investment-relevant This endorsement by social and environmental Investors in public themes: ending poverty, SDGs. These leading major global investors and outcomes is a tried markets can contribute protecting the planet investors are broadening the business community and tested investment by investing in companies and prosperity for all, their RI strategy beyond is laudable. It represents strategy aligned with addressing relevant with specific targets to environmental, social and another example of the the objectives of aspects of the SDGs be achieved up to 2030. governance (ESG) risk mainstreaming of ESG and the SDGs. This has through their products, Some of these goals are mitigation to encompass impact investing. traditionally been done services and the way they more investible than positive contributions using alternative assets. manage their operations; others and for those that they can make through However, it also presents However, the SDGs and use their influence as are, a growing number of their investments to the a direct risk for cynicism and the scale of capital investors to engage with investors have committed challenges highlighted by if investors dilute the needed to meet the UN’s companies to align with to an investment agenda the SDGs. SDGs in order to link objectives have opened the broader objectives focused around the their investments the door to greater of the Sustainable to the SDGs without consideration of impact Development Goals. being able to evidence investing using listed how the investments investment strategies. Together, the providers Who is driving uptake? contribute in meaningful of capital, the managers and measurable ways The growth in the of capital and the The 2017 United asset owners, convening to alleviating the green bond markets investee companies Nations Environment under the auspices of developmental challenges demonstrates how we invest capital in, Programme’s Positive the Dutch Central Bank, addressed therein. companies and investors can work together Impact Initiative provided committing to increasing can work together today to meet the 2030 a stamp of approval their allocation to Impact investing, where to contribute to the Agenda for Sustainable in terms of framing SDG-aligned investments. investors focus on environmental objectives Development. investments around these financing businesses of the SDGs particularly in important social and and projects that are the areas of Clean Energy environmental issues. designed to produce (SDG 7) and Climate We have also seen Dutch positive and measurable Action (SDG 13).

23 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

Balancing the double objective of creating positive social impact and financial returns requires the ability to seek out innovative projects. At the sharp end: A combination of innovation and investment can help generate Impact investing more effective impact results. Here we demonstrate how we go about setting and measuring the positive in private equity social and financial outcomes of a project within one of our impact strategies.

Social impact requirements

Starting with the overall As part of the investment To meet this objective, theme of health and framework, we identified we identified two specific well-being, our investment the key impact objective: impact targets, which strategy centres around UN were: Sustainable Development  To tackle global health Goal 3 – ensure healthy challenges in developing  To improve the lives of lives and promote countries. approximately 10 million well-being for all ages. people annually by 2025 Underlying this goal is through the provision of a range of issues, which early diagnosis, vaccines, includes; financial risk and drugs at accessible protection, access to price points. quality essential healthcare services and access to safe,  To save the lives of effective, and affordable approximately 100,000 essential medicines and people annually by 2025. vaccines.

24 RI ANNUAL REPORT 2017/18 The UN SDGs were established to positively transform the world through sustainable development. Targeted impact investments can answer this call.

Financial requirements

The strategy’s financial diseases or maternal and returns are generated by infant health issues. providing equity, debt, The strategy can generate and project financing financial returns through to late stage clinical equity appreciation and The US Food and Drug Administration's Priority programmes. Financing is liquidation, by receiving Review Voucher (PRV) Program was set up to provided to a range of interest on loans, motivate more treatments for neglected and rare organisations including and through royalty diseases and also speed the approval of potential product development payments. The strategy blockbuster therapies. partnerships, contract also pursues research organisations, 'defined exits' through A developer of a treatment for a neglected or and pharmaceutical incentive programmes orphan disease receives a voucher for priority companies and must be like the US Food and Drug review from the FDA to be used with a product of deployed towards Administration’s its choice or sold to another developer. developing products that (FDA) Priority Review primarily target neglected Voucher Program.

25 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

Laying out the framework

For each of these A notable early success vaccine has been used to With approximately 6.6 diseases, the investment from this investment has treat cholera outbreaks million doses delivered framework defines been the development in Haiti in December 2016 to date, the vaccine has impact objectives, targets and distribution of a and Somalia in March achieved significant and outcomes to identify cholera vaccine, Euvichol, 2017, as well as disaster- positive outcomes as a the specific desired which was financed affected areas in Sierra result. results. through this vehicle. The Leone in September 2017.

The framework for cholera is as follows:

ANNUAL ESTIMATED IMPACT IMPACT WHO/PUBLIC DESCRIPTION TARGET BY RESULTS THESIS METRIC HEALTH 2025 TO DATE Submitted Cases of for WHO Lives cholera 694,858 100,000 prequalification. Increase improved prevented Used by supply of public health CHOLERA cholera authorities to vaccines treat outbreaks Deaths from Lives saved 8,130 1,200 in Haiti and cholera averted Somalia.

26 RI ANNUAL REPORT 2017/18 Concrete, quantifiable results Application to the UN SDGs

The results show these figures to increase The strategy shows that concrete, quantifiable with corresponding investments linked to Haiti faced a fresh evidence of the kind of positive health outcomes. the UN SDGs can tackle outbreak of cholera in positive social outcomes challenges such as 2016 after Hurricane that can be achieved The products financed ending communicable Matthew hit the area, through impact investing. by the vehicle, including disease epidemics while flooding rivers and fouling Euvichol, are monitored maintaining financial wells, forcing people to The increased supply of against global health integrity. drink contaminated storm Euvichol has prevented statistics provided water. It is the second an estimated 100,000 by organisations like The UN’s SDGs were outbreak of the water- cases of cholera to date the World Health established to positively borne disease to affect and saved an estimated Organisation to assess transform the world the island; it recorded its 1,200 people from dying how vaccines like through sustainable first outbreak after the of the disease. Euvichol are helping development. To achieve 2010 earthquake. to solve global health this, new financing This drug is still in the challenges. models that steer funds relatively early stages of towards activities and distribution, so we expect initiatives that promote impact on the health and sustainability and address well-being of people in neglected areas are Somalia and Haiti. These In Somalia, lack of rain necessary. results have been achieved caused severe drought, in conjunction with robust displacing hundreds of Targeted impact oversight - which included thousands of people. investments can answer monitoring product quality, Although the rainy season this call. In this example, safety, and business ethics brought some relief, the financing an enterprise - helping to ensure financial flooding it caused likely that has developed an results are delivered in a increased the number of essential vaccine has responsible way. cholera cases. clearly made a positive

27 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

Green bonds: Listed impact a route to low-carbon investing Planet bonds With the potential to change. However, to make route to investing in the address several of a material contribution low-carbon economy. the United Nation’s to environmental goals, Sustainable Development green bonds require scale Here we look at the growth Goal (SDG) impact without compromising on of the market, particularly indicators1, green bonds their ‘green’ credentials. in China, and how it has can be an effective Green bonds, which are the potential to provide instrument to help to explicitly designed to significant support in the address environmental raise capital for projects transition to a ‘greener’ challenges and with clear environmental Chinese economy. particularly climate benefits, offer a tangible

1 From www.undp.org/content/sdfinance/en/home/solutions/green-bonds.html, green bonds have the potential to target address UN SDG #6, 7, 8, 9, 11, 12, 13, 14, 15.

28 RI ANNUAL REPORT 2017/18 Building scale in the green bond market

The green bond market continues to develop at a significant pace, with demand particularly strong Demand - According to the Climate Bond Initiative from institutional investors. In 2017 there was more than US$120bn in new issuances, making it a record (CBI), 54% of green bonds have been allocated year for green bonds (Exhibit 1). to socially responsible and/or green investors. Institutional investors have a large share of green holdings as the market offers transparency and environmental benefits at similar prices to non-green bonds from the same issuers. Exhibit 1: Another record year for green bond issuances Pricing - In a high demand environment, pricing is key. In a sample analysed by the CBI, pricing for most green Strong presence in Jan-17 First bonds was in line with prices achieved on ‘traditional’ new issuances. Additionally, on occasion, green Issued amount the primary market French green of Asian banks sovereign bond bonds in the secondary euro corporate debt market (in USDbn) Jan-14 Green bond Dec-16 First green issuance performed better than traditional bonds (although this principles published sovereign bond has not been the case in the US dollar sector). Strong AXA IM integrates Nov-14 Barclays MSCI issuance with demand has seen oversubscription ratios above 2 (for green bond index launch green bonds Poland both euro and dollar green deals). in its RI strategy First Chinese Liquidity - Liquidity has improved significantly over First sizeable green bonds 0 corporate green the past two years, with bid/ask spreads compressing, bond by "EDF" allowing better trading in secondary markets. Existing issuers have continued to be active and the green bond benchmark transaction issued by the French State early 2017 offered undisputable liquidity to 2012 2013 2014 2015 2016 2017 investors.

