AXA Hong Kong is carefully monitoring the social impact of the allocation changes it makes as it aims to reduce its carbon footprint by 20% come 2025.
As global economy recovers from the Covid pandemic, the Hong Kong life insurer is cautious of a rebound of carbon emissions in its portfolio and is preparing itself for more aggressive allocation adjustments if needed, its chief investment officer Richard Chan told AsianInvestor in an exclusive interview.
The company, which manages $25 billion of assets at end of March 2022, has the same carbon reduction target as its parent AXA Group, which is to reduce the carbon footprint of its general account assets by 20% between 2019 and 2025.
This is in line with the targets set by the Net-Zero Asset Owner Alliance, whose members have committed to transitioning their investment portfolios to net-zero emission by 2050.
To achieve the target, Chan relies on an investment strategy that has both organic and inorganic elements.
“Organic means whenever we have new money or coupon of maturities, we can bias towards the best (asset) within the sector. So, we try not to have a skewed distribution by sectors, but instead within each sector, we try to invest in the best among available companies,” he said.
“But at the same time, due to asset-liability management or accounting reasons, from time to time, we will rebalance our investment portfolio. For example, we may want to - purely for duration gap management - sell some short-dated bonds and invest in long-dated bonds. So, we also take the opportunity of those rebalancing to increase the green assets and reduce carbon footprint in our portfolio,” he said.
As of the end of 2021, the Hong Kong portfolio has been slightly ahead of the linear reduction target set out each year. “I really believe we will reach or outperform the 20% target before 2025,” he said.
SOCIAL IMPACT MATTERS
But the life insurer will not simply reduce exposure for the sake of meeting the target, hence it will not scale up allocation to green sectors all at once.
“We can in theory sell (shares of) some manufacturers and then invest into other equity sectors. But we don't want to do that,” Chan said. There could be some companies that are carbon-intensive but still make sense for social development, for example, mining companies or equipment manufacturers that support the renewable energy sector, he noted.
On the other hand, electric cars, which are generally seen as environmentally friendly, are operated by batteries whose manufacturing processes produce pollution.
“So, we keep discussing on that and we are trying to reduce carbon in the sense, without unintended social impact,” he said.
The company also actively invests in projects with different ESG (environmental, social, and governance) benefits. It acquired approximately 24,000 hectares of Australian woodland and an associated forestry management business through AXA Investment Managers, its asset management arm, last July.
Many investors face a major challenge in gathering and tracking reliable ESG data, such as carbon footprint.
AXA Hong Kong, which has its headquarters in France, taps on the group’s centrally developed and managed investment reporting database to keep track of its portfolio's exposure almost in real-time.
Chan relies on the database to check the carbon footprint of the portfolio and surveys the different sectors for ESG-friendly opportunities. Thanks to the database, his team of 14 is able to keep track of the portfolio's ESG performance in addition to overseeing strategic asset allocation, managers oversight, and hedging overlay activities.
AXA Hong Kong is concerned that there will be a rise in carbon emissions from increased economic activities in the post-pandemic recovery. “We are very cautious if there will be any rebound (of carbon emissions),” he said, adding the company will adopt more aggressive and proactive measures to manage that situation.
About 80% of AXA Hong Kong’s $25 billion assets are managed by in-house managers from AXA IM - a good arrangement for both parties in terms of having a common understanding of ESG targets and investment processes, he said.
Chan’s team is mostly responsible for engaging with external managers on the remaining 20% of assets, most of which are in alternative assets, such as private equity and real estate.
“It is difficult in the sense that usually we invest through a fund, which is different from a mandate. We cannot just jump in and change the investment criteria. So that means the initial due diligence is the most important part,” he said.
“We need to make sure we are dealing with general partners that we know for a long time, and they also have very strong ESG standards, and we also look at the investment and make sure the investment itself makes sense from an ESG perspective,” he stressed.
While greenwashing remains a challenge for all asset owners, especially in Asia with its fewer standards and regulations, Chan takes a conservative view in defining green assets held by the company.
He does not consider the listed equity investments as green assets, as “most companies, no matter how good they are, they are not 100% doing green activities”.
In the case of real estate, he would only regard buildings with well-defined, third-party labels as green buildings. As for credit, the company relies mainly on green labels defined by Bloomberg. Green assets include only green bonds but not social bonds, sustainable bonds, and sustainability-linked bonds, he said.
Green assets aside, AXA Hong Kong will invest in various ESG-friendly assets and transitional projects so long as they bring positive outcomes to the environment and society, he added.