2022 Climate Report

Editorial

The energy transition requires timely and coordinated collective action

Thomas Buberl

AXA Chief Executive

Officer

This year's Climate and Biodiversity Report has been prepared in the shadow of the war in the Ukraine. As the cloud of Covid-19 started to lift, Europe was suddenly confronted with a new challenge: a violent conflict, and an associated humanitarian crisis, the largest Europe has experienced since the end of WWII. Subsequently the global economy is experiencing disruptions to supply chains, increases in energy prices and related price increases to primary materials and agricultural commodities.

In 2022, AXA continued to explore forward-looking metrics. Applying the "Warming Potential" metric, AXA's investment portfolio revealed a temperature of 2.6°C; an improvement on previous years, but a metric that will remain significantly dependent on the carbon intensity of the global economy. This is why AXA continues to provide funding and insurance to support the transition to new, less carbon intensive models in all sectors, including real estate, utilities, transportation, as well as to innovations supporting greater electrification and the circular economy.

Covid-19 and the war in the Ukraine are stark reminders that with an interconnected and globalized economy, come interconnected risks. To add to this complex situation is climate change, where climate-related perils can cross political borders and cause complex and compound impacts to human societies and their natural and built environments.

The urgency to act on climate change continues to increase. Since AXA's last Climate Report, the IPCC published its latest report which concludes that there is no time to lose; we must accelerate the energy transition. While there have been some reductions in emissions, globally, they continue to increase, and the physical impacts of climate change are already being observed. The longer mitigation action is delayed, the less feasible some strategies may become. It is also imperative to increase adaptation efforts, to reduce risk and increase resilience.

While short term measures are required to respond to these immediate crises, there is an even more

important role for coordinated, long-term action.

The costs of transition

To acknowledge that Europe is experiencing an energy crisis is not to be an apologist for inaction. Rather, it is necessary and responsible observation that the global economy is still heavily dependent on fossil fuels: for energy generation, heating of homes and offices, for mobility, and industrial processes, among other things.

There are costs associated with every energy choice we make, and we are at the beginning of a process whereby immediate transition risks and longer-term physical risks must be balanced carefully. Beyond current price increases, choosing "business as usual" fossil fuels may have less of an immediate impact to consumers and businesses. However, we will incur immediate costs related to energy sovereignty, and longer-term costs associated with GHG emissions and in particular

the physical impacts of climate change. Choosing lower carbon energy today means immediate higher costs to invest in necessary infrastructure and retire high-emitting power plants, but over the longer term, less reliance on foreign sources of energy and much-needed reductions in GHG emissions.

We are all conscious of an increasing sense of urgency as the years to net-zero tick away and we realize that our efforts, as important as they are, may not be enough. As the IPCC warns us, even if current commitments from governments are implemented, we are on track to a 3.2 degrees world. We are being called on to collectively transition to a lower carbon economy in time to avoid the worst effects of climate change, while avoiding sudden shocks in energy prices, risking continuity of supply and services to local economies. Accelerated mitigation is only possible if together, we focus on the most high-impact areas: increased efficiency and electrification of buildings, industry, and transport, for example, and rapid decarbonization of the electricity sector. Net-Zero commitments on a 2050 timeline must remain our goal.

Collective action also implies participation from all actors: the right enabling environments set by governments; investment, and real-economy transition with support from private-sector coalitions, and individual action. For institutional investors and insurers like AXA, we must find the right balance to support transitioning sectors which form the backbone of the current global economy, while also financing new and disruptive

products and technologies.

Exploring the climate - nature nexus

This year's Climate and Biodiversity Report highlights AXA's ongoing commitments to contribute to fighting climate change and biodiversity loss.

AXA has also made strong progress towards its first intermediate portfolio emissions reduction target. In 2021, AXA reduced the carbon footprint of its investment portfolio by 29% compared to 2019. This result reflects changes in the real economy and select management actions and is a demonstration of what is possible for large institutional investors committed to fighting climate change. It is an encouraging step to continue setting ambitious goals for future intermediate emissions reduction targets.

We are also pleased to publish for the first time an analysis of the impacts of AXA's investments and operations on biodiversity, in line with "Article 29", and building on the Beta version of the Taskforce on Nature-related Financial Disclosures (TNFD). These analyses reveal that progress has been made to help translate nature into a language the financial sector can understand, but that ongoing work is still required. By partnering with Iceberg Data Lab and working with peers, AXA is committed to the development of decision-useful metrics.