Source: Climate Bonds Initiative and AXA IM Research – as of 31 December 2017.

29 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

While Chinese issuers decline, China remained highly-polluting, energy- accounted for 30% of the second biggest issuer intensive and investment- 2018: the expansion global issuances in after France. driven growth model of private financing 2016, primary market towards a green, efficient activity tapered off in In its 13th Five-Year Plan, and sustainable system, for the Chinese green transition 2017 following Beijing’s the Chinese government powered by consumption attempt to deleverage the set ambitious carbon and services. financial system. We think emission reduction and this halt is temporary, and energy efficiency targets. To achieve these goals, issuance will resume as The plan will mean the People's Bank of China China accelerates its green rebalancing China’s (PBoC) estimates that an transition. Even with this economy away from a annual investment of at least RMB 2 trillion to RMB 4 trillion, (US$320bn to $640bn), will be required2. Exhibit 2: China - a growing share of the global green bond supply Considering only 10%-15% of this will be funded by public finances, a way to 1000 USD bn channel the remaining China (aligned with only China definition) 85% from the private- 800 sector is needed. The China (aligned with both China 600 & international definition) green bond market was developed precisely for Other (aligned with 400 international definition) this purpose. The CBI forecasts that the green 200 This forecast is for illustrative purposes only, bond market could and does not constitute an offer to buy or sell. It 0 grow to US$1 trillion by does not constitute a reliable indicator of future 2012 2013 2014 2015 2016 2017 2018f 2019f 2020f 2020, and our estimate shows that China is set performances. These forecast returns should not be Source: Climate Bonds Initiative and AXA IM Research – as of 31 December 2017. relied upon and no representation is being made to dominate this global that any fund or strategy will or is likely to achieve 2 By Jun Ma, ex-chief economist of the PBoC, “China’s central bank wants private capital for supply (Exhibit 2). profits or losses similar to those shown herein. green investment”, interview with CNBC, 25 February 2016

30 RI ANNUAL REPORT 2017/18 Common international standard is within reach

In December 2015, the there are still some Despite the outstanding PBoC released a set of deviations. Some projects, issues, the Chinese rules, becoming the first mainly relating to fossil authorities are moving fast country to have clear fuel, are eligible for green to develop and liberalise regulations governing bond financing in China, the market. The PBoC its green bond market. but are excluded by the has been in discussions Analysis and selectivity Nevertheless, the international principles. In with regulators, issuers coexistence of other addition, global investors and investors in Europe, remain key standards3 can create risks are concerned about the such as the European and confusion that may level of transparency and Investment Bank, to harm the development credibility of reporting, develop common The rapid international growth in the green bond market of the market. A future despite more than 70% standards for the green highlights the importance of due diligence. Being harmonisation of these of onshore issuances last bond market and an selective is key to raising the standards in the green bond rules is vital for improving year being independently update is expected this market. Discriminating between individual green bonds clarity and investors’ verified4. Furthermore, year. Finally, Beijing is and investing accordingly helps ensure the most relevant confidence in Chinese even for the interested determined to continue and impactful green projects receive financing. green bonds. investors, market access the path of capital account can be a practical hurdle, liberalisation, which will With the market still in relatively early stages of Comparing China’s green given China's controlled ease foreigners’ access to development, investors should be mindful of potential bond standards with capital account and the onshore market. cases of ‘green washing’, where inappropriate projects the usual international limited convertibility of its receive financing simply by applying a green bond ‘standards’ shows that currency. ‘stamp’. To combat this, thorough research of each issue and insight on individual issuers is essential. The lack of common standards on green bond eligibility criteria in 3 Other regulators, such as the National Development and Reform Commission, China Securities the global market means that systematic monitoring and Regulatory Commission and the Shanghai Exchange, have developed their own standards follow-up analysis are necessary to ensure issuers are 4 Ernst & Young Global and PriceWaterhouseCoopers delivering on their promised environmental impact.

31 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

The ‘ins and outs’ The expansion of impact investing into public equities, largely prompted by the United Nation's Sustainable Development Goals (SDGs) initiative, of impact investing has raised much debate. The reason for this is that there are a number of grey areas to consider when it comes to applying impact investing to listed in public equities: markets. Simply applying a catch-all ‘impact’ label to all environmental, social and governance (ESG) investments does both approaches a disservice.

Spotlight on Perhaps the best way to highlight the challenges of public market impact emerging markets investing is to show how it could be applied in practice. The developing world is where capital is needed most

The liquidity, transparency grow into a market simply tackle such problems by and scalability of public by servicing people’s broadening access to their markets means they have basic needs. Companies products and services, the capacity to ‘move that can supply goods especially to under-served the needle’ in terms of or services, like essential populations, through impact. medicines, clean water lower prices, wider and sanitation or basic distribution or education. Research shows that in financial services are This is usually made 2011 some 71% of the in a position to make a possible by leveraging world’s population lived positive impact. their scale, tapping public on less than US$10 a day, sector support and/or and as such, firms have We are most interested in simply being innovative a massive opportunity to corporations that look to and focused.

1 Source: Pew Research Centre. “A global middle class is more promise than reality’ (updated August 2015). 15% were classed as ‘poor’ (under $2 a day), and 56% were class as low income ($2-10 a day).

32 RI ANNUAL REPORT 2017/18 How do we do it? Impact investing must go further than ESG integration

When creating a public equity impact (e.g. healthcare or education), strategy, a number of objectives must environmental impact (e.g. climate change be fulfilled concurrently. As always we or sustainable living) and economic look for companies that we believe impact (e.g. livelihoods or productive can generate significant, sustainable infrastructure). Some impact funds may shareholder value over the long term. focus on a single theme or a narrow list of themes, such as climate change or In terms of 'impact' we are looking water scarcity. Others may target multiple for companies offering products and themes, and therefore, may be grouped services which provide useful societal together under umbrella themes that help benefits for either their customers (e.g. clients to better understand the fund’s healthcare, education and agricultural focus, such as 'inclusion', 'enabling', 'well- solutions) and/or for society at large (e.g. being' or 'planet action'. renewable energy and water conservation strategies). We may also include firms Based on the impact themes selected, generating impact via their operational each strategy explicitly addresses a strategies, such as unique corporate number of UN SDGs through our core social responsibility programmes, or investment themes. In the case of through their targets to significantly cut emerging markets, umbrella themes CO2 emissions and/or landfill waste, might include providing for basic needs, for example. Our feeling is that only the enabling the population to participate stand-out groups should be considered as and contribute to commerce, and/or operational impact companies. increasing social mobility. From here we categorise potential investments To work this into an equity strategy, we under each theme and develop an active have developed a framework of 14 impact engagement strategy to deliver positive themes covering three broad territories of social impact. impact – these include; social impact

33 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

Investment themes and UN SDGs

In any impact investment and outcomes actually firms can viably disclose Rapidly rising - through public or private help to resolve targeted the necessary data, smartphone adoption, markets - the specific SDGs, and what types and that they really do the proliferation of objectives around the don’t? These theories provide valuable insight electronic wallets and explicit impact themes can then guide fund into whether positive more widespread use of will form the basis of the managers in terms change is occurring. biometric identification strategy. of their investment are opening up a wave decisions as well as Promoting greater of new markets in many Typically, the investor in establishing which economic participation in broad areas such as should have some sort impact key performance under-served populations ecommerce, payment of theory of change. For indicators (KPIs) to is a particularly good solutions, micro instance, what types monitor. A lot of work example of how we insurance and online of micro finance or should go into which KPIs frame our 'enabling' learning. We believe the infrastructure solutions to use, to ensure that umbrella impact theme winners will be those within emerging markets. bringing the under-served This area incorporates into the formal economy financial inclusion, quickly and responsibly, Rapidly rising smartphone enabling technology, and and the potential rewards productive infrastructure. for these companies adoption and the proliferation The investment could be huge. opportunity in this space of electronic wallets are opening is very exciting, where Next we outline how we technology adoption is frame our investment up a wave of new markets providing opportunities case in terms of delivering for companies to disrupt positive societal impact incumbents and to cater as outlined by the UN for potentially huge SDGs . addressable markets that were previously inaccessible.

