Sustainable investing: Two paths to a common destination

Sustainable investing is increasingly recognised as the practice of incorporating environmental, social and governance (ESG) factors into investment decision-making for stocks and bonds. AXA Investment Managers’ Global Sustainable Equity strategy, which will celebrate 11 years in operation in August 2025, interprets the term ‘sustainable’ through two distinct paths: the sustainability of companies’ earnings and the integration of ESG information into fundamental analysis.

Sustainable investing is increasingly recognised as the practice of incorporating environmental, social and governance (ESG) factors into investment decision-making for stocks and bonds. AXA Investment Managers’ Global Sustainable Equity strategy, which will celebrate 11 years in operation by August 2025, interprets the term ‘sustainable’ through two distinct paths: the sustainability of companies’ earnings and the integration of ESG information into fundamental analysis.

Ram Rasaratnam, Chief Investment Officer for Equity Quantitative Investing (EQI) at AXA IM, states, “We set out to develop an actively managed global equity strategy that employs a factor-based investment approach, with a focus on ‘low-volatility’ and ‘high-quality’ factors.”

In this context, ‘quality’ refers to the sustainability of recurring earnings. The assessment of a company’s sustainability from a quality perspective involves an analysis of five years of earnings data, with particular attention to the stability of those earnings, which serves as the cornerstone of the modeling process. The term ‘sustainable’ was chosen in 2014 to align with the in-house quality model used for stock selection within this strategy.

The concept of ‘low volatility’ plays a crucial role, as AXA IM aims to maintain a portfolio of stocks that exhibit lower volatility than the overall market, thereby providing a cushion during market fluctuations. “Our findings indicate that when these factors are combined, the outcome is greater than the sum of its parts. Across all our strategies, we seek to identify companies with sustainable earnings and low volatility,” Rasaratnam explains. “This approach allows us to recognise companies with robust profitability models that can deliver consistent earnings even amid market turbulence, which can positively impact their share prices.”

This strategy effectively addresses investors who view sustainable investing through the ESG lens, positioning the portfolio at the intersection of these two definitions of sustainability. “At its core, ESG investing is about fundamentals,” states Rasaratnam. “A company’s ability to generate earnings is closely linked to how it treats its employees and manages its environmental responsibilities. We can measure these features and relate them to earnings – whether through brand reputation or potential fines for corporate misconduct. These factors all influence the fundamentals.”

In alignment with all equity strategies at AXA IM, Rasaratnam emphasizes the integration of responsible investment considerations in three key ways. “First, we incorporate ESG data into our research and portfolio construction where feasible, integrating ESG insights into the signals we deploy. Second, we exclude certain sectors and industries that we believe are detrimental to society and investors.

“The third pillar is engagement – exclusion alone does not change corporate behaviour. Our scale as an investment manager, combined with our large insurance parent company, enables us to engage with companies in a meaningful way,” he explains.

By utilising a twin-factor model with integrated ESG information, Rasaratnam argues that the result is a well-diversified portfolio driven by fundamentals. “This strategy follows a global ACWI (MSCI All Country World Index) ex-Australia approach, investing in all markets without taking country-specific bets, while focusing on building a portfolio of stock selections. We aim for a well-diversified portfolio, and the incorporation of ESG information enhances our understanding of the fundamentals, resulting in an ESG-integrated portfolio that remains fundamentally sound,” says Rasaratnam.

For these reasons, AXA IM considers this strategy a valuable component of an investor’s core global equities allocation. “We believe that building a portfolio of high-quality companies – often recognised household names – while avoiding volatile stocks can lead to long-term outperformance across market cycles. Our commitment to delivering this at a competitive price underlines our belief that this strategy can serve as a core allocation for the long term.”

A minor challenge lies in the name itself. “As the ESG theme has gained traction, the designation of our strategy has unintentionally categorised it in a specific manner. We are often presented a choice between being categorised as an ESG fund or a core equity allocation, yet in our view these are not mutually exclusive,” observes Rasaratnam.

“However, we envision it as a three-pillar diagram: it is possible to be a core equity allocation, maintain a well-diversified portfolio, and simultaneously integrate ESG factors. Our strategy occupies the intersection of these three pillars,” he adds.

By combining elements from each category, the strategy aims to achieve two primary objectives: to provide protection during down markets and to deliver long-term outperformance on a risk-adjusted basis. With a solid ten-year track record, this strategy presents a compelling opportunity for investors seeking a core equity allocation that offers better risk-adjusted returns over the long term, all at a lower fee than merely investing in the benchmark.