ESG Fundamentals can be a key driver of returns
Hilde Jenssen, Head of Fundamental Equities at Nordea Asset Management
ESG investing has not only become mainstream, but is increasingly in the spotlight. In the past, the perception was that ESG investors would compromise on performance, but now it is becoming clear that investing responsibly does not have to mean giving up returns.
At NAM, we believe ESG integration is the key to reconciling financial returns with responsible investment standards. Here, the manager not only ensures the investment adheres to strict ESG standards but incorporates the results of ESG analysis into the investment process.
Our in-depth research highlights which ESG risks are most material to each company; these may be as important to share price performance as financial risks prove to be. A deeper analysis of companies’ ESG performance and dialogue with company managements enable our portfolio managers better to understand not only a company’s ESG status, but also its direction of travel. This helps us to identify tomorrow’s winners, as companies that manage their ESG risks effectively may also be better positioned to manage their business risks in general.
This risk assessment is factored into the fundamental investment analysis that any active manager performs. We believe this marriage of ESG with the fundamentals in the investment process can be a key driver of returns: this is the philosophy behind NAM’s STARS ESG-enhanced funds. The STARS funds aim to beat their benchmarks, invest in companies living up to certain ESG standards and drive change by engaging with companies to improve ESG aspects of their business. These latter two aims are not only consistent with our performance ambitions, but can be part of the performance driver.
At NAM, we see active ownership as a powerful way to foster positive change, protect shareholder value, and enhance long-term returns. Active ownership includes voting as well as engagement activities performed by both our ESG dedicated team (RI Team) and investment team. Within our STARS portfolios, we have worked with many of our holdings to help them minimize their ESG risks and maximize their ability to create value for shareholders.
We’ve seen the potential benefits of ESG investment in the extreme volatility of recent months, during which our STARS portfolios have held up well. The STARS funds have benefitted from their underweight position in energy stocks and materials — STARS strategies do not currently invest in conventional oil & gas producing companies due to the high ESG risks and their limited achievements in contributing to a low carbon transition. At the same time, bigger positions in areas such as technology, where we consider the companies’ management of risks such as data privacy and cybersecurity, have also proven helpful.
I am very pleased with the performance of our STARS products. The portfolios are based on our high conviction stock ideas where our view on how much the company is worth differs from the market. Therefore, our ability to select individual companies continues to drive performance, which our clients should expect from an active manager.
When managed with a close eye on ESG factors, funds like NAM’s STARS range demonstrate the ability to generate attractive risk-adjusted long-term returns.
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. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest key investor information document (where applicable) relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange related transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of the investment can greatly fluctuate and cannot be ensured. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. The Legal Entities’ branches, subsidiaries and representative offices are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Investment Funds, S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and representative offices. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.