Stockholm (NordSIP) – On 11 November, Forever Sustainable gathers an impressive number of sustainability experts in the Norrsken House and online, even though everyone must be busy following the ongoing COP27. The topic is Sustainable Finance in an Unstable World. As customary for Forever’s events, the audience consists of a mixture of scholars and practitioners, corporate sustainability specialists and investors.
The afternoon’s highlight is a panel discussion attempting to divine the future of ESG, deftly moderated by Erik Feldt, Partner at Forever. Joining him on stage are Anette Andersson, Senior Sustainability Investement Expert at SEB Asset Management; Anna Strömberg, Portfolio Manager and Head of Sustainability at Carnegie Fonder; Fredrik Nilzén, Head of Sustainability at Swedbank; Fredrik Nordström, CEO of Fondbolagens förening; Niclas Düring, Chief Impact Officer – ESG Private Equity at Trill Impact/Nordea Asset Management; and Tobias Fransson, Head of Sustainability, Finance & Communication at AP4.
Defying ESG critics
The immediate impression is that the sustainability experts on the panel do not seem particularly anxious about the massive criticism that ESG has attracted lately. If ESG is indeed a “broken idea” incapable of “saving the world”, as the Economist claims, then those practitioners who work with the framework daily are taking it with admirable ease. “In the future, ESG will become just a natural part of financial analysis,” comments Andersson. However, that doesn’t mean that her job is in danger of disappearing, as there will always be room for improvement and engagement.
Strömberg agrees that sustainability is a natural part of any sound fundamental analysis. According to her, ESG data is a way to understand a company’s sustainability risks. She adds that plenty of exciting investment opportunities exist among companies trying to transform society.
Düring points out that it is easier to drive and push for sustainable change in the private markets, where his company operates, as it offers direct access to management and all the available information. He sympathises with the conundrum of investors in the public space who do not have the same luxury.
Data will improve
The panellists do acknowledge some of the critics’ points. ESG scores can be confusing as they differ significantly among data providers and rating agencies. According to Andersson, this is to be expected, and she suggests that ESG ratings should be compared to the different valuation targets provided by analysts rather than to credit ratings. The scores are also expected to converge somewhat once the CSRD regulation is fully implemented.
Nilzén reminds us that it has taken forty years to develop the IFRS to its present state. While the standardisation, regulation, and integration of non-financial information are going much quicker, we are still in the middle of this transparency revolution, according to him. “Become an ESG controller,” he urges the students in the audience.
Rigged and ready
It appears that the Swedish financial industry, at least, is well-positioned for the sustainable transformation ahead. According to Nordström, who closely follows market trends, Swedish asset managers have high sustainable ambitions. The majority of the funds in the country are classified under SFDR article 8. Almost all fund companies are PRI signatories, and at least 80 % have net zero targets and climate reporting.
Even investors not directly affected by the EU sustainable regulations yet, such as AP4, seem to welcome the new rules and are proactive in implementing them. “We have already rigged the organisation accordingly,” says Fransson. According to him, out of 25 investment specialists at AP4, 15 already have hands-on sustainability experience.
Helping the transition
The panellists also air their frustration over being punished instead of rewarded by the markets when financing the sustainable transition. “As a bank, we have a commitment to our lenders, even those in ‘dirty’ industries,” says Nilzén. The bank can try to nudge them in the right direction by adjusting the pricing. But he also feels the responsibility to help them issue green bonds, for instance, to accelerate the transition.
The common sentiment seems to be that it is better to stick with an investment and help the company improve. A lot of companies already have decent plans for the transition. “If we exit, who will make these companies change,” one of the panellists says. Lending, too, can be a powerful tool if you link the loan to meaningful KPIs.
Don’t forget the ‘S’
Touching upon the ‘S’ aspect of ESG, the panel discusses why this sustainability area is still relatively immature. It is natural, according to Strömberg, as the regulation is still lagging. The EU taxonomy, for instance, starts with the ‘E’, and there has been less focus on the rest. “Covid, however, taught us a bit about the importance of the ‘S’,” she adds.
Andersson, on the other hand, believes that asset managers already work more with the ‘S’ than they think they do. For instance, they consider working conditions across the value chain, diversity, and fair remuneration. And as to insufficient regulation, she points out that we already have the minimum safeguards and the DNSH principle incorporated in the EU regulatory framework, even without a separate ‘S’ taxonomy.
The panellists are aware of the gloomy reports of late claiming that capping climate warming at 1,5 degrees is unattainable. They agree that the net-zero target is not based on a realistic assessment of where we currently are. Yet it doesn’t mean we should abandon the target. “It’s a swim or sink moment in time,” says Düring.
And judging by the current aggressive stance of the US fossil lobby, the oil and gas industries must be feeling seriously threatened now. Surely it means that ESG matters more than ever.