What transitions are we facing and what is the role of asset managers?

The global economy is undergoing a rapid transformation. There are two dimensions: the macroeconomic aspect and how economic players behave in such an environment.

Philippe Waechter. What challenges does the global economy face?

The global economy is changing dramatically. We had a long period where behaviours were rather cooperative, coordinated, and it worked rather well. However, this dynamic has ended with the pandemic, followed by shortages of semi-conductors. This has changed attitudes. How to think about these issues? There are three challenges that we can face today.

The first challenge reflects the imbalances resulting from this period of coordination and cooperation, those resulting from long periods of globalisation.
• The starting point is very strong technological competition between China and the US. A lot of technology was transferred to China and China became a rival to the US. And that happened in 2016-2017, when Trump stepped up against the ‘invasion,’ of Chinese technology.
• The second element was that the shortages that had been experienced had prompted governments to refocus on their own territories. In other words, we had previously a territory that was very open, with opportunities everywhere. Today, the world tends to be vertical. Each country wants to be able to follow its own destiny. There are new technologies and innovations, and everyone wants to produce them to continue playing the same game as others. Hence the return of a term, that of industrial policy: The world was very horizontal, it is vertical. 
• The third point on this first challenge is geopolitical balance that has changed. Tensions and technological competition, production efficiency and conflicts in Ukraine and the Middle East have caused the world to become fragmented.  This is the end of global coherence, since Americans, Europeans, Chinese, Russians, Indians no longer all play the same partition. 
• The fourth is monetary policy, which has been extremely accommodative for years. Central bankers today realise that this policy is probably not the most effective. They think differently.  
These four points come from our history.

The second challenge is demographics. 
• Asia's population is projected to decline very rapidly, as is Europe's population . The US population will continue to grow. The balance will be affected by these population trajectories: The one with a growing population will be stronger than the others. 
• In an ageing population - and this is very clearly the case in Europe - we must think differently about distributing income between the active people that produce and generate the income, and the pensioners that benefit from the income created. Arbitrage is always difficult to find, this is a key element for the coming years.

The third challenge is climate change.
As the European agency Copernicus mentioned very recently, 2024 is the first year that exceeds 1.5 degrees on the preindustrial average . We are above the Paris Agreement, so action must be taken very quickly to stay within a viable framework. As a reminder, 1.5 degree is the low limit at which one begins to see irreversible effects of global warming on behaviour. This is arguing in favour of a rapid reduction in our fossil fuel consumption, together with further investment in renewable energy and carbon capture. Because at some point, if we want to stay 1.5 degrees, we will have to catch carbon on a very large scale.

These are three very different challenges that the world is facing today and that did not exist a decade ago. It is a real upheaval, which has local consequences, consequences between major areas and which will change our life in a lasting way.

Nathalie Beauvir. How do these transformations affect the management practices of players such as Ostrum AM?

The major changes mentioned by Philippe Waechter, and especially the way we want to support them, have a de facto effect on our investment approach, both in terms of risks and in terms of impact opportunities and, ultimately, in terms of steering the dual financial and extra financial performance.
While public investment is increasingly uncertain in a tense social and geopolitical context, the role of finance is more relevant than ever to ensure and above all accelerate the financing of a sustainable economy. 
However, the way in which this accompaniment is done must change. Today, there are limits to a manichean approach to transition based solely on exclusions. Limits in terms of financial performance, as investment universes are further reduced, but also limits in terms of the availability and quality of the data on which these exclusions are based. 

Excluding a company does not guarantee that it will increase its climate ambitions. On the contrary, it may even seek funding from other investors who are less scrupulous in terms of transition or ESG more broadly. 
Moreover, the transition must not be understood only from a climate point of view. It must also consider other dimensions, including geographical, technological, social and environmental ones. In other words, it must be fair. As a result, these major changes and challenges force us to rethink our investment practices and move towards a more holistic, qualitative and committed approach to sustainability issues. All of this, and it is important to emphasise it, in a changing, multifaceted, and increasingly challenging regulatory context.

Philippe Waechter. If we come back to the macroeconomy, who can influence these behaviours on the financial markets?

Central banks have a big role to play, but they don't all have the same vision. In the United States, the Federal Reserve does not feel that it is a major player in the energy transition. Jerome Powell said clearly: ‘This is a question I leave to the White House.’ In Europe, on the other hand, Christine Lagarde is very attentive to this issue. Clearly, it has brought about a change in behaviour within the ECB.
In the 2021 ECB Strategy Review, she incorporated the climate issue and this is a considerable leverage to change behaviour. Once we have a set of accounting standards that make it possible to know who is virtuous or not, we will be able to benefit the companies that are most virtuous in terms of climate. 

