Lack of SRI investment funds worsens trade-off for responsible allocators


Stockholm (NordSIP)- For allocators who adhere to a sustainable investment philosophy, trade-offs can be very different from those fund managers face. If everyone involved in SRI now understands that investing responsibly does not require giving up any risk-adjusted return, allocators also have to take into account other questions.

Is the offering of responsibility-labelled products broad enough? Does the label adequately reflect the content? Are the measures used by portfolio managers appropriate? We sought answers from Gunnela Hahn, Head of Responsible Investments at the Church of Sweden and Christina Hillesöy, Head of Responsible Investments at Länsförsäkringar, one of Sweden’s largest insurance companies. Both institutions invest mainly through external managers and have responsible investment at heart.
For the Church of Sweden, ethics have always been of great importance. Hahn, who joined in 2008, is responsible for the sustainability aspects of the organisation’s investment policy, within a team of four at the financial department. Hahn’s role is to ensure that her organisation is at the forefront of responsible investing. For example, she drove the divestment from oil and coal in 2008, thereby following the Church’s philosophy. “We were ahead of our time”, she comments, “and we were confident that it would work out well. It is important that sustainability goes hand in hand with financial return.”

- Promotion -

For Länsförsäkringar, the history of responsible investing is linked to its origins. The company is formed of 23 local insurance companies which have always been engaged with local societies on environmental and social issues. Profitability was enhanced by encouraging society to behave responsibly, thereby avoiding accidents, while preserving the environment and improving society’s wellbeing simultaneously. The organisation’s commitment to responsible investments has increased over time and solidified with the hiring of Hillesöy in 2014, at which point her full-time position was created and Länsförsäkringar AB became a signatory of the UN Principles for Responsible Investment (UN PRI). Her responsibility is to ensure that ESG principles are part of the manager selection process, to work with the fund managers on their own ESG process, to continuously develop Länsförsäkringar’s approach to responsible investments and to engage with the companies that the organisation invests in (even
when done indirectly through external managers).

Christina Hillesöy

“On an overall basis”, remembers Hillesöy, “I was warmly welcomed. No one resisted the increased focus on ESG, as it was already taken into consideration before. The real challenge was to find managers that had both good financial management skills and strong ESG principles and processes. It could be very frustrating, and it still happens
sometimes.” One of Hillesöy’s and the External Management Selection team’s goals is therefore to try and promote responsible investing amongst external fund managers, and other asset managers, in order to increase their level of ESG-proficiency and the breadth of product off ering. At Länsförsäkringar, the ESG side of the manager selection process is performed based on a 35-questions assessment which covers three main topics: the organisation’s commitment to ESG including policies and ESG teams, the engagement with companies, and the integration of ESG in the investment process. A score is established and reviewed annually. The team will select the managers with the best score within the relevant product category, provided that the financial performance is satisfactory. Hillesöy and the External management selection team team meet annually with the external fund managers to provide feedback and advice. “Many external managers are very keen on getting advice”, she says, “especially those who have not come very far yet.” “When we invest in external funds, we cannot decide which investments they should exclude”, Hillesöy explains, “but we try to persuade the managers to follow our exclusion list. We do see some fund managers implement changes, especially when it comes to controversial weapons, since it is such a
big issue for many Scandinavian investors”. “We also encourage fund managers to engage directly with the companies they invest in as well as integrate ESG into their investment analysis”, she adds.

In general, Hillesöy wants to drive ESG integration within existing funds, as well as support the creation of more responsible products. Some markets in particular are not very mature, she believes, such as in the case of Emerging Market credits. Private equity has been an early mover in the alternative investment space, but there is a still room for improvement. Equity and credit products, especially in the traditional long-only developed market, have integrated ESG criteria but they can also develop
further. In particular, relative managers should shift to the new indices that take ESG into account, instead of the conventional indices that include many harmful companies. In fact, it is surprising if not slightly disappointing that there are not more ETFs available that invest in these indices. Hillesöy adds that responsible investment managers across asset classes should shift towards selecting the best ranking investments according to ESG criteria instead of merely focusing on eliminating the worst ones.

