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Corporate Bonds assets covered by ESG analysis 95% |
15 AXA GROUP 2019 Climate Report June 2019 2. Strategy. |
Converting international climate objectives (such as those derived from the COP21 Paris Agreement, French or EU energy mix targets) into quantitative investment targets is a new and complex risk modelling exercise. AXA has been testing different approaches since 2016 and it is clear that no tool today enables to conduc... |
Being cognizant that there has yet to be methodological consensus on climate risk and opportunity assessment for the financial sector, AXA has continued to adopt a “test and learn” approach in order to refine our understanding of our exposure to climate-related risks, and how to better contribute to the low-carbon tran... |
Building on previous efforts, in 2018 AXA has decided to deepen its work based on the methodology provided by an external climate risk partner (Carbon Delta, also used in 2017), while also extending its use of internal “NatCat” models to cover a wider spectrum of our Real Assets investments. |
This work covers two broad areas: “transition risk” and “physical risks” (see Box). AXA strives to build a climate dashboard of relevant KPIs that form a complete and meaningful picture of its position with regards to climate. In addition to Carbon Delta for corporate debt and equities, our investment teams also test m... |
Contribution to global warming, expressed in temperature. |
SOVEREIGN DEBT Warming Potential. |
Carbon intensity Carbon Footprint, expressed in T eq.CO2/GDP. |
METRIC WHAT DO WE MEASURE? ASSET CLASS DATA PARTNER. |
REAL ASSETS Physical risks costs Building-level impacts of extreme weather events, expressed in €m. |
Group Risk Management. |
CORPORATE BONDS & EQUITY Transition risks costs. |
Physical risks costs. |
Impact of CO2 emissions reduction, expressed in % of revenues afected. |
Green revenues Future green revenues, expressed in % of revenues. |
Contribution to global warming, expressed in temperature. Warming Potential. |
Impact of extreme weather events (asset damages and business interruption), expressed in % of revenues afected. |
CORPORATE BONDS, EQUITY, SOVEREIGN DEBT, REAL ASSETS. |
Carbon intensity Carbon Footprint of AXA’s portfolio, expressed in T eq.CO2/m$ of revenues. |
How are “Transition” and “Physical” Climate Risks Defined? |
According to the TCFD, companies may face “transition” and “physical” risks: ❯ “Transitioning to a lower-carbon economy may entail extensive policy, legal, technology, and market changes to address mitigation and adaptation requirements related to climate change. Depending on the nature, speed, and focus of these chang... |
These definitions are used by numerous organizations, and frequently referred to in this report. |
Context Box. |
Climate-Related Analysis: Corporate Debt and Equity |
16 AXA GROUP 2019 Climate Report June 2019 2. Strategy. |
As coined by the TCFD, modelling the extent to which investors may be impacted by shifting market and regulatory trends related to the transition to a low-carbon economy is termed “transition risk”. |
It can be measured in financial or purely “climate” terms, and it can be applied to various asset classes, notably corporate fixed income & equity, sovereign debt, and Real Assets. AXA is currently testing the financial implications of such concepts, as described below. |
“Warming Potential”: Why does this new metric matter? |
As highlighted in this report’s introduction, the Paris Agreement’s goal to contain global warming below 2°C invites all market participants to reorient “finance flows” in line with this target. The TCFD guidelines expect “asset owners to describe how they consider the positioning of their total portfolio with respect ... |
This is why more and more investors are turning towards new types of analyses and corresponding metrics that seek to complement these efforts, while also presenting a more insightful response into what it means to be a “Paris-aligned” investor. AXA presents the concept of “Warming Potential” in the following pages as a... |
“Warming Potential” Methodology. |
As explained in the Box above, the concept of “portfolio alignment” with international climate targets, as expected by voluntary (TCFD) and mandatory (art. 173) frameworks, requires testing innovative forward-looking metrics. Since 2018, AXA leverages a “transition risk” model developed by Swiss environmental fintech C... |