34 RI ANNUAL REPORT 2017/18 Impact umbrella theme: Enabling

Creating opportunities and making lives easier through finance, Investment and growth opportunities are easier to facilitate through productive infrastructure and technology the development of a stable domestic savings base and the use of technology, such as smart phones, to bring people into the formal economic system. Primary SDG alignments: Theme capital intensity: medium

Other SDG alignments: Theme cyclicality: medium to high Smartphone penetration (% of population)

% Lack of financial penetration is an impediment and a problem 80 but it also represents a huge opportunity for innovative financial 70 companies and the economy at large. 60 50 40 30 Financial inclusion and credit penetration 20 % 10 160 0 Banking system credit (as % of GDP) USAUK ChinaBrazilMexicoIPhilippines ndia Pakistan 128 Bank account penetration (as % of population) Source: Pew Research Centre, 2015 96 64 Applying an impact investing philosophy to public markets requires a cohesive framework, firstly to identify themes to be addressed, and 32 then to carefully assess the relevant underlying investments. Equally 0 the investment manager will need to tenaciously encourage better High Upper middle Lower middle Low company disclosures on societal impacts and try to track and report Income Profile on appropriate KPIs. However, it is this reporting discipline - giving a clear indication of the positive societal benefits that have come about Source: World Bank, 2014 and 2015. Bank account penetration – those aged as a result of the investment - that is key in helping to establish impact 15 and older with a bank account investing’s credibility in public markets.

35 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

The Board of Directors of the Jean-Jacques Laffont Foundation in Toulouse decided last year to make their first foray into impact investing when they Client case study: took up a mandate in one of AXA IM's impact programmes. Jean-Jacques Below leading members of the investment committee share some of their Laffont Foundation considerations in arriving at the recommendation in favour of this investment. Background

Established 10 years ago, Economics (TSE), one sizable endowment of close the Jean-Jacques Laffont of the leading research to €100m. This is used to Foundation was set up centres in economics create a highly competitive to support the creation in Europe. The joint research and educational of Toulouse School of establishment of the environment with Foundation and of TSE state-of-the-art facilities was undertaken with the to produce world class goal of creating a firm research, and to attract and durable institutional and retain the best faculty basis for the world- staff. The Jean-Jacques renowned research cluster Laffont Foundation, in economics that had whose president is Nobel emerged in Toulouse laureate Jean Tirole, is as an offshoot of the currently undertaking a centuries’ old public promising international university, the University fundraising campaign of Toulouse-Capitole. focused on individual and Funded through both corporate donors interested public and private in supporting first-rate contributions the economic thinking and Foundation has built up a knowledge.

36 RI ANNUAL REPORT 2017/18 Financial objectives

The Foundation’s financial policy is built The impact investment forms part of the on a model inspired by the leading US endowment’s exposure to alternative universities. That is to build up a sizable, asset classes, that is assets that are perennial endowment that finances its considered stable but not very liquid. spending through the endowment’s As is the case for many university financial returns, without depleting endowments, the endowment can afford capital. Its aim is to limit drawdowns of a significant exposure to illiquid assets. In expected real returns. The preservation of the current low-return environment, the the endowment’s capital is an important Board of Directors authorised that up to signal to stakeholders, staff members one third of the total endowment can be and the public that TSE’s strategy is placed in alternative assets. focused on securing and consolidating its position as a leading research centre Diversification was a key criterion that over the long term. made impact investing attractive to the Foundation. The investment committee Securing the endowment is paramount, reasoned that the investment projects but the Foundation has the flexibility included in AXA IM’s impact strategy to ensure a steady spending policy by would very likely hold the promise of a low smoothing fluctuations in returns so that correlation with other asset classes in the it remains consistent with its long-term portfolio. In particular, the impact strategy’s goals. exposure to emerging markets provides significant diversification and the structure The endowment’s very prudent of the projects means that they are probably financial profile is in line with the view less exposed to the macroeconomic of the public auditor who oversees the fluctuations that characterise other asset Foundation. classes in emerging markets.

37 RI ANNUAL REPORT 2017/18 IMPACT INVESTING AND UN SDG ALIGNMENT

Motivation for the move into impact investing

The investment in impact is still alive today in TSE’s sustainable development. same high standards of projects allowed the research community. For example, the idea of risk and return applied Foundation to reconcile its The research agenda of sustainable finance is one to all investments of investment activities with many faculty members that has been explored in the endowment. The many of the topics that and research groups at detail by TSE researchers committee members characterise its research TSE are focused on areas for quite some time, are confident that its activities. As a man of where economics can and their research and investment in the impact conviction, Jean-Jacques make a positive change. conclusions bear strong strategy provides an Laffont, the late founder Furthermore there is links to impact themes. effective way of meeting of the Toulouse centre of a strong presence of its goal of achieving a level excellence in economics, research topics that relate Thus, an allocation of return for a given level believed that economics to impact investing, such to an impact strategy of risk that is at or close could be a force for good as the energy transition, was the opportunity to to the efficient frontier. At in the world, and his vision climate change and reconcile the way that the the same time it allows it endowment’s capital was to fund projects that make invested with the topics of a positive contribution to TSE’s economic research, society. The prior belief of some and consistent with many of the conclusions that TSE committee members was economists have arrived at. In short, it provided that there would need to be a way of directing TSE’s money towards the same some concession on income investments that much of its research points to. generation if the impact aspect For the investment was taken seriously committee, it was always clear that this investment would be held to the

38 RI ANNUAL REPORT 2017/18 Impact strategy – Measurement considerations and concerns and reporting

There was initially some select an asset manager The investment committee considers regular reports from scepticism from the that had an established the investment manager to the endowment crucial as they investment committee history with the strategy need to provide the Board with transparent metrics on regarding the revenue and had ‘skin in the game’ the investment. Given impact investing is a relatively new goals achievable with through co-investments concept, there is a necessary element of due diligence, impact investing. The with large institutional but there is also a broader range of criteria to consider. prior belief of some investors. Measures of financial performance, risk exposure, and committee members was impact outcomes are provided through relevant financial that there would need to Even so, the Jean-Jacques and impact KPIs. These are delivered in a clear, consistent be some concession on Laffont Foundation framework on a periodic basis to help the committee to income generation if the views the investment provide concrete evidence to the Board. This helps to impact aspect was taken as a learning tool. The ensure that the Board can make informed decisions on seriously. However, the investment committee is future investments. revenue targeted by the keen to learn more around strategy is in line with the how particular aspects benchmark return that within the impact strategy the Foundation hopes to develop over time. For Supply needs to rise to meet demand realize, and the objective example, investments to generate a predictable, in microfinance have Ultimately, the members of the investment committee smooth income profile is been tried and tested but believe that there is significant demand for these kinds consistent with the overall how scalable are these of impact strategies from investors like themselves. The strategy of the portfolio. investment opportunities? supply side needs to step-up to meet this demand by Will the market become developing investment solutions that retain integrity with As this was the overcrowded? Will there regard to impact projects, and competitiveness in financial Foundation’s first continue to be sufficient returns experience in impact projects in which to invest investing, it was important or will opportunities This article was written in conjunction with the that they were able to become limited? Jean-Jacques Laffont Foundation

39 RI ANNUAL REPORT 2017/18 40 RI ANNUAL REPORT 2017/18 3 Big Data - ESG integration and measurement

41 RI ANNUAL REPORT 2017/18 BIG DATA - ESG INTEGRATION AND MEASUREMENT

In the hunt for income, equities represent a rich opportunity. Attractive ESG and income: dividend-paying companies are present in all markets, across all industries and capitalisations, but investors seem to think dividend payouts only reside in a investors handful of sectors. Sectors with more exposure to ‘old economy’ names, such don’t have to as telecoms, energy, finance, utilities, do typically offer higher yields. However our research shows that income opportunities in other segments are abundant for those willing to cast a wide net. This breadth of opportunity compromise means that investors need not sacrifice their commitment to environmental, social and governance (ESG) principles to achieve attractive income.

Kathryn McDonald, Income investing with less ‘C’ Head of Sustainable Investing at AXA IM Rosenberg Equities, Given that two of the found that the higher component of their ESG the stocks in each of the explains why income-hunters most polluting sectors dividend payout parts of goals when looking for payout ratio quintiles; might consider going green - energy and utilities - the equity market were not income. quintile one (Q1) offers typically exhibit higher unduly dominated by the the most attractive dividend payouts, many biggest polluters. Removing the highest dividends per unit of yield-hungry investors carbon intensity stocks earnings. The graph on may ask if it’s possible While the top payout from our analysis showed the right shows the effect to achieve a high level of basket of stocks did there was virtually no of removing all the stocks income without taking on contain its share of high impact on the average with carbon intensity of significant carbon risk? carbon footprint names, it dividend payout ratio >2000. Removing many of Our recent analysis of was clear there were many and that there are ample the worst offenders from a cross section of 2,200 lower-carbon options to opportunities for capturing a carbon standpoint has developed and emerging choose from within the high dividend payouts virtually no effect on the markets stocks for which highest income-paying without investing in the median payout ratio of carbon intensity data, ESG part of the market. This most polluting companies. each quintile, but has a scores and valid dividend shows investors don’t need The graphs show the dramatic effect on each information was available to compromise on the ‘E’ average payout ratio for quintile's carbon footprint.

