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    Boutique ESG Research to the Rescue

    Stockholm (NordSIP) – With sustainability questions dominating the agenda, the financial industry is scrambling to fill the ranks with qualified ‘ESG-certified’ or at least sustainability-trained individuals. For seasoned sustainability experts, the opportunity to leverage expertise and answer more than one firm’s needs is more attractive than ever. Dag Messelt (pictured), most recently Sustainable and Responsible Investment coordinator at Alfred Berg – BNP Paribas Asset Management, decided earlier this year to launch his own firm, sustainAX, to dedicate his time to improving sustainability in the investing world, helping investors, investee companies and investment banks make better decisions. NordSIP reached out to Messelt to understand his mission and find out how he will fulfil it.

    Founded in February 2021, sustainAx is based in southern Sweden, in Malmö, and counts three employees, including Messelt. “We found that we can contribute to a more sustainable world by making our competence available to investors and companies that aim to do the same but need help. Our starting point is to make ESG research reports, not the algorithmic number-crunching type that we see plenty of, but human quantitative and qualitative research of companies,” he explains.

    “We focus on the private and the small-cap part of the investment universe, the part that the other ESG research providers do not research. As there are many under-covered companies, we focus on those that our investor clients ask us to cover. To date, we have released 2 ESG sector reports and researched 110 Nordic companies. We currently have the capacity to cover a 200-company universe but expect to grow this capacity through new hires,” Messelt continues.

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    “I can see how tighter regulation and competitive pressure increase the need for fuller ESG research coverage of portfolios. How can you practice ESG Risk Integration without proper ESG research on all your portfolio holdings? Some investors fill in the gap with portfolio manager desk ESG research for these smaller companies, but it will vary tremendously from one portfolio manager to another. There may even be a conflict of interest when portfolio managers perform ESG research on a company they already like – not necessarily a good starting point for an independent ESG research report,” Messelt explains.

    “Our research help investors identify ESG risks and opportunities and include questions to engage with companies. We also recommend some steps in the direction of financial quantification and ESG Integration,” he says. “If portfolio managers lack the time and the competency to do perform their own ESG research and maintain a full updated ESG research library on all the smaller companies and private companies, we may provide a compelling solution. Our clients can leverage our expertise instead of hiring a dedicated ESG analyst, which is hard to come by nowadays.”

    For Messelt, one of the biggest challenges in the SRI field is the lack of competence. “First of all, experts have their own definitions and terms. Specialists might find them easy to understand but the laymen, not so much. As a result, meetings may become, in the most extreme cases, a collection of monologues with little exchange, unfortunately. An increase in regulatory jargon isn’t helping,” he explains.

    “Secondly, SRI is really about investment processes and not only about reporting, but many don’t see it that way, yet. Publishing an SFDR classification and reporting the ESG average score of a fund is easy. To have a documented ESG Integration process in place and setting up and controlling a detailed investment strategy with KPIs requires much more. The work should start with the processes and the reporting should follow, but today we see a lot of the opposite,” Messelt continues.

    “Thirdly, there are only a few certified ESG analysts out there. The content of what investors include in their ESG research can therefore vary tremendously, and so does the outcome of the research. LinkedIn is exploding with sustainability, responsible investment and ESG titles, while there is little formal training backing it. #esgcompetencewashing is actually an active discussion out there. Smart asset managers now send all their portfolio managers and analysts out for ESG education,” Messelt exclaims.

    “One type of competence that is lacking and harder to source with current inhouse capabilities is environmental and social expertise. ESG analysis often presents ambiguities and dilemmas. Are blue hydrogen and natural gas investments in Norway sustainable? Are the Swedish investments in biofuel the right way to go? Couldn’t nuclear energy be the solution to reducing GHG emissions? Is it true that a Tesla needs 8 years before it gets even with a new diesel car in terms of CO2 emissions? Is offshoring of activities socially ethical? The mining of metals are essential for the electrification of the world but at what human cost? ESG training will help highlight these types of issues, but the technical knowledge necessary to fully understand their implications can take years to acquire,” Messelt says.

    “The EU Green Finance leads to regulation asset managers need to react to. As awareness and quality communication increase, to be a laggard becomes a clear competitive disadvantage. The demand for competence, education, and certification will grow fast. Meanwhile, leveraging on the competence of specialist consultants and researchers is probably the most efficient way to go,” Messelt concludes.

     

    Picture courtesy of sustainAx

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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