Walking the ESG talk

Written By: Stephen Hearle Director, Global Institutional Business Nordea Asset Management

Stephen Hearle from Nordea Asset Management pinpoints five questions to ask before choosing your ESG partner

There is no question that over the last few years ESG has moved from niche to the mainstream. This has recently led to a proliferation of options and solutions available to investors. In absence of clear and established ESG standards to date, finding the right solution or the right ESG partner has hence become increasingly challenging for investors, fund selectors and distributors. To help you navigate through this maze, here are the five key questions you should ask when choosing the right ESG solution – or an asset manager to be your ESG partner:

1. Do they offer ESG solutions aligned with your needs?
Answering that question starts with understanding your needs and expectations. For instance, are there particular values that are important to you? What is your framework and the expected outcome of your investments? In order to not give up on performance, you probably need to look for a partner offering solutions using an approach, such as ESG integration, with the potential to deliver long-term returns while meeting certain responsible investment standards.

If you are strongly driven by values (and ready to accept the potential performance deviations this may lead to) you might want to exclude some sectors or even specific companies from your portfolio. Another approach could be focusing on certain themes, e.g. climate change, that are important to you. The RI space offers a broad range of approaches meeting these expectations to different degrees. It is important that you pick a partner that can understand these approaches and offer you various options depending on your needs.

2. Are they able to prove a longstanding expertise in RI or ESG?
Expertise in ESG cannot be acquired overnight, but rather it requires a longer learning curve and the right resources. An asset manager who has been working on RI and ESG policies and practices for a long time has had time to understand the difference nuances it takes. Their organisation must live up to its values and demonstrate sustainability also from a corporate social responsibility (CSR) standpoint. In essence, it must be part of their DNA. As an investor you should take a note of the organisation’s long-term commitment and milestones within the field of RI.

3. Do they have proof points to demonstrate that they are walking the talk of ESG?
No matter what your approach to RI is, make sure that your asset manager is truly integrating ESG into their investment processes. This starts with an understanding of the resources allocated by the organisation. Is there an internal team? How large and experienced is it? Do they produce internal ratings or rely purely on, often flawed, external data? Another key area is to understand to what extent ESG data is having a real influence on investment decisions and incorporated into portfolio construction. Furthermore, asset managers should make field trips and engage with companies on a regular basis. These measures place the responsible investor in a better position to understand and assess how a company is positioned to manage ESG opportunities and risks.

4. Are they transparent?
We all require transparency and data from the companies we invest into. The same principle should imply to asset managers: their activities must be demonstrated and disclosed in order for you to be able to understand their ESG approach and its value added. Examples of useful ESG reporting are Annual Reports, PRI Transparency Reports, voting statistics as well as reports on corporate engagement activities. You should also expect to find all relevant RI policies publicly available.

5. Do they actively seek change?
Change or impact creation is an important feature of ESG. Active ownership is a key approach to foster such change. It can take various forms, such as exercising voting rights as a shareholder and engaging with the investee companies through active dialogue. It is generally regarded as one of the most effective mechanisms to reduce risks, enhance long-term returns and drive positive change, so make sure your ESG partner also “walks the talk” and gets out to the field to meet the companies. In addition to using the voting rights at AGMs, all investors across asset classes can interact with companies to foster positive change. Some of the most used means of engagement are investor initiatives and dialogues with companies. Often it is also useful to make field trips to the areas where companies operate in order to gain valuable insight into the company.

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and representative offices. This document is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. This document may not be reproduced or circulated without prior permission. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.