42 RI ANNUAL REPORT 2017/18 Impact of removing largest polluters Includes stocks with carbon intensity >2,000 Exclude stocks with carbon intensity > 2,000 1.0 500 1.0 500 Carbon intensity (RHS) Carbon intensity (RHS) Payout ratio (LHS) Payout ratio (LHS) 0.8 400 0.8 400

0.6 300 0.6 300 atio atio yout r yout r 0.4 200 0.4 200 Pa Pa Carbon Intensity Carbon Intensity

0.2 100 0.2 100

0.0 0 0.0 0 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Highest to lowest payout ratio Highest to lowest payout ratio

Source: AXA IM Rosenberg Equities, Trucost. Universe is approximately 2,200 developed and emerging markets equity companies, observed at 30 June 2017. Universe includes dividend paying companies only. Quintile buckets are capitalization neutral. Observations with in category are equal weighted. In our universe, seventy five companies had carbon intensity of > 2,000 on this date. Note: results of this analysis using median payout ratio (instead of mean) is nearly identical to what is shown. Carbon intensity is measured as CO2 tons/$m of revenue.

For the avoidance of doubt it is important to acknowledge that the quintiles depicted here are not portfolios, per se. For an active income strategy – which we strongly advocate – it is better to think of the high payout ratios quintiles as potentially representing a selection universe of attractive names. The implication of this experiment, therefore, suggests that it is indeed possible to significantly reduce the carbon intensity profile of a high-payout selection universe.

We repeated this analysis using Direct and First Tier Indirect carbon emissions (measured in tonnes CO2e, as opposed to intensity which scales carbon emissions by revenue). The results were similar to those presented here. By omitting the 56 stocks with carbon emissions of > 30,000 tonnes CO2e we reduced the average carbon footprint of payout quintiles 1 and 2 by approximately 50% with no meaningful reduction in the average payout ratio.

43 RI ANNUAL REPORT 2017/18 BIG DATA - ESG INTEGRATION AND MEASUREMENT

Removing Good governance and income investing In the second part of the developed and emerging pay dividends typically be putting themselves the highest carbon same study, we analysed markets companies have better governance on the right side of good the relationship between for which both ESG profiles than their non- governance practices. intensity stocks governance principles data and valid income paying peers, meaning and dividend policy for data was available. We dividend-seeking In our sample, dividend- from our analysis approximately 4,100 found companies that investors may already paying companies’ more attractive showed there was governance scores appeared to be driven virtually no impact by better transparency, on the average Governance Profile of Dividend-Paying management incentive vs Non-Paying companies profiles, and stronger dividend payout shareholder rights. Limiting our scope to ratio iienae eian on ae eian dividend payers only and to the companies that pay out less than

Source: AXA IM Rosenberg Equities. e their annual earnings, or Universe is approximately 4,100 3 we found stocks developed and emerging markets equity e sc with higher payouts companies, observed at 30 June 2017. also exhibited more Universe includes dividend paying and 2 attractive governance

non-paying stocks. All mean differences Governanc profiles, meaning good between payers and non-payers are governance is generally statistically significant at = 0.05. supportive of income Use of median instead of mean values investing. results in the same conclusions. 0 Governance Pillar score oenane oa tte ansaen aeole Mt Inentie and sub scores are proprietary to AXA IM. illa oe oe oe Rits oe oe

44 RI ANNUAL REPORT 2017/18 No need to compromise Governance Profile by Payout Quintile on the ESG profile of your investments 10 9 Our analyses suggest that to achieve high income within the equities market, investors do not 8 need to abandon their ESG goals. In fact, ESG factors such as good governance show a positive correlation to higher dividend paying companies. Furthermore, when it comes to environmentally 7 conscious investing, the parts of the equity market with the highest carbon footprints were not the only places to find high dividend income. Adding ESG criteria to an investment approach should 6 not hinder the objective of finding higher income. 5 These are all key considerations for income investors, particularly as the direction of travel 4 regarding ESG and its growing importance globally. ESG information can help point investors to 3 both threats and opportunities – some of which may take years to play out, but will work to shape our economy nonetheless. We believe income strategies that can take advantage of all relevant Average governance score 2 company information – including ESG - have the greatest likelihood of success and those already 1 committed to ESG investing should not see their income opportunities dampened.

0 While the conclusion from our in-house analysis is that good governance appears to work to Q1 Q2 Q3 Q4 Q5 support an income-oriented investment approach, it’s also important to note that the stocks at Highest to lowest payout ratio greatest risk of dividend cut or cancellation – a key risk of equity income investing – exhibited a governance profile that was slightly superior to peers. Therefore, while good governance can be Source: AXA IM Rosenberg Equities.1 Universe is approximately 3,400 a key attribute of higher dividend paying stocks, other metrics must also be taken into account to developed and emerging markets equity companies, observed ensure a more complete understanding of the risks related to potential dividend payout cuts. at 30 June 2017. Universe includes dividend paying companies only. Payout Ratio is used to construct quintile buckets of equal capitalisations (Q1 – Q5). Payout Ratio is defined as the dividends

per share paid divided by the trailing 12-months divided by earnings 1 2 Companies paying out less than their annual earnings, that is, companies with payout ratios of <1, make up per share over the same period. Stocks with Payout Ratios greater the majority of dividend payers. There are, however, a non-trivial number of companies with payout ratios of than 1.0 are not considered. Observations within category are >1, meaning that they use debt to finance dividends. This is obviously not sustainable, but is nevertheless a equal weighted. Board Structure and Shareholder Rights scores tactic that allows maintenance of dividends during periods of financial stress. are proprietary to AXA IM. Difference in median value of Q1 vs. Q2-5 2 The quintiles are roughly capitalization neutral in that each quintile samples from both large and small cap Governance Score is statistically significant. stocks.

45 RI ANNUAL REPORT 2017/18 BIG DATA - ESG INTEGRATION AND MEASUREMENT

Underpinning all AXA IM Rosenberg Equities investment strategies is a set of Quantitative equities: beliefs that we think contribute to a better investment outcome for our clients: Blazing a trail with ESG …future earnings and fundamentals drive equity returns …factors link to fundamentals …ESG information can lead to fundamental insights integration and big data …a relentless focus on details improves investment outcomes …innovative use of technology benefits clients

The road to integration Few asset managers put puts us in the industry or norms-based negative company’s return on equity environmental, social vanguard. screenings. (ROE) appear to support a and governance (ESG) Over the past years, strong economic argument beliefs at the heart of their AXA IM Rosenberg Equities responsible investment for a broader integration of investment philosophy, but has a long experience has garnered increasing ESG rather than applying our commitment to ESG is of managing socially attention from investors an exclusion-based policy. such that we have included responsible portfolios around the globe As a result, in 2014 ESG considerations across for clients and has been recognising that company Rosenberg Equities all of our strategies, some managing responsible ESG features can impact actively integrated ESG US$22 billion of assets, and investment (RI) strategies portfolio performance into a portfolio managed intend to provide reporting since the 1990s. Initially, not only in terms of risks under our Sustainable on ESG KPIs1 for all our the process consisted but also have positive Equity strategy, choosing portfolios. We believe this of responding to clients’ long-term implications for to consider companies’ is a clear commitment to needs through divestment returns. Indeed, our own holistic ESG attributes a more sustainable form from companies involved research on links between rather than simply applying of equity investing and in controversial activities solid governance and a divestment policy.

1 KPI – key performance indicator

46 RI ANNUAL REPORT 2017/18 Capturing ESG

AXA IM’s well-established RI data framework allows ESG criteria to be incorporated into our quantitative investing models relatively easily. ESG data simply becomes another piece of information to be incorporated into the investment process and taken into consideration when portfolios are constructed. Optimisation techniques allow a portfolio to be constructed that retains the risk/return attributes we seek while improving the overall ESG profile. Our approach also allows for specific impact targets to be achieved, for example an explicit level of carbon exposure or governance considerations such as the percentage of woman on company boards, but we take account of ESG considerations in our strategies in multiple ways:

 We believe the management of water and energy resources will profoundly affect our economic and environmental future. As result, we seek to tilt our portfolios to have a lower carbon footprint and water intensity compared to the benchmark index.

 We believe that companies that have a strong corporate governance deliver stronger earnings quality. As such we aim to achieve an improved measure of governance in our portfolios compared to the benchmark index.

