Architas has developed a global responsible investment policy which outlines our approach to the integration of sustainability risks in investment decision-making. In accordance with the SFDR, these sustainability risks include environmental, social or governance events or conditions that, if they occur, could cause an actual or a potential material negative impact on the value of our investments.
As a multi-manager, we invest mainly in funds (through fund-of-funds structures) and marginally through direct investments in securities. In our [fund-of-funds business], sustainability risks are integrated in our investment decision-making process through the selection of the managers who will invest on our behalf through various fund vehicles.
When selecting funds in which to invest, our priority with regards to integrating sustainability risks in our investment decision-making is to ensure that the managers of these funds have the appropriate resources and expertise that enable them to identify financially material sustainability risks. We do this through a process called “ESG due diligence”, which has been embedded in our investment due diligence processes for all new investment decisions since June 2020 and will cover all investments held before that date on a legacy basis by the end of 2021. The objective of our ESG due diligence process is to perform a qualitative ESG assessment of underlying funds by adding a dedicated questionnaire in the request for information (RFI) process, followed by face- to-face due diligence meeting(s), to cover inter alia: ESG policy and governance, integration in investment decision process, engagement and voting, monitoring and reporting. Using collected information, the sector analysts will form a view on the robustness of the ESG process (including peer comparison) and present findings back to the investment team. Our ESG function is responsible for maintaining a qualitative scoring system with a minimum threshold, under which the fund is flagged for further review; this could result in removal from approved buy lists.
Architas’ responsible investment policy can be found here:
What responsible investing means to us (pdf)
Architas as a member of the AXA Group is subject to the AXA Group Responsible Investment Policy (“the Policy”) and in certain circumstances contractually obliges investment managers acting as a delegate of Architas to adhere to the Policy. The Policy is not applied to Funds that are structured as funds-of-funds or funds that track an index, due to the nature and structure of those Funds. Details of all Funds to which the Policy applies are disclosed in the relevant Supplement.
The Policy has identified specific issuers in the following sectors the securities of which are excluded as potential investments of the funds/mandates:
The most current sector guidelines are available on the AXA Group Responsible Investment website
https://www.axa.com/en/page/responsible-investment
Architas does not currently consistently consider the adverse impacts of all investment decisions on sustainability factors (i.e., environmental, social and employee matters, respect for human rights, anti-corruption and anti-bribery matters) as part of its due diligence policies for investments. This is because Architas has not been able to go to the granular level of evaluating adverse impacts due to the current difficulty in obtaining reliable data and the indirect nature of some its investments leading to difficulty in obtaining underlying data.
One of the challenges faced by financial market participants when integrating sustainability risks or Principal Adverse Impacts (“PAI”) in their investment process is the limited availability of relevant data for that purpose: such data is not yet systematically disclosed by issuers or, when disclosed by issuers, may be incomplete or may follow various methodologies. Most of the information used to establish the exclusion lists or determine ESG factors is based on historical data, which may not be complete or accurate or may not fully reflect the future ESG performance or risks of the investments.
Architas, however, intends to consider adverse impacts at an overarching level. In addition Architas is considering making adjustments to our investment processes to consider adverse impacts consistently and at a granular level as part of all of our due diligence policies within the next 24 months, with the anticipated increase in the availability of reliable data.
Architas encourages fund managers engaged by it or the managers of funds invested in to engage with portfolio companies and vote on ESG issues on behalf of the funds in which we invest. During our due diligence process, we may also examine the fund managers’ ability and commitment to vote on ESG issues.
Due to the types of funds managed by AMMEL (multi manager funds and fund of funds) it has not published an Engagement Policy. It has made the required disclosures under the Shareholders Rights Directive here:
With Corporate Responsibility criteria already incorporated in the performance conditions of the AXA LTI (weighting for 10%*), the Remuneration Policy is consistent with the integration of ‘sustainability risks’, within the meaning of, and as required by Regulation (EU) 2019/2088 of November 27, 2019, as amended. This criteria is based on a target on AXA’s score on Dow Jones Sustainability Index (assessing Environmental, Social and Governance dimensions). Targets and calibration of all financial and non-financial criteria are reviewed annually by the Board of Directors.
*weighting for 30% as of 2021 grant.
In addition, the variable part of the Investment team remuneration, in our European locations, is aligned with the EU regulation on remuneration policies.
It is based on a scorecard where the global funds performance represents 50% of the individual performance.
For 2021 end of year review, an ESG criteria will be added and will represent at least 10% of the total performance.
The Manager’s sustainability risks integration policy
The Manager has designed and implemented a sustainability risks integration policy, which is in line with Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector ("SFDR"). Under SFDR, "sustainability risk" means an environmental, social or governance ("ESG") event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment. The Manager's policy therefore approaches sustainability risks from the perspective that ESG events might cause a material negative impact on the value of the Funds' Investments. Sustainability risks are integrated into investment decisions by including an ESG due diligence process as part of the Manager's investment due diligence process that is applicable to delegate manager selection for manager of manager products, and fund selection for fund-of-funds products [or investment advisory mandates]. This process covers all new investment decisions/ manager selections as of June 2020 and all prior decisions/ selections on a legacy basis by the end of December 2021.
While the Manager cannot remove all sustainability risk from the portfolio of any Fund, the Manager’s ESG due diligence process aims at reducing the tail risk related to sustainability across the Fund’s investments and delivering more stable returns over the long term.