The other thing, and this is something that was recently tested by the ECB, is to see how the financial system would withstand shocks. Stress tests were carried out on the climate trajectory, on the ‘brown to green’ transition, that is, from carbon industries to greener industries, including other constraints as well.
The result was that the Eurozone's financial system would shake up the shock rather well, even if the situation was relatively adverse. Our financial system, led by the ECB and market participants, is a very successful one. Even in a very large energy transition.

Nathalie Beauvir. As an asset management company, what is Ostrum AM’s position in the context of the transition?

We have developed investment strategies to support the transition, which are based on several interrelated pillars. 
The first is the development of exclusion policies such as those relating to fossil fuels. We have published a coal policy and a non-conventional oil and gas policy, based on demanding quantitative thresholds.

As I mentioned earlier, this leverage is no longer enough. We therefore place emphasis on ESG integration. This qualitative approach to double materiality is carried out by credit analysts who rely on their knowledge of sectors and companies. Particularly regarding the climate, we have developed a proprietary methodology for evaluating companies' climate strategies, especially in high-emission sectors, in order to assess their capacity and willingness to compromise.

The third pillar on which we are acting is that of engagement and the latter is spread from several angles. 
• Firstly, we are working to materialise our clients' Net Zero Asset Alliance (NZAO) commitments for which we manage a significant percentage of assets with a decarbonisation target, either in terms of reducing carbon footprint or intensity or in terms of temperature alignment. 
• Secondly, we aim to translate into concrete action our own climate commitment. We are currently exploring ways to join the Net Zero Asset Manager Initiative (NZAMi). 
•The third angle concerns our stewardship activities, whether through our engagement and dialogue actions or through our voting policy, which wants to be active and responsible. In 2023, we have a 97% voting rate at general meetings.
This approach to stewardship, beyond shareholder engagement, is key for an actor like Ostrum AM, who is a major bond investor. This particularity also led us to begin a dialogue with sovereign issuers based on their contribution to the Sustainable Development Goals (SDGs), particularly for the climate transition, focused on the SDGs 7 - which aims to guarantee access for all to reliable and sustainable energies at affordable cost and SDGs 13 - regarding the measures taken by States to fight against climate change.
• Finally, the fourth angle is the funding of solutions through the deployment of thematic impact offers. Thus, we launched the ‘Climate and Social impact bond’ strategy, focused on the fair transition, 100% invested in sustainable bonds and classified Article 9 according to the SFDR regulations.

Nathalie Beauvir. Ostrum AM has real ambitions on the transition. What role does the company intend to play to go even further on these major issues?

Ostrum aims to be recognised as an advanced partner and to engage in sustainable transitions with all our stakeholders. 
To do so, we have created the Sustainable Transitions Department this summer, reporting directly to the CEO, which is responsible for CSR issues and taking sustainability considerations into account in our investment strategies. It aims to promote the sustainable transitions of all our stakeholders, be they our employees, suppliers, customers, issuers or our financial ecosystem. 
To carry out this task, the Sustainable Transitions Department is currently working on several development axes. 
The first one is to clarify our positioning not only on climate change but also on biodiversity. For example, we will soon publish our exclusion policy for palm oil. 

Another key focus is to complement and enhance the consistency of all our ESG policies. We will continue to align with best market practice, while seeking some flexibility to support companies transitioning to a sustainable economy more efficiently.
To achieve this, and these are the third and fourth axes, we will reinforce the qualitative part of our non-financial methodologies and analyses. We will increase and further organise our stewardship actions with the development of sector engagement frameworks, with a more transparent escalation process and more accurate and timely steering of our engagement and resulting actions.

The last priority is to accentuate the development of differentiated and complementary thematic solutions, beyond our Climate and Social Impact Bond strategy.  
• A product range that I would call " pure SRI ", aligned with the requirements of the French SRI Label ‘V3’, covering equities and fixed income to enable efficient asset allocation.
• A “Brown to Green” transitions offer to finance the transition of the economy, including companies in high-emission sectors, based on demanding qualitative analysis, proprietary climate strategy assessment methodology, and enhanced engagement actions.
• An impact offer through our expertise and strong positioning in sustainable bonds, where we currently have over 40 billion euros of assets under management.