FEATURE: Heavyweight global investment manager AXA IM Alts is continuing to push through the headwinds in green investment and ESG to deliver on the triple bottom line. The Fifth Estate sat down with global head, Isabelle Scemama and some of her senior leadership team, to understand what’s driving its approach.
With just over $307 billion of assets under management spread across the UK, Europe, Asia, the USA and Australia, AXA IM Alts operates in an extremely diverse landscape.
Its focus is on asset classes that deliver positive environmental and social impact such as renewable energy, infrastructure, nature-based carbon sequestration and real assets that are optimised for sustainability. It is also one of the largest non-bank lenders in the world, with a suite of alternative credit investment strategies including impact investing, asset-backed securities, leveraged loans, insurance-linked securities, direct lending and bank capital transactions.
With global presence comes exposure to the rapidly shifting sentiment in the USA. Global head of AXA IM Alts, Isabelle Scemama, says this is not new territory.
“We are a global player. Even if we have a European base, we manage more than 200 billion euro of assets, private assets across all asset classes, real estate, infrastructure, credit, alternative credit, and private equity and so we are used to navigating through changing environments and complex environments,” she says in an in depth interview with The Fifth Estate.
The current US situation is “an additional level of complexity” that also creates some opportunities for enhancing capability.
“What we also realise is that over the past years, our capability to generate returns is thanks to the relative value of the arbitrage we can make across asset classes … that’s something we have done.”
There is even more at stake now, Scemama says.
Tackling the climate crisis, one asset at a time
Regardless of what is said in the Oval Office, Scemama and her team of about 800 people globally will continue to advocate for diversification and selectivity in the investment approach and remain invested within the US market without compromising on principles.
“We stick to a level of risk where we feel quite comfortable, but more importantly, we diversify our portfolios.”
Nearly $135 billion of AXA IM Alt’s AUM comprises private real estate, and there was a deliberate shift over the past decade out of office and retail assets into alternative sectors showing promise of growth and resilient income, such as BTR residential, affordable housing and healthcare.
Affordable housing in Australia is attractive
In Australia, the affordable housing sector is currently a major attraction, and Scemama is most proud of her company’s work in that sector.
The combination of extreme need in the market and the risk/return profile makes this a solid business case, and she says the social and environmental dividends are wholly aligned with the underlying ESG principles that guide decisions.
“We are coming in as outsiders… but we have a very innovative strategy,” she says.
Some of this growing global affordable housing portfolio is developed with partner organisations – such as, in Australia, community housing providers – and another significant tranche focuses on acquiring existing, ageing assets and investing in upgrades to convert them to energy-efficient, low emissions properties.
Making a splash with Dolphin Square
In 2020, for example, Scemama’s company spent more than $1.6 billion to buy Dolphin Square, a residential building of 1223 rented apartments. It is now investing over $400 million across five years to upgrade the building for energy efficiency, thermal performance and reduced carbon emissions.
The property is something of a legend, where famous musicians, artists and film stars lived, loved and held memorable parties. Scemama mentions that General de Gaulle also resided in the building during World War II noting that the building wasn’t “fancy” at that time (and nor was the general).
The location was key to the asset’s attraction, she explains. It also has excellent services and amenities including a large garden in the centre, a pool, gym and tennis courts, and it can attract tenants that are “not super rich London people”.
What Dolphin Place did not have were building services that kept tenants’ content and comfortable. The legacy heating system was so ineffective it took around two weeks after it was switched on for winter before the final apartments felt the warmth. When it was fully operational, heat levels were so high residents needed to open windows in the middle of winter to stay comfortable.
“That is completely not energy efficient,” Scemama says.
A major retrofit project has since been undertaken to replace the heating system, upgraded the windows, removed fossil fuels and improved energy efficiency. Working closely with existing tenants and ensuring they understood the process, including the lengthy duration, was key.
“You cannot retrofit such a building in one month’s time. It’s a more than five year project. You have to manage that, staircase by staircase, and manage the people that are inside. Retrofitting residential, a big residential asset like this, one is always (complex), because it has to be managed and done with the tenant.”
Retrofits are a challenge but also rewarding on a global scale
In all of its existing asset upgrade projects, Scemama says the company looks to halve energy use and decarbonise. Looking across the portfolio, the emissions profile of refurbished assets is coming in at a 90 per cent lower carbon emissions compared to the point of acquisition.
While it is a major challenge globally to deal with existing building stock and update it for performance and reduced emissions, this is also where she sees enormous opportunity. In France and Switzerland, retrofitting is being undertaken across the affordable housing portfolio. Also in Switzerland, projects are underway to convert office assets to residential.
In Europe the energy efficiency aspect of the retrofits is possibly even more critical because energy costs are high, she says.
Selling the data centres was a good call but lending was retained
The evolution of the company’s strategy has included making the decision around 18 months ago to sell the fund’s data centre platform to Brookfield. Scemama explains that as a financial decision, the sale met the requirement of fiduciary duty because it was able to realise a “very good return”.
It also reduced the company’s exposure to this very energy-intensive asset class to the role of credit provision, which is a “very strong focus” generally for ongoing growth.
“We have in total, 35 billion (Euros) of real asset debt, so including infrastructure and real estate debt, and it’s where we have most of the investment in data centres. We like the defensive positioning of those exposures at this time of the cycle.”