 We expect our portfolio to display an improved overall ESG profile compared to the benchmark. Our model will naturally prefer companies with higher ESG scores.

47 RI ANNUAL REPORT 2017/18 BIG DATA - ESG INTEGRATION AND MEASUREMENT

Handling controversies What’s next?

We generally prefer to believe regulatory and due to poor business The above outlines how we have consider ESG actively by profitability risk to be practices. captured ESG information in our favouring companies with under-represented investment process. However, ESG data higher ESG scores, all else We begin with the itself will continue to change and evolve, equal, and tilting away  Controversial weapons: ‘Category 5’ controversies so we are exploring alternative data sets from those for which the Companies involved in list by Sustainalytics, to classify the commitment of companies opposite is true. However, anti-personnel landmines a leading provider of to ESG. where applicable we and cluster bombs. Also ESG and corporate will wholly divest from a including chemical and governance research and Our testing of alternative data included number of specific sectors: biochemical arms and ratings, but also consider analysing ESG commitment using nuclear weapons. other stocks that may financial reports. We looked at the ESG  Tobacco companies: have been flagged by vocabulary used in companies’ annual Companies included  Coal: Exclude our investment staff for reports using a Natural Language under tobacco in companies that generate targeted review. Processing (NLP) technique. The results the Global Industry more than 50% of their showed the median and lower/upper Classification Standard revenues from the coal Stocks that fall into this quartile of word counts for each sector (GICS) are divested as we industry bucket are reviewed by in the S&P 500 Index. From this data we our internal controversy found the following:  Palm oil: Exclude committee and, unless companies which do not there is compelling  Almost all industries have seen a Almost all commit to responsible evidence that their material increase in ESG discussions and sustainable palm controversial issues will industries have oil production (RSPO) be addressed in the near  Energy and basic industries’ ESG standards future, and/or unless the mentions remain (perhaps surprisingly) seen a material company is currently low Finally, we actively screen a target of our overall increase in ESG for the most severe corporate engagement controversy stocks, which initiatives, the companies discussions we believe present a are removed from risk to future operations portfolios.

48 RI ANNUAL REPORT 2017/18 S&P500/ ESG Vocabulary in 10-K Risk Factors Our NLP modelling is in relatively early stages and further work needs to be Showing median and lower/upper quartiles of word counts done before implementation into the investment process, but together with Energy our traditional analysis, we believe ESG information is: Materials 0 0  Economic in nature 00 Industrials  Not well represented in traditional Consumer investment information (e.g. financial Discretionary statements)

s Consumer Staples  Not typically required by regulators or

eto standardised Health Care

I  Slow moving… for the most part Financials  Information Long-horizon… for the most part Technology We believe that ESG information Telecommunication Services is complementary to traditional fundamental information. Utilities Taking ESG factors into account is nothing more than considering Real Estate extra-financial information while evaluating the attractiveness of an asset. 050100 150200 250300 Using a quantitative investment process o ont means we can do this consistently and methodically across a wide range Source: Standard & Poor's SEC Edgar filing statements for S&P 500 companies from 1995 to of assets. 2017. Rosenberg Equities. Industries defined by MSCI GICS sectors

49 RI ANNUAL REPORT 2017/18 BIG DATA - ESG INTEGRATION AND MEASUREMENT

AXA IM In 2017 we put in place a new, four-step approach to address environmental, social Real Assets and governance factors across the direct property assets we manage.

Vision 2030 In 2015, we launched Today, our vision is We have put plans in an ambitious strategy well on track. As of place on an asset-by- to improve the 31 August 2017, asset basis, and by 2020, sustainability profile 38% of our direct over 60% of our assets of the direct property property assets under under management assets we manage: management1 (AUM) should hold sustainability Vision 2030. Focused were certified with a labels. on obtaining external recognised sustainability certification labels label: BREEAM, LEED Vision 2030 is an for the assets we or respected local important tool to help us manage, Vision 2030 certifications such as HQE meet investor and tenant has a central goal: by in France or Minergie in demand and mitigate 2030, 75% of direct Switzerland. market risk, as it ensures property assets under the assets we manage management should In total, 25 additional meet market standards hold internationally certifications were from an environmental, recognised sustainability obtained during social and governance certifications. the 12 months2. (ESG) perspective.

1 Source: AXA IM - Real Assets. Assets under management at 30 June 2017 2 Certification labels obtained between 1 September 2016 and 31 August 2017

50 RI ANNUAL REPORT 2017/18 Vision 2030 In 2017 we recognised the need to go further. Taking a pro-active approach to ESG is as much about creating value as protecting it. Our ENVIRONMENT SOCIAL GOVERNANCE investors need to know we are

Complementing Vision monitor progress over  ESG footprints: anticipating environmental, 2030, we have put time. In 2017 we carried We collect resource use in place additional out 486 ratings, covering and emissions data for regulatory and market risks steps to improve our 50% of our assets (€25 all assets in scope. For property assets. We use billion in AUM). high potential assets Isabelle Scemama, CEO, Real Assets a proprietary system (just under 70% of the developed by AXA IM  ESG action plans: portfolio by AUM1) we - Real Assets to carry We put in place short-, monitor reductions in out an in-depth ESG medium and long-term energy consumption and assessment and portfolio actions to improve the service charge savings, of the ESG tool in 2016 to benchmarking for some ESG rating of each asset and provide reporting track, monitor and aid the of our clients: in scope. We aim to to investors on resource data collection process anticipate legislation, use KPIs. In 2017, we at each of our assets.  ESG ratings: We upgrade assets and collected data for 889 Implementing the tool calculate ESG ratings on a equipment as well as trial assets, around 85% of our has brought us consistent series of metrics to define and roll out innovative planned total. data and the ability to and benchmark the measures. This new approach compare and benchmark asset’s ESG profile and follows our introduction our assets.

51 RI ANNUAL REPORT 2017/18 BIG DATA - ESG INTEGRATION AND MEASUREMENT

AXA IM AXA IM – Real Assets is actively involved Real Assets in the most important industry working groups relating to ESG

AXA IM - Real Assets participates in several industry working groups. These are Industry participation designed to shape an industry response to implementing regulations, or to pool resources and ideas for sustainable innovations.

Major role in ULI European Sustainability Council

AXA IM – Real Assets As Chairman of the ULI bi-annual Council Days, plays an active role in European Sustainability which include visits to the Urban Land Institute Council, AXA IM – Real sustainable properties (ULI), a global non- Assets Global Head of and developments. profit organisation with Sustainability Nehla Krir nearly 40,000 members organises a programme The first of these events worldwide. The ULI for the Council’s 30 in 2017 included a visit to provides leadership in members. Focused on FIRA, a 50,000m² the responsible use of highlighting important AXA IM - Real Assets office land and in creating sustainability topics development project and sustaining thriving across Europe, it under construction in communities. includes calls and Barcelona.

52 RI ANNUAL REPORT 2017/18 The Urban Land Wide-reaching involvement Institute provides in industry groups an excellent forum to share existing In addition to our work  IIGCC (Institutional with the ULI, in 2017 Investors Group on best practice we participated in the Climate Change) – following groups: Property Group, an and identify ways organisation that  UNEP FI Property provides over 120 for the real estate Working Group, a global investor members with partnership between a collaborative platform industry to improve UNEP and the financial to raise issues on climate sector that numbers over change its environmental 200 institutions, including banks, insurers and fund  OID (Observatoire de footprint, and have managers l’Immobilier Durable), an independent association a positive impact  GRESB, an industry- with around 30 member driven organisation organisations that brings Nehla Krir, Global Head of Sustainability, Real Assets committed to assessing together professionals the sustainability from the public and performance of real private sectors in France estate portfolios around to promote sustainability the globe. 850 real estate in commercial real estate, companies and funds and publishes a yearly took part in the 2017 benchmark benchmark.

53 RI ANNUAL REPORT 2017/18 54 RI ANNUAL REPORT 2017/18 4 Monitoring Risk and active stewardship

55 RI ANNUAL REPORT 2017/18 MONITORING RISK AND ACTIVE STEWARDSHIP

Our approach to stewardship comes from our strongly held belief that both company management and investors have critical roles to play in sustaining Stewardship the health of financial markets and ensuring the efficient allocation of capital. We believe a proper consideration of environmental, social and governance report 2017 (ESG) matters will impact on the long-term sustainable performance of companies and benefit investors of such firms.

