The Art of Procuring Sustainable Funds

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    Stockholm (NordSIP) – Since its launch a little over a year ago, the Swedish Fund Selection Agency (Fondtorgsnämnden, or FTN), responsible for selecting funds of high quality for the Swedish premium pension fund platform, has been busy assembling a team of experts and outlining the rules of the game. Finally, on 30 June, the agency initiated its first-ever procurement process, searching for actively managed European equities.

    “As a representative of all ultimate asset owners, FTN has a big responsibility but also the possibility to drive change at many levels,” declared Nadine Viel Lamare, the agency’s Sustainability Strategist and Communications Officer, upon joining the organisation in December last year. “Compared with a situation where no sustainability requirements when it comes to ESG integration have applied to the funds on the platform previously, the bar will be raised significantly,” she said at the time.

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    Now that the first procurement process is underway, NordSIP reached out to Viel Lamare to hear how this raised sustainability bar is playing out in practice.

    Ambitions backed by law

    “The ambition level is high, as FTN is responsible for procuring cost-efficient, sustainable and controllable funds of high quality,” she asserts. “This stems from the requirement in the procurement law regulating FTN. The law also stipulates that fund agreements shall include conditions requiring the fund manager to manage the fund assets in an exemplary manner in terms of sustainability through responsible investment and ownership,” she adds.

    As a baseline, the Swedish law that governs FTN’s activities sets out that a fund manager should observe what follows from international agreements that Sweden has entered into and which relate to sustainability issues. “The mandatory requirements and the RFP questionnaire have been designed to meet these minimum requirements and to assess the quality of the fund management for this active European equity mandate and the cost for doing so,” explains Viel Lamare.

    Apart from submitting their annual sustainability report, aspiring fund managers are also expected to provide extra information on, e.g., Principal Adverse Impact (PAI) according to SFDR, sustainability-related material risks and targets, evidence of integration in the investment decisions, procedures and processes to identify and assess material sustainability risks, etc. Viel Lamare insists that such special requirements must be set in the procurements to protect the interests of pension savers. “That said, fund managers who have participated in other tendering processes will be familiar with the asks in the RFP as the scope of the FTN procurement documents is in line with established international industry standards,” she says.

    The quest for high quality

    As the Request for Proposal the FTN has just published states, “a Fund Manager that intends to offer a fund on the fund platform must manage fund assets in an exemplary manner in terms of sustainability.” We ask Viel Lamare to elaborate on what exactly it means.

    “For FTN, high quality in terms of sustainability means that sustainability should be an integral part in every step of the management of the fund, from investment philosophy to risk control and administration,” she says. “Thus, sustainability is not assessed on its own; it is an integral part of the quality assessment of the fund as sustainability factors might have an impact on risks and returns.”

    According to Viel Lamare, FTN expects a high-quality fund to have procedures and processes in place to identify and assess material sustainability risks and business opportunities related to sustainability in the businesses in which a fund invests. “Also, the manager should have procedures and processes in place to identify and assess whether businesses, existing or potential investments in the fund, are associated with violations of any of the ten principles of the Global Compact, the OECD Guidelines for Multinational Enterprises and the UN Guiding Principles on Business and Human Rights (UNGPs). These procedures and processes are to be integrated with the fund’s investment and active ownership processes,” she adds.

    The questions in the RFP have been designed to assess the quality of every step in the process as well as the consistency between them.

    What’s next

    The final interview phase of the procurement process is key, according to Viel Lamare. “It is an important step designed to verify and validate the tenders received,” she points out.

    As to future procurements, it might be fair to consider the pilot case of searching for active European equity funds as a blueprint. “What you see in this procurement material will form a base for sustainability requirements for other procurements,” comments Viel Lamare. “However, FTN will, for each procurement, review all requirements and adapt them to suit different asset classes and evolving sustainability standards,” she concludes.

    Image courtesy of @Binniamin Halid for NordSIP
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