Public Policy: Supporting the development of robust and usable policies to facilitate the transition to a more sustainable world

At AXA IM we adhere to the principles, standards and codes which govern policies and practices in the markets where we are active, while recognising the challenges that diverging approaches to ESG can create in terms of understanding and implementation. We strive to give transparency on our approaches and the footprint of our investments and have aimed to do so for several years.

The past years have marked a step change for the financial industry in many of the countries and regions where we operate, as major sustainable finance policies have entered into force. These have had material impacts on financial institutions in terms of disclosures, as well as product design, for instance the EU Sustainable Finance Disclosure Regulation. The new regulations have also resulted in new disclosure requirements for corporates, for instance with the introduction of the EU Taxonomy, a classification system that defines criteria for economic activities that are aligned with a net zero trajectory by 2050 and broader environmental goals other than climate. 

The EU Taxonomy, which has inspired the development of similar initiatives in many other  geographies, is at the heart of the EU Green Deal. The Green Deal will be completed from 2024 by the EU Corporate Sustainability Reporting Directive (CSRD), which requires all large companies and all listed companies to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment, while other geographies may rely on the standards developed by the International Sustainability Standards Board¹ , a baseline of sustainability disclosures focused on the needs of investors and financial markets.

This wave of new regulations continues to present challenges in terms of implementation, some due to usability issues in the regulations themselves. Other simply reflect the fact that these regulations are aimed at transforming the way the financial sector but also the real economy operates to ensure they support the transition to a Paris Agreement-aligned world – requiring structural changes to happen across the value chain. Ultimately, we are convinced the long-term goals of many of those regulations are aligned with AXA IM’s net zero commitment and can help facilitate the allocation of capital to support decarbonisation of high-impact sectors as well as innovation in the sustainable solutions necessary for the transition to happen – which shapes our policy views.

We have started to see illustrations of this virtuous circle and consider that the EU Taxonomy, the CSRD and the EU Corporate Sustainability Due Diligence Directive (CSDDD) have the potential to help us to implement our net zero targets more effectively as highlighted in the EU Platform on sustainable Finance Compendium of Market Practices which AXA IM contributed to as member and corapporteur
for the platform’s sub-group on Usability and Data. 

We also recognise that usability issues and the sequencing of regulations and guidance have led to significant costs and difficulties for investors in interpretating and implementing the legislation. We therefore consider that usability issues will need to be addressed quickly and in an orderly manner, bearing in mind the inter-operability challenges faced by global, diversified investors. We also believe that they should be accompanied by the appropriate real economy policies to enable an effective real-world transition towards more sustainable practices, consistent with the goals of the Paris 
Agreement. 

With a few years since the introduction  of the Sustainable Finance Disclosure Regulation (SFDR) and Taxonomy, users across the value chain have gained an enhanced, shared understanding of the key expectations but also challenges to be addressed to make the framework more usable. They have been able to share their views as several consultations were issued throughout the year. We contributed to these discussions through different channels, participating in technical working groups such as the EU Platform on Sustainable Finance, engaging directly with policymakers or jointly with peers as part of industry working groups such as the IIGCC Policy Advisory Group, the PRI Global Policy Reference Group, or the EFAMA ESG and Stewardship Committee. Our advocacy efforts in 2023 have focused notably on the following² :

Addressing the current shortcomings of SFDR within the European sustainable finance ecosystem. While we support overarching objective of providing increased transparency and comparability to our clients, several of the SFDR’s key concepts have remained too vague, in our view. These include the definition of what a sustainable investment is, resulting in uneven implementation across the market. We would also see benefits in the development of a complementary categorisation regime with clearer minimum criteria which could be based on metrics including some of the SFDR Principal Adverse Impacts and the EU Taxonomy, for example – provided the usability of those metrics continues to be improved (e.g. clarification of calculation formulae, use of estimates for non-EU companies, etc.). We believe this could address the needs of some of our clients and help facilitate the channeling of flows towards transition and sustainable investments to fund the current investment gap to reach EU net zero goals. 

We also encourage further simplification and proportionality in the disclosure templates, acknowledging that SFDR templates are complex to prepare, and to understand, and may have not had the intended effect in terms of facilitating end-investors’ understanding. Finally, we believe it will be essential to ensure an effective articulation between any revision made to the SFDR and the new sustainability preferences framework introduced in the EU’s Markets in Financial Instruments (MiF) regulation in August 2022. 

Our advocacy efforts on SFDR have taken place within the EU Platform on Sustainable Finance, as well as within various industry groups in public consultations on the revision of the Regulatory Technical Standards, and the revision of the Level 1 regulation. There have also been individual engagements with the French Treasury and selected local supervisory authorities.

In the UK, we also contributed to industry groups on the Sustainability Disclosure Requirements (SDR) and engaged directly with policymakers on this regulation, sharing our experience at EU level. We welcome the introduction of clearer rules in the UK. 