To this end, at AXA IM we:

Seek to understand Encourage companies Use our clients’ investor Evaluate a company’s the ESG issues to align with rights to push for desired particular policies that impact companies best practice outcomes from and practices in relation in which we invest on ESG issues investee companies to relevant issues

Enter into constructive dialogue and engagement with Align our votes at general meetings a company when its approach and/or practices on with our engagement objectives relevant ESG matters is below investor expectations

56 RI ANNUAL REPORT 2017/18 Engagement

By focusing on the issues we believe we can improve the risk/performance profile of companies in which we invest Our global engagement activities 137 34% 38% targeted companies

5 12% collaborative initiatives 16%

Source: AXA IM, for the 12 months Environmental Issues Overlapping ESG Issues ending 31 December 2017. Corporate Governance Social Issues

Through our engagement around climate change. their collective influence activities we aim to As a large investor we to bring about necessary use our influence as believe we have a key change. We will continue investors to encourage role to play in limiting to review our engagement companies to mitigate global warming to a strategy on this issue and key environmental and 2°C Scenario1. Given are currently considering social risks relevant to the systemic nature additional engagement their sector. of climate change, we objectives in relation to We have ramped up our believe investors need to climate change. 1 The 2°C Scenario is the proposal that places an upper limit on the increase in stewardship activities come together and use global temperatures of no more than 2°C above pre-industrial levels.

57 RI ANNUAL REPORT 2017/18 MONITORING RISK AND ACTIVE STEWARDSHIP

Climate Stewardship

We systematically a. Engagement: We continue to hold constructive and challenging discussions directly with companies, and as part of a coalition of investors, engaging with companies in key sectors. These discussions focus on strategies voted in favour to manage the challenges posed to businesses by climate change and emerging regulations in a carbon constrained world. This engagement encourages corporations to improve disclosure on their carbon risk of all resolutions resilience strategies as the world shifts to a low carbon economy. Improved disclosure of strategy and scenario planning is an important tool in terms of enabling investors to assess the risks and opportunities associated seeking a better with climate change and helps us make better informed decisions on behalf of our clients. approach to Our current engagement covers 36 companies in four key sectors – oil and gas, utilities, mining and automotive. climate change CLIMATE ENGAGEMENT 2017 issues at 15 key BP EDF SSE Arcelor Mittal US oil, gas and Eni GDF Suez - Engie Centrica BMW electric utility Royal Dutch Shell RWE National Grid Groupe PSA companies Statoil E. ON DRAX Groupe Renault Total Uniper Anglo American Volkswagen Lukoil EnBW Germany BHP Billiton Daimler PGE (Polska Grupa Energetyczna) Fortum Glencore Xstrata FCA American Electric Power Iberdrola Rio Tinto General Motors CEZ Enel Severstal Toyota

58 RI ANNUAL REPORT 2017/18 b. Filing shareholder resolutions: To support our engagement work we use our clients’ c. Voting – During the year we revised shareholder rights at general meetings to push companies to accelerate strategic planning on our corporate governance and voting climate change. policy. We wanted to highlight the critical issue of climate change, and the In 2016 we filed shareholder resolutions at the general meetings of Anglo American, Glencore and importance we place on companies Rio Tinto, all of which were approved by shareholders. In 2017, among others, we filed a shareholder to manage the associated risks. Our resolution at a meeting of US energy company, Exxon Mobil, a case which was particularly noteworthy, policy states that we will cast our votes as it meant the firm had to recognise the impact of climate change on its business. The resolution was at general meetings to support climate- passed by 62.3% of votes cast at the general meeting, marking one of the few occasions that a climate related resolutions. related resolution has been approved at the general meeting of a US company. In 2017 we were part of a coalition of investors that filed and voted in favour CLIMATE RESOLUTIONS 2017 of identical shareholder resolutions at Exxon Mobil AES Corporation Ameren Devon Energy the general meeting of 15 key US oil, gas and electric utility companies. These Dominion Energy DTE Energy Duke Energy First Energy resolutions sought improved disclosure around the management of climate risks. First Energy Hess Kinder Morgan Marathon Petroleum In addition, we systematically voted in Noble Energy Occidental Petroleum PPL Southern Company favour of all resolutions seeking a better approach to the strategic consideration of climate change issues by companies.

Rio Tinto Exxon Mobil Anglo American Glencore

59 RI ANNUAL REPORT 2017/18 MONITORING RISK AND ACTIVE STEWARDSHIP

Engagement activities for 2017/2018

We have several initiatives already in place to increase disclosures to be used by companies in providing our efforts around climate change. These focus on information to investors, lenders, insurers and other collaborative activities with like-minded investors, stakeholders. This is a step-change in that it provides as we believe that climate change is an area where a single framework for disclosure that cuts across collective influence, will bear greater results. sectors and markets. It puts a company’s governance, strategy and leadership at the heart of its disclosure GC 100 engagement: The GlobalClimate 100+ is a on climate related risks. We will be using the TCFD major five-year initiative to target and engage with the framework as the basis of our engagement with top 100 of the largest greenhouse gas emitters. These companies, as this broadens climate stewardship companies represent 85% of annual greenhouse beyond emitters to other sectors where climate emissions1. change equally poses a financial risk.

The engagement objectives include curbing Proactive voting on climate risks: Where we emissions, strengthening climate-related financial have concerns that companies are not responding disclosures and improving governance on climate adequately to climate-related issues and engagement change risks. These align with the recommendations is not progressing, we will use our voting rights, of the Task Force on Climate-related Financial beyond shareholder resolutions to vote against a Disclosures (TCFD). This builds on work we currently range of resolutions including the annual report and do with the Institutional Investors Group on Climate accounts, director elections and remuneration. Change (IIGCC) where we are leading engagement with companies in the utility and automotive sectors. Board diversity: We strongly believe that the ability of a board to adequately conduct its oversight TCFD engagement: The Task Force on Climate- responsibilities depends on it having the right mix related Financial Disclosures (TCFD) has developed of directors with relevant skills, backgrounds voluntary, consistent climate-related financial risk and experience. This naturally points to the

1 ClimateAction100.org and CDP data

60 RI ANNUAL REPORT 2017/18 important benefits that diversity can have on the long-term success of companies. We have been engaging with boards to promote Stewardship: diversity, both at the leadership level and throughout Engagement - Schneider Electric the company. Discussing diversity is now a standard agenda item and the tone regarding diversity issues,  Gender Diversity: 42% female at board level; 21% at executive committee particularly in terms of gender representation at board  International Diversity: 64% of executive committee is based outside Europe level, is very positive.  Signatory to the Women Empowerment Principles  84% of employees work in countries that apply the Schneider Gender Pay Equity Plan While we will continue to push for diversity at board level, we understand that gender diversity should also include internal progression within companies to combat the hourglass effect. This is where there is a broad gender balance at the bottom of an Stewardship: organisation but decreases up the hierarchy of senior Voting - Alphabet Inc management, before improving again at board level – but only in response to shareholder engagement or AXA IM’s standard policy supports shareholder resolutions promoting gender regulatory changes. at board and executive levels, seeking improved disclosure on gender pay equity and diversity in general. A further evolution of our policy on diversity is to use our voting rights to push for increased gender In line with this policy we supported shareholder resolution at Alphabet, asking the diversity at board level. During 2017 we voted in company to prepare a report detailing the policies and goals to reduce the gender pay support of shareholder resolutions seeking increased gap. We supported this resolution as Alphabet is starting to lag behind its peers on this representation of women on boards and better key issue. Many technology companies, including Amazon, Apple and Microsoft, have disclosure on gender pay gaps, and the board strategy either disclosed their wage gap and/or committed to address gender pay issues. for closing such gaps. The resolution was supported by 13% of voting shares.

61 RI ANNUAL REPORT 2017/18 MONITORING RISK AND ACTIVE STEWARDSHIP

Board nomination process: There is broad support across different markets for the elimination of the practice where director elections are bundled into one resolution. This results in an ‘all or nothing’ voting option on the board and deprives shareholders of ICA Gruppen the ability to cast their vote on the performance of individual directors. Over the past three years we have ……Therefore, we again urge you to consider proposing individual been working with a group of international investors director elections and individual vote count as a standard practice to engage with Swedish companies to unbundle the at the earliest opportunity. Further in this letter we reiterate our director election process. Of the 40 companies initially concerns about bundled director elections and the importance of targeted in 2015, close to half have now adopted the individual elections and vote count for global institutional investors... practice of individual elections. We are continuing our engagement with the remaining companies. Extract from AXA IM’s letter dated November 2017

UN Global Compact/ Reputation risk We have a long-standing engagement programme targeting companies whose policies and practices are demonstrably in breach of the principles of the UN Global Compact, and where the company has not taken action to correct the breach. Vedanta - Safety

Vedanta is one company we have been engaging During the latest reporting year, Vedanta’s record on safety and with regarding its safety record and the impact of its fatalities continued to build positive momentum with a 65% reduction activities on the environment and local communities. in fatalities compared with 2014, when our engagement programme Our dialogue has moved in a positive direction following began. In addition, the company continues to show a declining Lost changes made during the tenure of former CEO, Time Injury Frequency Rate (LTIFR) – an important indicator of good Tom Albanese. Our focus has shifted to ensuring that safety practices in the mining industry. The company had the best year positive developments on key sustainability issues are so far in terms of its overall safety performance. embedded within the culture, operations and practices of the company.