Its modelling approach combines top-down data and bottom-up economic and company data to establish a forward-looking climate-related set of metrics. Indeed the WP methodology relies on a top down approach based on: ❯ country-level “Paris Agreement” commitments (Nationally Determined Contributions, “NDCs”) projecting ca... |
One of the key features of Carbon Delta’s approach is to correlate macro level “carbon budgets” with companies depending on their geographic footprint and sector, as well as business mix. By working with Carbon Delta, AXA was also able to produce a more balanced Warming Potential approach(1) considering both companies’... |
❯ a “Sector Agnostic” approach which is based on an absolute emissions intensity view, regardless of the sector or the functioning of an economy. It simply aggregates the emissions of all companies and does not provide leeway to high emitters via greater sector-specific carbon budgets. As such, this Warming Potential d... |
❯ counterbalanced by green patents issued by emitters, the hypothesis being that companies with more patents will be more likely to develop the green technologies required to transition to a low carbon economy. |
The “combined” (averaged) Warming Potential approach places more emphasis on emissions reductions from carbon-intensive sectors, while still ensuring that all other sectors are expected to contribute to the transition to a low-carbon economy. This deliberate methodological choice factors both the sectors’ relative cont... |
(1) Perimeter used for Warming Potential calculations: Sovereign 99.7% of Assets Under Management, Corporate debt 70% AUMs, Equities 95%. |
Methodology Box. |
AXA’s “Warming Potential” |
17 AXA GROUP 2019 Climate Report June 2019 2. Strategy. |
AXA’s Corporate Investments’ Warming Potential Sector Breakdown. |
Corporate Bonds Warming Potential (Temperature) ● Corp. investments Temp. "sector specific" in °C Corp. investments Temp. "sector agnostic" in °C ● ● Corporate Investments Temperature in °C. |
Basic Materials. |
Energy. |
Utilities. |
Diversified. |
Industrial. |
Government. |
Consumer Cyclical. |
Consumer Non-cyclical. |
Communications. |
Financial. |
Technology 0 |
1 2 |
3 4 |
5 6 |
7. |
Warming Potential (°C) |
Equities Warming Potential (Temperature) ● Corp. investments Temp. "sector specific" in °C Corp. investments Temp. "sector agnostic" in °C ● ● Corporate Investments Temperature in °C. |
Basic Materials. |
Energy. |
Diversified. |
Utilities. |
Industrial. |
Consumer Non-cyclical. |
Consumer Cyclical. |
Communications. |
Financial. |
Technology. |
Warming Potential (°C) 0 |
1 2 |
3 4 |
5 6 |
7. |
Source: Carbon Delta. |
How can a large asset owner like AXA influence its Warming Potential, bearing in mind the numerous regulatory and fiduciary constraints to which an insurer's investments are subject? There is still room for action. For example, our analysis shows that AXA’s climate-related divestments (coal, oil sands) have reduced our... |
A First Estimate of AXA’s Corporate Investments Warming Potential. |
Based on the methodology described above, AXA’s Corporate Securities (debt and equities combined) “Warming Potential” estimate stands in line with widely used market indices (BofAML Global Aggregate – Corporate and MSCI ACWI) of 3.3°C. It should come as no surprise that these figures are above 2°C: this confirms that w... |
The graphs on this page show this analysis per sector and per asset class (corporate debt vs equities). |
3.3°C 4.6°C. |
The “Warming Potential” of the main corporate market indices. |
The “Warming Potential” of AXA's divested coal and oil sands assets |
18 AXA GROUP 2019 Climate Report June 2019 2. Strategy. |
The Key Role of the Power Sector: from Carbon Budgets to a Targeted Energy Mix. |
As analysed by the IPCC(1), the current climate pledges (NDCs) are broadly consistent with a warming of 3.2°C by 2100, and CO2 emissions show no sign of stabilizing yet. To achieve a «1.5°C world» two conditions must be met. |
1) Shifting the energy mix. In the power sector, renewables will need to supply 70% to 85% of power by 2050. There is still room for fossil fuel generation combined with technology to capture and store CO2, (termed CCS – Carbon Capture and Storage) but it will be limited: around 8% for gas and close to zero for coal by... |
2) Shifting energy demand. Industry will need to reduce CO2 emissions by 75-90% by 2050 compared to 2010. Clean electrification, alternative lowcarbon fuel sources and CCS will be needed, as energy and process efficiency in industry by themselves are insufficient. Buildings and transport will need to shift heavily towa... |
(1) Special report on Global Warming of 1.5°C. |
AXA’s “Cost of Climate” |
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