For example a sustainability risk could be a burden to a particular sector such as energy or mining from regulation, with respect to climate change, that is likely to increase the cost of burning fossil fuels and have a knock on effect of reducing demand for those fuels that emit carbon dioxide. The purpose of ESG due diligence in this regard is to ensure that Investment Managers are taking these sorts of sustainability risks into account when selecting issuers to invest in. Those issuers that are more exposed to sustainability risks and are not managing those risks in an appropriate manner are likely to see financial performance negatively impacted, which could result in reduced returns for Unitholders.
The Manager as a member of the AXA Group is subject to the AXA Group Responsible Investment Policy (“the Policy”) and in certain circumstances contractually obliges Investment Manager acting as a delegate of the Manager to adhere to the Policy. The Policy is not applied to Funds that are structured as fund-of-funds or Funds that track an index due to the nature and structure of those Funds. Details of all Funds to which the Policy applies are disclosed in the relevant Supplement.
The Policy has identified specific issuers in the following sectors the securities of which are excluded as potential Investments of the Funds :
The most current sector guidelines are available on the AXA Group Responsible Investment website https://www.axa.com/en/page/responsible-investment
The likely impact of sustainability risks
The Manager has assessed the likely impact of sustainability risks on the returns of the Funds and this section sets out a qualitative summary of those risks. The ability of the Manager to assess the impact of sustainability risks is complex. The assessment of sustainability risks requires subjective judgements and is based on data that is difficult to obtain, incomplete, estimated, out of date or otherwise materially inaccurate. Even when identified, there can be no guarantee that the impact of sustainability risks on the Funds' investments will be correctly assessed.
To the extent that a sustainability risk occurs, or occurs in a manner that is not anticipated, there may be a sudden, material negative impact on the value of an Investment and hence the returns of a Fund. Such negative impact may result in an entire loss of value of the relevant Investment(s) and may have an equivalent negative impact on the returns of a Fund. However due to the diversification within collective investment schemes and furthermore in fund-of-funds structures, the risk of significant loss from a single instrument is diminished in such structures.
The impacts following the occurrence of a sustainability risk may be numerous and vary depending on the specific risk and asset class. In general, where a sustainability risk occurs in respect of an asset, there will be a negative impact on, and may be an entire loss of, its value. For a corporate issuer, this may be because of damage to its reputation with a consequential fall in demand for its products or services, loss of key personnel, exclusion from potential business opportunities, increased costs of doing business and/or increased cost of capital. A corporate issuer may also suffer the impact of fines and other regulatory sanctions. The time and resources of the corporate’s management team may be diverted from furthering its business and be absorbed seeking to deal with the sustainability risk, including changes to business practices and dealing with investigations and litigation. Sustainability risks may also give rise to loss of assets and/or physical loss including damage to real estate and infrastructure. The utility and value of assets held by businesses to which a Fund is exposed may also be adversely impacted by a sustainability risk.
Sustainability risks are relevant as both standalone risks, and also as cross-cutting risks which manifest through many other risk types which are relevant to the assets of a Fund. For example, the occurrence of a sustainability risk can give rise to financial and business risk, including through a negative impact on the credit worthiness of other businesses.
The increasing importance given to sustainability considerations by both businesses and consumers means that the occurrence of a sustainability risk may result in significant reputational damage to affected businesses. The occurrence of a sustainability risk may also give rise to enforcement risk by governments and regulators and litigation risk.
A sustainability risk may arise and impact a specific Investment or may have a broader impact on an economic sector, geographical regions and/or jurisdictions and political regions. Many economic sectors, regions and/or jurisdictions, including those in which a Fund may invest, are currently and/or in the future may be, subject to a general transition to a greener, lower carbon and less polluting economic model. Drivers of this transition include governmental and/or regulatory intervention, evolving consumer preferences and/or the influence of non-governmental organisations and special interest groups.
Laws, regulations and industry norms play a significant role in controlling the impact on sustainability factors of many industries, particularly in respect of environmental and social factors. Any changes in such measures, such as increasingly stringent environmental or health and safety laws, can have a material impact on the operations, costs and profitability of businesses. Furthermore, businesses which are following current measures may suffer claims, penalties and other liabilities in respect of alleged prior failings. Any of the foregoing may result in a material loss in value of an investment linked to such businesses.
Further, certain industries face considerable scrutiny from regulatory authorities, non- governmental organisations and special interest groups in respect of their impact on sustainability factors, such as compliance with minimum wage or living wage requirements and working conditions for personnel in the supply chain. The influence of such authorities, organizations and groups along with the public attention they may bring can cause affected industries to make material changes to their business practices which can increase costs and result in a material negative impact on the profitability of businesses. Such external influence can also materially impact the consumer demand for a business’s products and services which may result in a material loss in value of an investment linked to such businesses.
Sectors, regions, businesses and technologies which are carbon-intensive, higher polluting or otherwise cause a material adverse impact on sustainability factors may suffer from a significant fall in demand and/or obsolescence, resulting in stranded assets the value of which is significantly reduced or entirely lost ahead of their anticipated useful life. Attempts by sectors, regions, businesses and technologies to adapt so as to reduce their impact on sustainability factors may not be successful, may result in significant costs being incurred, and future ongoing profitability may be materially reduced.
In the event that a sustainability risk arises this may cause investors to determine that a particular investment is no longer suitable and to divest of it (or not make an investment in it), further exacerbating the downward pressure on the value of the investment.