We know that nature is our ally, and we must respect and harness it to successfully rise to the dual challenges of climate change and biodiversity

loss.

Stronger together

The solidarity that we have witnessed across Europe as the war in the Ukraine has intensified reminds us that we are stronger together. Europe has demonstrated its ability to mobilize, together, for the common good. Collective and sustained efforts are needed to confront future challenges of the energy transition. For AXA, this means continuing to mobilize its teams and experts, work with governments, partnering with our clients, and engaging in coalitions with peers to accelerate

transition.

Cross interview: Frédéric de Courtois and George Stansfield

On the occasion of the publication of AXA's Climate and Biodiversity Report, AXA Group Deputy CEOs Frédéric de Courtois and George Stansfield reflect on progress made to date, and some of the challenges that lie ahead.

AXA has set the standard for insurers seeking to leverage both sides of the balance sheet to act against climate change. How does this work in practice?

Frédéric de Courtois- AXA aims to have a coherent approach to enabling the transition towards a decarbonized economy, both as an investor and an insurer. We believe these two levers place us in a unique position within the financial sector. This is why we have taken strong commitments, notably more restrictive policies when it comes to the energy sector, biodiversity protection and human rights risk. These commitments were reinforced in the lead-up to COP26 at the end of 2021. However, in practice, it is not always possible to replicate these policies to the letter on both sides of the balance sheet due to differences in these business activities. In addition, an investor has the benefit of a broad investable universe, whereas when an insurer chooses not to cover an activity, it is the end of the line. However, where there is a red line AXA is not afraid to act, and we are not afraid to lead by example. It is all about striking the right balance.

George Stansfield- Transparency on actions and progress is important. All our policies are public and can be consulted, and we listen to a range of stakeholders when developing these policies and we review them regularly. Having sound internal governance with the right checks and balances is key when considering issues like this that can impact multiple aspects of our business and multiple stakeholders, both internal and external. So is engaging with our people so they understand why AXA has taken a position, especially for our underwriters who are on the front line.

FdC- While the immediate impact on GHG emissions may be hard to quantify, we are convinced that over the mid- to long-term, such initiatives can contribute to new practices. In this regard, we believe that collective action from investors and insurers can play a role in helping to steer the economy towards a low carbon future. The remaining challenge for AXA, like any

investor or insurer which chooses to draw a line under certain activities, is that a competitor may win this lost business. When we say underwriting restrictions are not an easy decision, this is what we mean. To critics of restrictions, we say they can have a substantial impact. This is what we can observe with coal. Today, there are close to 40 insurers and around 60 investors globally that have put in place restrictions on coal.

There is a perceived ambition gap between national commitments and what the science is telling us. What should a large investor or insurer like AXA do in such circumstances?

FdC- We continue to increase our green investment target, which currently sits at €26 billion by 2023, and we continue to actively seek new opportunities. For example, our recently announced commitment to invest €1.5 billion in forests. With this commitment we have demonstrated innovation by investing in nature-

based solutions. At the same time, we must finance

the real economy as it transitions, but this process will not happen overnight. There is no magic button for transition: we have a responsibility to accompany the real economy as a whole on this journey.

GS- Governments and regulators have a critical role to play in setting legislative frameworks and standards to define what is green, or not. This has been the subject of much debate at an EU level for example, with the Taxonomy Regulation. Governments can also help steer the economy supporting new technologies. This is what we see in France, for instance, with the recent announcement of ecological and energy transition portfolios in the new French government. Public private partnerships are also key to help ensure the

efficient allocations of climate finance to where it

is most needed.

FdC- The ambition gap is also a reflection of the

tensions between the science and the economic and social reality of today. We must be sensitive to the pressures on job and wealth creation during transition. Even if we know that transition entails upfront costs to help the most emitting sectors decarbonize, to provide training for workers, and to

finance necessary investments in technology and

infrastructure, the cost of "doing nothing" would be higher. Recent research suggests that the most

pessimistic estimate of the cost of fighting climate

change is lower than the most optimistic estimate of doing nothing. A just and orderly transition isn't nice to have, it is essential for social buy-in. Again, governments must lead the way, setting the rules and providing adequate protection when required.

