AXA IM: Impact investing has a performance problem

Sustainable and impact investment strategies have had a rough few years from a performance perspective, leading investors to question whether it is possible to make money and do good at the same time.

Anna Väänänen, head of listed impact equity at AXA Investment Managers (AXA IM), said investors have “burnt their fingers” in the past two years. “The whole industry has a big issue with performance.”

Investors and clients used to be worried about greenwashing but now they ask more questions about performance. “Now it’s about performance, it’s about tracking error, it’s about the predictability of the performance,” she said.

Some impact investment strategies became unstuck because they invested in small companies that were insufficiently robust to cope with supply chain disruptions following the Covid-19 pandemic, then peak inflation and interest rate hikes.

“They could not swim because they did not have what it takes and they ended up having zero impact,” she observed.

Performance, therefore, was Väänänen’s priority when she joined AXA IM from Mirova in September 2023. She introduced strict minimum criteria for stocks to ensure they fulfil the dual mandate of impact and performance.

Companies must exhibit structural growth, a strong competitive position, operational leverage, a solid balance sheet, proven execution, growing profits and cash flow, a high quality management team and an “interesting” valuation.

Ultimately, she wants to invest in innovative companies that are driving change and are leaders in their sector, be it drug research, precision agriculture or batteries. “We try to identify the leaders of the transition,” she added.

Väänänen helms the People and Planet Equity strategy, which collates the best ideas from three thematic funds: Energy Transition, Social Progress and Biodiversity.

Below, she describes some of her high conviction holdings – companies that have the potential to change the world for the better and at the same time, make a lot of money for their shareholders.

John Deere

The agriculture industry causes 80% of deforestation and uses 50% of habitable land, yet food production needs to increase 50% by 2050 to keep pace with the world’s growing population.

There is a pressing need for agriculture to become more efficient, sustainable and environmentally friendly, and tractor manufacturer John Deere is at the forefront of this.

John Deere has placed cameras in its tractors that take pictures of the ground in real time which are uploaded to the cloud. Artificial intelligence (AI) is used to identify weeds and then the tractor’s sprayer is programmed to target the weeds alone, reducing herbicide use by 70%.

This initiative is creating regular software revenue for John Deere that diversifies its income from sales of large farming machinery. Its tractors can also analyse the quality of soil and then provide nutrients or irrigation in a precise way.

Digital twins

Another theme in the portfolio is the creation of digital twins, enabling anything from medicine to infrastructure to be tested in the digital sphere.

Dassault Systèmes is using a digital replica of the human brain to test neurological medicine  and improve its understanding of Alzheimer’s and Parkinson’s disease.

Bentley Systems creates models of the natural environment including ecological data, which it uses to test whether its bridges can withstand extreme weather events. The company also uses its models to research the impact of infrastructure on the natural environment, for instance how would chopping down a forest affect local water levels.

National Grid

National Grid may be listed in the UK but more than half its business is on the US east coast, where the grid network is suffering from years of under-investment. National Grid is upgrading the grid system to protect it from natural disasters and to incorporate renewable energy.

SAP and tech exposure

About 30% of the People and Planet Equity strategy is held in IT and software but that is a broad church. “I don’t want to go too much into any one theme but the truth is that IT is driving change at the moment,” Väänänen said. “If you want to have impact then IT, healthcare and industrials will be the core three elements.”

SAP is an example of a tech stock in the portfolio with sustainable credentials. It provides software to help companies with nature-based reporting and it is a leader in enterprise resource management. SAP has been moving its licences to the cloud and has enhanced its growth prospects by cross-selling products.