Stockholm (NordSIP) – Moderated by NordSIP Editor-in-Chief Aline Reichenberg Gustafsson, the October 24th Northern Trust lunch seminar roundtable on Global Trends in ESG opened up a ‘space between spaces’ serving both to clarify the definitions sustainable investment operates by and elucidate the challenges ahead of it. In discussion with panelists Mamadou-Abou Sarr (Global Head of Sustainability, Northern Trust), Carina Silberg (Head of Sustainability, Alecta), Irene Mastelli (Investment Strategist, Nordea) and Andreas Ullsten (Senior Advisor, Impact Invest Scandinavia), themes were broached as to how the Sustainable Development Goals (SDGs) can be integrated, how impact can be achieved across portfolios, and what role governance and ESG more broadly plays.
Among the breadth of panel questions, which ranged from, e.g. the constraints on liquidity due to the long-term nature of sustainable investments, to whether ESG research, innovation and development are sufficiently remunerated in the companies driving the changes to the global economy, two pivotal questions served to set the framework for the ensuing discourse. 1) Does it make sense to approach E (Economic), S (Social) and G (corporate Governance) separately, is one dimension considered to be more important than the others, and are investors on average focused on one to the detriment of the others? And 2) do portfolio managers analyse investments through the lens of specific SDGs, or should ‘ESG’ or ‘sustainable investing’ cover the SDGs in general?
ESG: The meaning of letters
Evolution to cover the whole spectrum of ESG occurs naturally as a consequence of initial involvement in one area, Mr Ullsten suggested. Nordea’s Irene Mastelli offered that the aspect of governance may be dominant, but that ESG is approached differently from its three different entry points (E, S and G). It necessarily evolves holistically as a result of dialogue and mediation, where the term ESG itself has been instrumental and helpful in moving the mainstream investment community towards sustainability. Alecta’s Silberg noted any combination of the components of ESG behaves differently in different geographical regions: the outperformance of emerging markets contributes to the governance component in those markets, for example, but clients still demand a general, holistic integration of ESG into investment portfolios. The question then becomes how much a manager can do in one particular sector by, for instance, picking the best companies and excluding the worst, in the hope that aggregate returns will reflect ESG integration across the board, despite individual differences in both manager approaches and ESG components themselves.
Conversely, E, S and G don’t have the same level of materiality when it comes to financial importance, despite being interrelated at some point, Northern Trust’s Sarr offered. Due to the attention the market is currently giving ESG and emerging markets, now may well be the time to move beyond its packaging as an acronym and to delve more into what its particular components mean, considering that people often mistake the ESG ‘package’ for an investment style, and are consequently often disappointed with its outcomes. Sarr, who himself is passionate about the ‘S’ (social) dimension, or with how helping people translates into financial returns, suggested that area perhaps both provides and requires the most subtlety, in contrast with the tropes of corporate governance that people are most comfortable with. More attention, therefore, needs to be paid to the other components of ESG, and how these are implemented in investment portfolios.
One of the biggest challenges for the financial industry, it emerged from audience participation, is how scattered the market is. For institutions, for example, there are thousands of ways of explaining and implementing ESG, and institutional clients rarely have the same standards. The expectation from individuals buying stocks may be that there is a similar kind of ESG value across the board, but this is not so considering the thousands of different managers with different styles of harvesting value.
SDGs: Rendering the intangible tangible
These varying but complementary views led naturally to the topic of whether the UN SDGs should be considered independently or as unique factors regarding their integration into investment portfolios. Alternatively, is the SDG 2030 agenda all-encompassing enough to translate into changes at each or some of the individual levels in terms of the kinds of investments made? Mastelli of Nordea suggested that it is hard to assess how an entire portfolio may be improving, by looking at individual SDGs. Available measures, such as reducing carbon footprints, predominate. Numerous methodologies related to carbon emissions can touch on a lot of the SDGs without making it possible to assess each component individually. Impact Invest Scandinavia’s Ullsten concurred, suggesting the metrics are lacking to measure tangibles. SDGs provide a helpful metric, but not all SDGs are investable material, he said, whereas the degree of investability is significant for the various groups of investors with very different predominating concerns.
Julia Wikmark, Responsible Investment Associate with EQT, the Swedish private equity investment group, provided the more positive insight from the private equity space that the implementation of SDGs in private equity offers an excellent opportunity for EQT to exercise active management as majority owners in portfolio companies, and assess how they go about their implementation. The role of EQT’s sustainability team is to provide these businesses with the right tools and right examples to make it tangible for them in the face of the conflicting reports and different ways to understand criteria. It is also to raise awareness of the SDGs themselves and consider what solutions are needed and what companies and sectors can provide these answers.
Foreshadowing the sometimes conflicting issues, the opening keynote on Global Trends in ESG delivered by Sarr included commentary on macro ESG trends and the need to harmonise how we look at ESG scores. He underscored that not all indexes are created equally and the many methods and ways of evaluating compliance that can mean very different things for various companies. Mr Sarr also addressed the development of the tools over the past 20 years to assess CSR within a portfolio. These provide different ways to achieve outcomes – where not all are meant to deliver outperformance, and the point is that divesting or lowering carbon footprint strategies leaves or creates the space for other opportunities to invest, rather than necessarily expecting immediate returns from the sustainable elements in a portfolio.
Before the launch of the UN SDGs in 2015, Sarr suggested, most earlier frameworks for sustainable finance were merely principle-based, whereas the SDGs have provided new metrics for assessing advances, forcing a more definite distinction between impact and impactful investing. Impactful investing requires other mechanisms than a company’s investment process and other factors to take into account, such as major market shifts, or the shifting generation in the investment world to millennials, who increasingly insist on ESG and sustainability solutions as a component of the investment process.
Amid the inherent uncertainty resulting from the meeting of a wealth of experience at the roundtable, one thing appeared clearly: the certainty of continuous change amid shifting definitions and increasing expectations.
Image: (c) NordSIP