Another area where Hillesöy is surprised responsible investment has not been more integrated is the hedge fund industry. After the reputation of the hedge fund
industry suffered so much from questionable ethics during the last financial crisis, she believes ESG would off er a way to redemption (no pun intended). She admits that it is currently difficult for certain strategies to find the right approach to integrate ESG investment criteria, but the hedge funds should organise themselves better, drive change and define their own standards. They should follow the example of the private equity industry has done already a few years ago. Concretely, it means forming or reinforcing committees within hedge fund trade organisations, providing guidelines and templates and promoting responsible investment across strategies.

Gunnela Hahn

One burning topic among investors today according to Hahn, is to measure the impact investments have on society. She welcomes this focus, since ESG is not equal to sustainability – a tobacco company can have the highest ESG scores for example. Nowadays, an increasing amount of information is available about the purported degree of sustainability of a product, but does the measurement correspond to the actual goal behind the responsible investment policy? “A fund may publish its carbon foot print”,
Hahn explains, “but it could be misleading. A solar panel manufacturer will have a higher carbon footprint than a bank, which lends a lot of money to carbon-intense projects.” Those familiar with carbon-measurement terminology talk about “scopes”, which determine which emissions are being measured. Scope 1 measures the energy generated and used by the company itself. Scope 2 looks at the energy consumption the company would source from outside. These are relatively easy to measure in terms of carbon footprint. Scope 3, which is the hardest to measure but also the broadest, includes the emissions of carbon dioxide and other greenhouse gases in the whole value chain, from suppliers to the use and deposit of the end-product itself, and so on. In most sectors, Scope 3 stands for over 80% of the total emissions. As an example,
Hahn explains that in the car industry, the biggest part of the carbon footprint comes from driving the cars, not from the actual production or distribution of the cars. Some talk about Scope 4, which could include the negative footprint, as in energy savings and increased efficiency generated by the use of end-products, such as in the case of solar panels. “Scope 3 is already difficult to measure”, Hahn says, “and Scope 4 is not captured at all in carbon footprint measurements currently.”

“For asset managers and the financial industry in general, carbon footprint measured as it is today is a good start, as the use of numbers is a way to approach the issue that is familiar to most in this industry,” Hahn comments. “But it should only be the first step of a more thought through climate strategy. An in-depth analysis of the opportunities and risks in the whole value chain needs to be performed.” According to Hahn, the carbon footprint or other such simplified numerical measurements should not be used to communicate with the end-investors, and it should not drive the investment selection process alone. There is a risk that an asset manager will have to abstain from investing in good companies, such as those with attractive Scope 4 scores. “People want simplified measurements, but carbon footprinting can be very misleading,” Hahn concludes.

That being said, for Hahn, the financial industry’s progress has accelerated in the SRI dimension at a somewhat surprising speed. She explains: “When we exited fossil fuel investments in 2009, not many other asset managers were moving. Today, everyone is looking at carbon as a strategy to reduce risk and find opportunities. What surprised me was that it became so big and so suddenly. Scientists have warned us about global warming for decades. Perhaps the Paris agreement was a trigger and what followed was a large snowball effect. Also, the divestment movement probably played a huge role.” As a consequence, the advantage for early movers like the Church of Sweden is that the relative performance of their decarbonised portfolio is positive. This should serve as an example to other funds and incentivise them to accelerate the adoption of sustainable investment practices, and as Hillesöy prescribes, to be amongst the first to seek best-in-class companies in this dimension. If the trend continues the companies
that are best at ESG will certainly be tomorrow’s outperformers, not only because they will be better positioned fundamentally and carry less risk, but thanks to the inexorable shift of the financial industry into more sustainable investments.


This article was first published in a special report co-produced by NordSIP and Hedge Nordic. The special report can be accessed here.


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