In 2021 the Net-Zero Insurance Alliance was launched, with AXA as Chair. What has this Alliance been working on? Why is it important for insurers to set net-zero ambitions?

FdC- Insurers are an essential party for all economic transactions and their engagement towards net-zero pathways is required if we are to collectively transition. Therefore, it made sense for AXA to call for the creation of this Alliance and AXA is pleased to act as Chair of the NZIA. 2022 has already been a fruitful year for members.

Members of the NZIA have committed to transition their insurance and reinsurance underwriting portfolios to net-zero greenhouse gas emissions by 2050, consistent with the Paris Agreement. To achieve this goal, the NZIA is collaborating with the Partnership for Carbon Accounting Financials to develop a proposed first global standard to measure insured emissions. Members of the NZIA

will be required to publish their first intermediate

science-based target within six months of the publication of this standard.

To support collective change, it will also be important for insurers to engage with other actors in the insurance ecosystem, including brokers.

GS- AXA also continues to actively participate in the Net-Zero Asset Owner Alliance and has made strong progress towards its first intermediate target, which is detailed in this Report. This Alliance has helped to set the standard for protocol and target setting, and over time we hope that this approach will be adopted by other Net-Zero Alliances. AXA IM, our asset manager, is also engaged in the Net Zero Asset Managers Initiative and reports on progress regularly. In May 2022 AXA IM published its second progress report and announced that 65% of all assets under management are managed in line with Net-Zero pathways, in line with the IPCC 1.5°C pathways report.

In last year's Climate Report, AXA introduced its aim to develop "green business" to support the transition. What has happened since?

GS- In April 2022, AXA announced a green business target to support more sustainable behaviors and business models for both retail and commercial clients. This includes a wide range of activities, from providing insurance coverage for renewable energy plants and equipment to designing and implementing more sustainable claims practices. There is also significant potential for us to help our commercial clients in their transition. Engaging with an existing client to better understand the challenges they face to decarbonize or shift their business model, and helping them manage risks, is a powerful way for us to support the energy transition.

FdC- We are convinced that we must accompany real economy actors to enable the energy transition. To do so, we cannot stand on the sidelines, rather we must stand with our clients and provide the right advice and direction. This work is driven by a long-term view and the knowledge that many of an insurer's key activities are effective adaptation mechanisms: disaster

risk management, climate services including early warning systems, social safety nets and risk spreading and sharing, for example This is why, for example, we are expanding our risk consulting offers for commercial clients with AXA XL and AXA Climate. Beyond our products and services, climate risk and opportunities have become key focus areas to the daily work of a broad range of teams: from finance to legal, from strategy to risk management, IT and investments.

The last twelve months have seen increased action from regulators on both sides of the Atlantic - as well as calls for greater convergence. What should be the priority?

GS- Current efforts to harmonize and improve extra-financial reporting standards are certainly welcome and should be a priority. More broadly, many sustainability practices have been, and are being co-built by the private sector, regulators, scientists, and civil society organizations. We believe in sharing expertise and supporting transparency in reporting activities, which is what drove AXA to release its first Climate Report in 2016 using the TCFD recommendations. Since its creation in 2015, the TCFD has helped drive climate-risk related market transparency measures, which are being adopted by many governments around the world including in the EU, the UK, and potentially the US.

As for nature-related risks and opportunities, the creation of the Taskforce on Nature Related Financial Disclosures in 2021 is also an important milestone. This initiative aims to develop a framework for biodiversity, backed by the science, similar to what the TCFD has done for climate. Like many other financial institutions, AXA is eager to see decision-useful metrics emerge on biodiversity, and as a member of the TNFD, AXA is actively contributing to this effort.

FdC- Consensus on climate scenarios and their variables will be increasingly important as regulators and supervisors continue to explore climate risk-related stress tests. Again, AXA

contributes to these exercises to help build collective understanding and consensus between public and private actors on the best approaches to understand climate-related risks.

GS- Finally, we hope that the various regulatory initiatives underway in Europe, in the US and in other markets where we do business can help drive convergence on classification, metrics, and reporting over the coming years. We appreciate the complexity of that task and know, of course, that there will always be local specificities and adaptations. However, there's clearly a large overriding interest to get to the right level of standardization to enable comparability of information across markets for users of this information, and a level playing field for private sector actors to operate and contribute to the transition.