Responsible investment

How responsible investing standards and policies affect returns

Executive summary

  • Excluding companies from investment portfolios due to certain business activities, products and services on sustainability considerations was arguably the first notable approach which came to define socially responsible investing as it emerged in the 1970s and 1980s. Exclusions continue to be the most widely adopted sustainable investment strategy, with more than 64%[1] of global sustainable assets under management using this approach.

  • AXA Investment Managers has implemented a series of exclusion-based policies and standards[2] and in this research paper, we assess their effect on investment returns.

  • Our analysis showed that AXA IM’s exclusion policies have a relatively limited impact on the investment choice available to fund managers - and excluding certain companies did not come at expense of risk-adjusted performance. What’s more, we also saw that it drove outperformance over the period studied.

The asset management industry has traditionally adhered to the notion that excluding certain companies from investment portfolios based on sustainability considerations linked to certain business activities, products and services will inevitably harm returns by reducing the investable universe. We have seen increasing volume of academic research which has dispelled this myth and shown this not to always be the case[3].

When it comes to environmental, social and governance (ESG) policies, the first question we are often asked is: What is the cost on return? As a result, we decided to assess the impact of our exclusion policies on investment returns.

As shown in Exhibit 1 (right), over a period of 49 months to 31 December 2019, the excess return[4] generated by excluding issuers across AXA IM’s exclusion policies (including all sectorial policies and ESG Standards policies) from the MSCI All country World Index[5] (ACWI) is positive: +0.92%. The outperformance has accelerated over the final 12 months of the study. The main drivers of this were companies in the climate risk and tobacco exclusion policies which dragged down the MSCI ACWI compared to a portfolio composing the same index constituents without the exclusion list companies.

See Appendix for more details of our exclusion policies.

Going into more detail as presented in Exhibit 2, the excess return generated by excluding issuers in the sectorial exclusion policies is +0.17%. The excess return generated by excluding issuers in the ESG standards policies is higher with +0.82%.

A look at risk

While the return component is important, risk has to be considered to have a full picture of the impact of exclusion policies.

From a risk perspective, we can see in Exhibit 3 that annualised volatility of indices with exclusion policies are in line with the parent index. The tracking error of filtered indices is similar to passive management and ranges from eight basis points for the sectorial policies to 32 basis points for AXA IM exclusion policies.

We notice the risk/reward ratio[6] is slightly improving with the increase of exclusions. We also see that MSCI ACWI ex. AXA IM exclusion policies has the highest risk/reward, while the excess return of 0.92% is lower than the sum of MSCI ACWI ex. sectorial policies’ and MSCI ACWI ex. ESG standards policies’ excess returns at 0.17% and 0.82% respectively, indicating some diversification benefit. Over the long term, AXA IM exclusion policies have not come at the expense of risk-adjusted performance on a broad equity market index.

Diversification is preserved

Exclusions, by definition, reduce investment possibilities
for portfolio managers. As described in Exhibit 3, exclusions from all policies represents 5.2% (market weight) of the MSCI ACWI index, of which 35% is explained by the tail risk ESG screen. This is why AXA IM has decided to give leeway
to portfolio managers with regards to tail risk ESG policy; thus, issuers where there is a robust investment rationale - or a clear sign of positive momentum - can remain eligible for investment. The goal is to retain the opportunity to invest in transitioning companies.

To put this 5.2% impact in perspective, the French socially responsible investment fund label ISR requires a 20% reduction in the initial investment universe using ESG indicators to meet the criteria of an ESG investable universe[7]. From a sector perspective, we can see
in Exhibit 4 that exclusions have the main impact on the utilities, materials and energy sectors - but this is still limited with a maximum impact of 20% on utilities.

The impact of AXA IM’s exclusion policies on the investment universe is material, with an impact above 5%, but limited compared to criteria applied to an ESG investment universe or sector biases.

On the other hand, for diversification purpose portfolio managers aim to build portfolios made up of multiple stocks with various characteristics. In Exhibit 5, we see excluded stocks are well scattered across the risk profile spectrum of the MSCI ACWI. There are many other candidates or stocks with similar risk profiles available within the universe. We believe this shows that AXA IM exclusion policies do not affect the ability to build diversified portfolios from a risk-profile or sector perspective.


[1] 2018 Global Sustainable investment review, Global Sustainable Investment Alliance
[3] For more please refer to “ESG and Financial Returns – an academic perspective” AXA Investment Managers, July 2019.
[4] Study is performed using daily chain-linked returns at instrument level. Exclusions over time are evolving due to stringent rules or in-out companies into exclusion lists, therefore official ban lists at the date of rebalancing have been excluded (“as was” rule) to reflect real implementation. The study is not a retropolated return study based on the last available ban lists (“as is” rule). A linear weight rescaling is applied to each instrument of the index after exclusion filters.
[5] MSCI All Country World Index, net return, in euro currency unhedged.
[6] Risk/reward corresponds to annualised return divided by annualised volatility and gives the amount of return per unit of ex-post volatility.
[7] Source :


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