62 RI ANNUAL REPORT 2017/18 Remuneration Executive remuneration is a subject of ever increasing attention and it has moved from a sole focus on aligning executive rewards with share price performance. Now there is more of a focus on how the Persimmon - Remuneration trajectory of executive remuneration aligns with the general workforce and social expectations around pay. ……. we voted against the resolution on behalf of our clients. Our voting position was informed by our house view that the long- Many markets now require disclosures of pay ratios term incentive plan (LTIP) does not incentivise management to between top executives and the rest of the workforce create additional value for shareholders but is designed to reward and this has broadened to social issues such as management for distributing existing shareholder value. gender pay gap reporting. For example, in 2017 the UK Government introduced legislation requiring all Extract from AXA IM’s letter dated February 2013 employers with 250 or more employees to publish information on the gender pay gap within their organisation.

We have focused on these issues for a long time and recent events reinforce our view that board decisions around remuneration have long-term consequences which may not be apparent until several years later. UK housebuilder, Persimmon recently made headlines for excessive executive pay based on a long-term share plan, which was initiated in 2013. The chief executive is due to receive £131 million, which AXA IM opposed when the plan was proposed. We were one of the few institutional investors to do so.

63 RI ANNUAL REPORT 2017/18 MONITORING RISK AND ACTIVE STEWARDSHIP

Voting Global voting statistics

Voting at company meetings is an important During 2017, we exercised our clients’ voting rights part of the dialogue between a company and its globally in line with our investment footprint. shareholders. As asset managers it is a fundamental aspect of our fiduciary duty to our clients. We do not vote in markets that still require investors to block shares or have imposed onerous administrative Our corporate governance and voting policy provides requirements on the exercise of voting rights. a robust framework for instilling proper governance in the companies in which we invest and forms the basis of our global voting activities. It is based on principles of good corporate governance which serve to protect the long-term interests of shareholders.

Global and local guidelines We voted at representing In addition to our global policy, we have voting guidelines for specific markets, recognising that 5,814 98% practices vary between jurisdictions and the general of general meetings held by companies in which we invest are subject to different meetings companies in our investment local laws and regulations on governance matters. universe When reviewing resolutions proposed at general meetings we judge them against fundamental principles of good corporate governance, while taking account of best practice standards pertinent to the relevant market and the company’s particular circumstances. We voted on 56,968 proposed company resolutions

64 RI ANNUAL REPORT 2017/18 Votes against management Global votes against management

2%2%1% We did not fully support management at 3% 3% general meetings, 5% 28% 2,275 or 7% of relevant 40% general meetings 9%

We voted against or abstained on 15% 25% 5,575 resolutions, or

Board Issues ESG Opportunities & Risks of resolutions voted. 9% Remuneration Related Party Transactions Capital Issues Other This level of dissension underlines our Accounts & Auditors Anti-takeover Provisions commitment ensuring that votes are cast Articles of Association General Meeting Formalities to promote our clients’ long-term interests. Business Reorganisation/M&A

Source: AXA IM, as at 31 December 2017

65 RI ANNUAL REPORT 2017/18 MONITORING RISK AND ACTIVE STEWARDSHIP

The breakdown of our dissenting vote shows that as investors we continue to focus on:

Board structure Remuneration Pre-emption rights How companies are led to How executives are incentivised Any potential dilution of our deliver shareholder value to deliver shareholder value clients economic interests

Shareholder interests Environmental and social oversight Our clients rights and interests Environmental and social issues in companies impacting on companies

Our levels of dissent and rationale for not supporting the Board differed from region to region, given that markets are at different stages of development on corporate governance issues, in particular, shareholder rights.

66 RI ANNUAL REPORT 2017/18 Regional breakdown of votes against management

1% 2% 2% 1% 3% 1% 2% 1% 4% 3% 3% 4% 6% 7% 26% 4% 7% 6% 7%

42% 11% 44% 16% 13% 24% 26% 14% 20%

1% 3% 1% 1% 1% 13% 6% Board Issues ESG Opportunities & Risks 7% Remuneration Related Party Transactions Capital Issues Other 14% 47% Accounts & Auditors Anti-takeover Provisions 54% Articles of Association General Meeting Formalities 28% Business Reorganisation/M&A Dividend Payout 24%

Source: AXA IM, as at 31 December 2017

RI67 ANNUAL RI REPORTANNUAL 2017/18REPORT 2017/18 67 SCORECARD

PRI AXA IM has been a signatory to the Principles for Responsible Investment since 2007. Each year, AXA IM’s Responsible Investment Transparency Report is disclosed on the Scorecard 2017 PRI website. The table below presents an overview of AXA IM’s 2017 PRI Assessment scores for each module, our score for our overarching approach to RI is A+.

AUM (%) MODULE E D C B A A+ OVERARCHING APPROACH TO RESPONSIBLE INVESTMENT AXA IM scored A+ Strategy & Governance Median Score A DIRECT & ACTIVE OWNERSHIP MODULES AXA IM scored A+ 10-50% Listed Equity - Incorporation Median Score A

AXA IM scored A+ 10-50% Listed Equity - Active Ownership Median Score B

AXA IM scored A+ 10-50% Fixed Income - SSA Median Score B

AXA IM scored A+ 10-50% Fixed Income - Corporate Financial Median Score B

AXA IM scored A <10% Property Median Score B

68 RI ANNUAL REPORT 2017/18 GLOSSARY

2°C Scenario 2015. The conference negotiated the Paris Agreement, a An internationally agreed threshold to limit the rise in global landmark global treaty on the reduction of climate change. temperatures to below 2°C from pre-industrial levels. The treaty lays out a framework to limit global warming to less than 2°C compared to pre-industrial levels. COP22 was Glossary 30% Club held in Marrakech, November 2016. COP23 was held in Bonn, Campaign launched in the UK in 2010 with the goal of Germany in November 2017. achieving a minimum of 30% women on FTSE 100 boards. Corporate governance BREEAM The system of rules, practices and processes by which a An international scheme that provides independent third party company is directed and controlled. certification of the assessment of the sustainability performance of individual buildings, communities and infrastructure projects. Corporate Social Responsibility (CSR) Corporate responsibility involves the search for an effective ‘fit’ Carbon footprint between businesses and the societies in which they operate. The amount of carbon dioxide released into the atmosphere as ‘Corporate responsibility’ refers to the actions taken by a result of the activities of a particular organisation, most often businesses to nurture and enhance this symbiotic relationship. expressed as tonnes of CO2 emission per USD million of revenues. Divestment Climate Bond Initiative Refers to the sale of stocks, bonds or investments that conflict An investor-focused, not-for-profit organisation that works to or are not aligned with specific ESG objectives, values or mobilise bond markets for climate change solutions. The aim convictions. is to reduce the cost of capital for climate-related investments by developing a large and liquid market, while providing EDGE certification tool trusted standards and certification. Designed to help organisations assess the level of diversity within their operations. EDGE certification is an assessment Collaborative engagement/initiatives methodology and business certification standard for gender Where a group of investors band together to use their equality. collective influence to bring about change. Enabling technology Conference of the Parties (COP): COP21, COP22, COP23 Innovative technological developments that promote A UN conference on climate change that is held annually. inclusion for the broad population. Enabling technologies are The 21st conference (COP 21) was held in Paris in December characterised by rapid development of subsequent derivative

69 RI ANNUAL REPORT 2017/18 technologies, often in diverse fields and have the potential • The European Insurance and Occupational Pensions Authority to generate giants leaps in performance and capabilities of (EIOPA) the user. Extra-financial Energy Transition Law (French) – Article 173 Elements of a company’s behaviour that may not be immediately The first of its kind in Europe, France’s Energy Transition apparent solely from an analysis of its financial data. Often ESG Law was passed in August 2015 and came into full effect in themes are associated with extra-financial factors. June 2017. With this law France provided a clear signal to institutional investors, encouraging them to become truly Fiduciary duty engaged on the subject of RI and to start to consider how to Fiduciary duties (or equivalent obligations) exist to ensure that better integrate ESG factors into their investments. The law those who manage other people’s money act in the interests of reinforces the role of institutional investors in financing the beneficiaries, rather than serving their own interests. The most transition towards a low-carbon economy and requires more important of these duties are: awareness of long-term issues in investment decisions. Loyalty: Fiduciaries should act in good faith in the interests of Engagement their beneficiaries, should impartially balance the conflicting The practice of shareholders entering into dialogue with interests of the different beneficiaries, should avoid conflicts of management of companies to change or influence the way in interest and should not act for the benefit of themselves or a which that company is run. third party.