The assets that were sold had programs in place to address the high energy use and emissions profiles. One program was recycling waste heat from the cooling system to heat an adjacent swimming pool. Others were procuring renewable energy through power purchase agreements (PPAs).
PPAs are not a total fix
Scemama points out that while PPAs for green electricity “allows you to show a very nice little report” there is a broader challenge for institutional investors in terms of carbon because “what matters is what is in the grid.”
“In Europe, notably, we are forced to report (on emissions). When we report on our carbon emissions (we must use) what we call a location-based approach, not market based. So, even if you purchase green electricity through a PPA with any electricity provider, you will have to report depending on where you are.”
That means an investor reporting in Germany needs to report data consistent with the German grid, which has a higher penetration of fossil fuels. Reporting in France, by contrast, benefits from the penetration of hydroelectric and other sources that have resulted in a grid that is “almost completely decarbonised”.
She observes that someone reporting in France using local grid factors for emissions may still however choose to procure “brown electricity” from elsewhere which may be “cheaper because nobody wants it.”
Mandatory reporting – so how’s it going in the EU?
In general, the introduction of mandatory sustainability reporting in the EU has been something Scemama and the team have taken in their stride.
Having the fundamentals in place already within the ESG strategy, well-established data collection and a proactive focus on decarbonisation-aligned assets and investments has helped both with responding to regulation and demonstrating leadership in the market.
Scemama believes their approach to ESG delivers a competitive edge.
“Since the beginning, we are not naive when we have started to really think about how to tackle this,” she says.
“We have always tried to find solutions that were that would be effective, that would be efficient, that would deliver a return, that would not be at the expense of the return, and that will really allow us to deliver something concretely.
“So, what we are focusing on is delivering strategies where we can deliver more efficient assets, more energy efficient assets, more carbon efficient assets, but in a way, also to generate additional return.
“And that’s something we have done, whether we look at what we do on decarbonising our real estate or investing in carbon avoidance.”
Carbon avoidance investments include not only renewables but also encompasses green transportation and natural capital projects that sequester carbon.
“Since the beginning, (we have been) being very much driven by delivering robust, efficient assets that embrace need and a demand and so consequently, that can generate higher return.”
The approach has been informed both by the “European DNA” and also the fact of being embedded within AXA, an institutional group, which will soon be known as BNP, following the August 2024 agreement to enter into partnership with BNP Paribas.
The message won’t change to suit the mood in Washington
Scemama says this all puts them in a position where “we don’t feel at all challenged by the new mood or the new messages we can hear from here or there, we continue to stick to and reinforce and accelerate on our trajectory, delivering our pathways on each of the 2500 buildings we manage.”
This doesn’t mean injecting the ultimate marginal Euro or marginal dollar to make the asset the “best possible” as that would not align with fiduciary duty to make sound investments.
“We have the same fiduciary duty as any, I think, investor in the world. We have to deliver, and optimise the return. But because we have a built-in DNA, we look at the assets themselves, at what can make them perform better? And that’s the way we address this.
“We continue to accelerate on this trajectory, and we are very comfortable, and we are not changing our speech or positioning.”
She says that in a fortnight she will be in the US and will be giving the same messages in that market as she has been presenting in Europe and Australia.
It’s all about moving early and staying ahead of the regulatory baseline.
Florence Dard, the company’s global head of client group said in the interview that Dutch investors, for example, were very early movers in taking account of ESG in their investments, ahead of both policy and regulations.
She has some advice for Australian funds and businesses now facing mandatory sustainability reporting.
“Keep it as concrete as possible,” Dard says. “Keep it as measurable and practical as possible, rather than entering into very complex KPIs that sometimes make not so much sense in terms of the real consequences it will have on either climate or social aspects.
“Interestingly, coming back to the Dutch, because they had been involved in the ESG topic way before regulation or policies imposed, sometimes they are challenging the regulation and the regulators to make it evolved so it’s concrete.”
Scemama adds that the methodology the company has deployed and developed, notably on the carbon reduction for real estate, is recognised even by Dutch investors as something that’s “setting the bar in the industry” because it is practical, it’s concrete, and it’s based on building efficiency.
“So, we can measure, we can be consistent … even with the regulations that even in Europe, have changed and continue to change and to evolve.”
Sharing knowledge across the global investment community
The company has been sharing its operational approach and decarbonisation strategy with investors in the Netherlands, Canada and the Nordic nations, who she observes are “very, very demanding” in terms of ESG. Canadians are also “quite strong on this” and the feedback so far in Australia has been that the strategy is unique and well ahead.
“People get comfortable (with it) because it’s really practical and technical, but it’s not complex reporting of KPIs that we could not monitor.”
The company’s head of Australia, Antoine Mesnage, joined the conversation, to say that this global level of endorsement is an outcome and a benefit of having a global footprint and “making the most” of either the regulatory environment or frameworks that drive some behaviours and also leveraging market-driven initiatives.
“Obviously, Europe has been a bit more regulatory driven,” Mesnage says. “Other markets, like Australia, are probably a bit more market driven.
“I think what has been for us something that we really have strong conviction on, is actually building our proprietary approach to it, benefiting from that global footprint … it’s not only about the regulation, it’s also about the understanding of what actually moves the needle, and focusing on what moves the needle, and trying to stay away from the noise as much as we can, because it’s an evolving topic, and staying focused on what actually achieves the outcomes that we want from an environmental perspective and social perspective.”