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    Northern European Asset Owners’ ESG Priorities Laid Bare

    Stockholm (NordSIP) – The main sustainability-related priorities and frustrations of Northern European institutional investors are highlighted in a survey commissioned by American Century Investments and carried out by Danish consultant Jesper Kirstein.  Focusing on equity investing, the study includes the input from 41 investors from the Netherlands, Sweden, Denmark, Norway and Finland with total assets under management of EUR 1.4 trillion.  NordSIP is present as the results of the study are revealed and discussed by Kirstein and American Century’s Head of ESG and Sustainable Investing Sarah Bratton Hughes.

    Article 6 funds’ days are numbered.

    Although funds classified as Article 6 under the EU’s Sustainable Finance Disclosures Regulation (SFDR) make up around a quarter of the respondents’ externally managed equity allocation, the overwhelming majority plan to exclude these in the near future.  Article 8 funds, which account for half the current exposure, will become a minimum standard and interest in Article 9 strategies is expected to grow.  According to Kirstein, the fact that two thirds of the respondents’ equities were externally managed shows that the Northern European trend for insourcing this asset class may have tailed off.  He believes “this highlights the big role that managers can play in providing thought leadership, research and analysis to investors.”  There is nevertheless a diminishing role played by purely active strategies, with the lower cost of passive and enhanced products having proved attractive to cost-conscious Northern European institutions.  Many of these enhancements have focused on ESG factors, with larger investors setting up customised benchmarks in some cases.

    Social factor measurement headache.

    81% of the respondents find the measurement of the “S” in ESG to be very, or somewhat, difficult.  As Kirstein points out, social outcomes are more readily defined and measured within impact strategies.  However, pure impact remains marginal in most equity allocations, and there is a lack of comprehensive social metrics integrated within mainstream strategies.  Kirstein takes the opportunity to highlight emerging markets (EM) as another problem area mentioned by the surveyed investors.  There is a lack of good quality EM ESG data, but for Kirstein that leaves room for managers and investors who can collect their own data and thus add value by considering social factors in their stock selection.

    Faced with the limitations of EM data, Bratton Hughes believes one should “not let perfection get in the way of good.”  In other words, she thinks that success in sustainable investing in emerging markets hinges on active managers using engagement as a tool for filling data gaps.  Continuing the social theme, Bratton Hughes stresses the importance of the “just transition” when steering portfolio companies towards better environmental practices.  This can mean focusing on how staff are being retrained or redeployed, for example.  She believes there has been some political and social pushback on ESG recently, perhaps caused by difficult economic conditions: “we need to get away from the concept of de-growth and really move to re-growth.”  Bratton Hughes says that a global, holistic ESG approach must consider allowing for emerging markets to continue growing, while developed markets seek to wind down detrimental activities.

    Exclusion lists persist but active engagement is the future.

    The study results show that Northern European investors still operate under quite extensive ESG-related exclusions but would prefer to implement more ESG-integrated strategies and those that focus on companies that are transitioning towards better ESG standards.  These approaches are considered by most respondents to offer better performance potential, and therefore a better fit with their fiduciary duty.  Kirstein points out that ESG integration is still a vague concept, and investors need to do their due diligence to avoid greenwashing.  Another result worth noting is that few respondents wish to receive Sustainable Development Goals (SDG) related reporting from their managers.  The feedback is that these are too vague to be useful for institutional investors.  The priority is instead given to carbon reporting and especially information on engagement activities.  The survey demonstrates that Northern European investors really want their equity managers to meet portfolio company management face-to-face to instigate positive change.  Collaborative engagement is also seen as a good way of increasing leverage.  However Bratton Hughes believes managers claiming genuine ESG integration should not outsource engagement and voting to external providers.  She explains that investors want to know that engagement processes are time-bound and to be kept informed by their managers of concrete outcomes.

    Asset owners must do their due diligence.

    Referring to the scepticism surrounding asset managers’ self-classification under SFDR, Bratton Hughes stresses that “there is no short-cut for old-fashioned due diligence, as much as we all wish these regulations were a silver bullet.”  She mentions comments from survey respondents having investigated Article 8 funds only to conclude they are Article 6 level at best.  With deep-dive due diligence, face-to-face company meetings and active management coming to the fore, this survey reveals that Northern European investors value longstanding, old school fundamental management skills as still highly relevant for the successful integration of ESG within equity portfolios.

    Image courtesy of American Century Investments
    Richard Tyszkiewicz
    Richard Tyszkiewicz
    Richard has over 30 years’ experience in the international investment industry. He has worked closely with major Nordic investors on consultancy projects, focusing on the evaluation of external asset managers. While doing so, Richard built up a strong practical understanding of the challenges faced by institutional investors seeking to integrate ESG into their portfolios. Richard has an MA degree in Management and Spanish from St Andrews University, and sustainability qualifications from Cambridge University, PRI and the CFA Institute.

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