ESG Prudence: Fiduciaries should act with due care, skill and Environmental, Social and Governance issues that constitute diligence, investing as an ‘ordinary prudent person’ would do. the three pillars of Responsible Investments. E, S, and G are the three central factors in measuring the sustainability Source: Fiduciary Duty in the 21st Century, United Nations qualities of an investment. Global Compact, UNEP FI, PRI and Inquiry, September 2015.

European Supervisory Authorities (ESAs) Financial inclusion These form part of the European system of financial Ensuring individuals and businesses have access to useful supervision. There are three European Supervisory and affordable financial products and services that meet their Authorities: needs – transactions, payments, savings, credit and insurance – • The European Banking Authority (EBA) delivered in a responsible and sustainable way. • The European Securities and Markets Authority (ESMA)

70 RI ANNUAL REPORT 2017/18 GLOSSARY

Financial Stability Board (FSB) Greenhouse Gas (GHG) An international body that monitors and makes Any of various gaseous compounds (such as carbon dioxide) recommendations about the global financial system. It was that absorb infrared radiation, trap heat in the atmosphere, established after the 2009 G20 London summit as a successor and contribute to the ‘Greenhouse Effect’. to the Financial Stability Forum. GRESB US Food and Drug Administration’s (FDA) Priority Review An industry-driven organisation that assesses the Voucher Program sustainability performance of real estate and infrastructure Established to motivate more treatments for neglected and portfolios and assets. rare diseases and speed the approval of potential therapies. A developer of a treatment for a neglected or orphan disease Institutional Investor Group on Climate Change (IIGCC) receives a voucher for priority review from the FDA to be used A collaborative platform to encourage public policies, with a product of its choice or sold to another developer. investment practices, and corporate behaviour that address long-term risks and opportunities associated with climate Global Climate 100+ change. A major five-year initiative to target and engage with the top 100 of the largest greenhouse gas emitters. High-Level Expert Group (HLEG) on sustainable finance Set up by the European Commission to develop an Global Impact Investing Network (GIIN) overarching and comprehensive EU strategy on sustainable A non-profit organisation dedicated to increasing the scale finance as part of the Capital Markets Union. and effectiveness of impact investing. In particular, it works to develop the role of impact investing by building a strong HQE network of investors and leaders. The French certification awarded to building construction and management as well as urban planning projects. Green bond A bond that is issued to raise capital for the development of Impact investing environmentally friendly projects or assets. Impact investing focuses on financing businesses and projects that are designed to have intentional, positive Green washing and measurable impacts on society while simultaneously When a company, government or other group make delivering financial market returns. As the social impact an unsubstantiated or misleading claim about the is fully embedded into the business model, there need environmental benefits of a fund or financial instrument. not be an inherent trade-off between impact returns and

71 RI ANNUAL REPORT 2017/18 financial returns. Impact investing harnesses the power of Low-carbon economy capital towards solving ‘real issues’ facing society. It is about An economy based on low-carbon power sources with steering the power of capital towards ‘greater utility’. minimal carbon emissions into the environment. It makes reference to a world where the temperature increase is International Energy Agency (IEA) contained below 2°C or 1.5°C. The International Energy Agency is a Paris-based autonomous inter-governmental organisation that was ESG mainstreaming established in the wake of the 1973 oil crisis. Today, the IEA The incorporation of ESG factors and analysis into investment acts as a policy adviser to nations in the fields of energy decisions. security, economic development, and environmental protection. Minergie A registered quality label for new and refurbished low-energy Key Performance Indicator (KPI) consumption buildings. The label is mutually supported A measurable value that demonstrates how effectively a by the Swiss Confederation, the Swiss Canton and the company is achieving its ESG and impact objectives. Principality of Liechtenstein along with trade and industry.

LEED OID (Observatoire de l’Immobilier Durable) Leadership in Energy and Environmental Design is a An independent association that promotes sustainable ratings system devised by the US Green Building Council to development and innovation in real estate by bringing together evaluate the environmental performance of a building. LEED professionals from the public and private sector in France. certification is a globally recognised symbol of sustainability achievement. Principles for Responsible Investment (PRI) The UN-supported Principles for Responsible Investment Listed impact (PRI) initiative was launched in 2006. The world’s leading An impact investment strategy implemented through listed proponent of responsible investment, the PRI is an equity or bond markets. Impact investing requires two independent organisation bringing together and supporting objectives to be met simultaneously: Creation of intentional, an international network of investors to put the six Principles positive and measureable social impact, as well as financial for Responsible Investment into practice. returns. The traditional area for impact investing has been in alternatives. To maintain integrity, listed impact solutions The six principles are to: should have robust controls in place to measure and report • incorporate ESG issues into investment analysis and both social impact and financial returns. decision-making processes

72 RI ANNUAL REPORT 2017/18 GLOSSARY

• be active owners and incorporate ESG issues into ownership United Nations Development Programme (UNDP) policies and practices UNDP is the United Nations’ global development programme. • seek appropriate disclosure on ESG issues from invested entities It works across 170 countries and territories, helping to • promote acceptance and implementation of the Principles achieve the eradication of poverty, and the reduction of within the investment industry inequalities and exclusion. • to enhance effectiveness in implementing the Principles • report on activities and progress towards implementing the United Nations Environment Programme (UNEP) Principles. UNEP was set up in 1972 as an agency of the United Nations to assist developing countries in implementing AXA IM was an early signatory to the PRI - in 2007. environmentally sound policies and practices. Today, UNEP is the leading global environmental authority, setting the global RSPO Standards environmental agenda within the United Nations system. The Roundtable on Sustainable Palm Oil has established a global standard for sustainable palm oil production. RSPO UN Global Compact certification is an assurance to buyers of palm oil products An initiative to encourage businesses worldwide to adopt that the standard of production is sustainable. sustainable and socially responsible policies and report on their implementation. Stranded assets Assets that are rendered worthless or devalued due to issues The UN Global Compact supports companies to: such as climate, regulatory or market change. 1. Do business responsibly by aligning their strategies and operations with Ten Principles on human rights, labour, Task Force on Climate-related Financial Disclosure (TCFD) environment and anti-corruption; and Set up to develop voluntary, consistent climate-related financial 2. Take strategic actions to advance broader societal goals, risk disclosures for use by companies in providing information to such as the UN Sustainable Development Goals, with an investors, lenders, insurers, and other stakeholders. emphasis on collaboration and innovation.

UN 2030 Agenda for Sustainable Development UN Environmental Programme Finance Initiative An agenda made up of 17 Sustainable Development Goals (UNEP FI) adopted by world leaders in 2015. The Goals encourage An initiative led by the UN that seeks to encourage the countries to establish national frameworks to end all forms implementation of sustainability principles in financial of poverty, fight inequalities and tackle climate change. Each institutions through the incorporation of ESG factors in risk goal has specific targets to be achieved over the next 15 years. analyses.

73 RI ANNUAL REPORT 2017/18 UN Guiding Principles (UNGP) on Business and Human Rights A global standard for preventing and addressing the risk of adverse impacts on human rights linked to business activity. The UNGPs encompass three pillars outlining how states and businesses should implement the framework: • The state duty to protect human rights • The corporate responsibility to respect human rights • Access to remedy for victims of business-related abuses

UN Sustainable Development Goals A collection of 17 global goals set out by the UN, which form part of the 2030 Agenda for Sustainable Development. They cover a broad range of social and economic development issues. They have been agreed by world leaders and aim to mobilise efforts to end poverty, fight inequality and protect and preserve the natural environment.

Urban Land Institute A global non-profit organisation with a mission to provide leadership in the responsible use of land and in creating and sustaining thriving communities worldwide.

Women in Finance Charter Established by the UK government’s Treasury department, it pledges to build a more balanced representation of women across the finance industry.

74 RI ANNUAL REPORT 2017/18 Not for Retail distribution: This document is intended exclusively for Professional, Institutional, Qualified or Wholesale Clients / Investors only, as defined by applicable local laws and regulation. Circulation must be restricted accordingly. 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. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent. Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 7 Newgate Street, London EC1A 7NX. In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries. © AXA Investment Managers 2018 Design & Production : Internal Design Agency (IDA) | 03/2018 | 27-09957 | Photo Credit: Gettyimages

axa-im.com