Another priority relates to the promotion of a regulatory environment which does not impede, and even supports shareholder engagement and voting in having an effective impact on investee companies’ governance and sustainability strategies. When it comes to voting, at EU level some progress was achieved with the revision of the Shareholders Rights Directive II (SRD II) in 2020, including with regards to voting transparency and votes on executive pay. However, investors have continued to face technical obstacles in exercising voting rights. We highlighted them in our contribution, individually as well as through several industry groups, to a call for evidence on the implementation of SRD II provisions from the European Securities and Markets Authority in 2022.

We continued to express those concerns in 2023, contributing again to the responses, individually as well as through several industry groups to the European Commission’s SRD II Impact Assessment study conducted to highlight key priorities to consider in the revision of the regulation. Another regulation we focused our efforts on in 2023 was the revision of the Listing Act, which in our view introduces a risk of dilution resulting from dual class shares, which could undermine the level of board accountability towards the concerns raised by minority shareholders. On a similar topic, we provided via one of our UK industry associations our concerns in relation to the FCA Consultation Paper on Primary Markets Effectiveness. We also responded to the consultation from the Vote Reporting Group on shareholder voting and vote transparency, calling for higher quality reporting while making recommendations to alleviate the reporting burden, among other things. Turning to shareholder engagement, to effectively support change within investee companies we believe robust stewardship policies and frameworks are essential. We have welcomed an increasing understanding from clients and certain regulators of the importance of quality of dialogue as a lever of change beyond, or even above, quantity.

At EU level, guidance arising from SRD II is lighter, as the regulation states that investors are expected to have an engagement policy in place at entity level, with implementation remaining largely voluntary at this stage. There is no EU-level guidance similar to the UK Stewardship Code either at this stage. While many large EU asset managers as AXA IM are signatories to the UK Stewardship Code which has contributed to reinforcing their shareholder engagement policies, practices and disclosures, we believe further guidance at EU level, including a common definition and understanding of reporting that is practicable and effectively supports stewardship understanding on all sides would be beneficial. We will aim to further convey this stance in 2024.

On corporate governance more broadly, we also provided our comments to the FRC as part of its public consultation on the updates to the UK Corporate Governance Code, welcoming further outcome-based reporting, as well as recommending increased transparency on climate governance at board level and stressing the importance of challenging ESG KPIs in executive pay.

We continue to advocate for issuers to adopt the best governance and sustainability-related policies and practices through our involvement in the Global Governance Policy Committee of the International Corporate Governance Network. This resulted in the publication of viewpoints dedicated to virtual general meetings and board governance of sustainability, as well as a statement highlighting investors’ concerns over announcements in the UK which may be detrimental to corporate governance standards and shareholder protections, potentially undermining the UK’s economic growth and attractiveness as a global financial center. 

We have continued to advocate for relevant and comparable sustainability related information to become available for a broader scope of issuers. This data is absolutely crucial to allow investment teams to embed ESG into their decisions in a robust manner, and to enable us to provide meaningful, comprehensive reporting to clients and regulators – thus satisfying new disclosure requirements at fund and entity level in the EU and beyond. In particular, we called for a double-materiality lens – looking at the impact ESG factors may have on financial performance, but also at the impact investments may have on the environment and the planet. This reflects our role as responsible investors, and our wish for a better convergence at a global level, building where possible on existing and viable standards. In 2023 our advocacy efforts have in particular focused on highlighting the need for ESG data distributed by data providers to be sufficiently robust, consistent, and reliable.

As we enter 2024, we will closely monitor the impact upcoming elections, including in the US and EU, could have on the policy landscape. When it comes to sustainable finance and real economy policies, we acknowledge that a more proportionate and targeted approach may be beneficial on a few targeted issues, based on lessons learnt from the first years of implementation. For example, sustainability disclosures with fund level disclosures adapted to the fund objectives. Beyond this, momentum must be maintained on the EU Green Deal, and on similar policies at a global level which look at sustainable finance and real economy in a complementary manner. This is important if investors are to be able to achieve their net zero commitments, and also implement the regulatory requirements which apply to them.

Against a backdrop made more complex by upcoming elections, there remains a need for takeholders to come together and regroup to find robust and workable solutions, from asset managers to corporates, auditors and consultants, policymakers and supervisors. This is essential if the EU is to achieve its 2040 climate targets, and for the asset management industry to continue to successfully implement net zero commitments. 

We hope to see further momentum on the real economy policy side, while acknowledging the impact and influence of macroeconomic events. We aim to continue to engage with our investor base, providing educational content on those important and evolving policies, to encourage an understanding of how these may change our way of working and change the nature of portfolio investments. 

We adopt a selective approach when deciding which initiatives we will participate in or support, focusing on topics and groups where we believe our involvement will have a material impact. Impact can often be greater by joining forces with other investors and stakeholders. Our public policy engagement is achieved through direct engagement with policymakers and regulatory authorities, participation in industry working groups, and responses to consultations.