By Hamlin Lovell, NordicInvestor
This interview is part of our upcoming report on ESG in the Nordics
NordicInvestor interviewed Markus Lindqvist, who leads a growing team of four dedicated ESG specialists, who work with the firm’s ESG committee and specific representatives for asset classes. Aktia has recently acquired the wealth management unit of Taaleri, taking total assets to over EUR 15 billion. The firm has also recently joined forces with the UNPRI and others to participate in the advisory committee of ASCOR in order to focus on ESG for sovereign debt.
ESG Priorities and Coverage: analysing sovereign debt
ESG priorities include climate, biodiversity and the circular economy.
ESG is integrated into all investment activities, whether or not products are labelled as explicitly ESG. It applies to in house strategies and external ones, where Aktia is seeking strong ESG integration and also allocates to some dedicated ESG and thematic strategies.
“Priorities vary between asset classes and sectors, based on materiality,” says Lindqvist.
Aktia was one of the first investors to apply ESG to sovereign debt, in emerging and frontier markets, about 15 years ago. Aktia has now joined forces with other institutional investors, such as the UK’s BT and Church of England pension funds, to participate in the Advisory committee for the Assessing Sovereign Climate-related Opportunities and Risk (ASCOR), which advises the UN PRI among others on scoring sovereign debt. “This is an exciting project that will lead to new tools to support investment decision making,” says Lindqvist.
“The one exception is commodities where ESG cannot be integrated into the current product design,” says Lindqvist. “Certainly there could be ways in incorporating ESG into a commodity strategy but our current product solution is a fund-of-fund that is used in allocation portfolios for additional diversification and the main purpose is to track the global commodity market allocation. The positions are taken through derivatives,” he explains.
Data and Reporting: in house analysis is essential
Lindqvist is frustrated that smaller companies, and frontier market sovereigns, may receive lower ESG scores, because bigger companies and larger countries report more, and not necessarily because the smaller companies or nations actually have worse ESG performance. “One of Aktia’s small cap funds, our Nordic Micro Cap Fund, is not rated by either MSCI or Sustainalytics, due to lack of data coverage,” says Lindqvist.
He expects that there will be more consolidation amongst data providers, but is also pleased to see out of the box thinking from startups such as Finland’s The Upright Project.
For scope 3 carbon data, companies are starting to focus on supply chains and end uses of products. Beyond that there are multiple themes across environmental, social, health and knowledge creation. “We are expanding our focus on social issues, applying more qualitative analysis to clean data and integrate it into decision making, and defining our own peer groups for best in class analysis. The raw data maybe sourced externally, but the analytical tools are being developed in house,” says Lindqvist. “Data gaps will be a problem for a long time and asset managers need to do it themselves,” he adds.
Exclusions, Best in Class, Benchmarks, and Transition: emphasizing transition
“We have currently around 100 companies/issuers on the list. The list is growing. We have not seen any companies that would have been removed from the list but this could certainly be the case at some point,” says Lindqvist. The list covers weapons, tobacco, gambling, adult entertainment, cannabis, predatory lending, coal and peat for equities. Corporate credit also excludes all fossil fuels, and alcohol.
Nonetheless, analysis also considers elements of best in class performance. “Though there are no best in class strategies or products as such, or formal minimum criteria for ratings or scores, we do qualitative analysis of companies relative to peer groups, using a mix of in house and external analysis,” says Lindqvist.
Standard benchmarks are used for now. “We currently use standard benchmarks. We have discussed about ESG benchmarks but not taken any action yet,” says Lindqvist.
Aktia emphasises future ESG performance, including carbon transition, rather that current ESG performance. “We want to see a positive trend of development. The easiest approach is to divest but this does not lead to any quick or real impact. We would rather focus on where we can help companies to take the necessary transition, and see real positive change in a structured way”, says Lindqvist. For instance, “we look at transition especially from energy producing perspective relating currently to fossil fuels and the strategy and ability to transition towards renewables,”.
Impact and SDGs: tailoring priorities to strategies
Aktia has created an impact fund, widely spread over microfinance, green bonds, renewables, and also listed companies and ETFs. ESG ETFs are also being used more broadly.
At firm level Aktia is prioritising SDGs 8,9,13 and 17, and reports on them annually. “SDG reporting will be added to listed equity and corporate credit funds in due course, and is likely to be broader than at firm level. At fund level it also varies more by strategy. For instance, emerging market debt could focus on gender equality, which is not actually a firm level priority,” says Lindqvist.
“The firm may develop more dedicated green investment solutions as well,” he adds.
Active ownership and engagement: talking to multiple stakeholders
Active ownership, stewardship and engagement blends a growing amount of direct dialogue with collaborative initiatives where Aktia has taken the lead on a CDP engagement non-disclosure campaign that led a gaming company to provide better climate change reporting. ”We are also active in nomination committees for smaller Finnish and Swedish companies, suggesting board composition and remuneration,” says Lindqvist.
Aktia engages not only with companies, but also with external asset managers, non-governmental organisations (NGOs), and government institutions, especially on climate, data, transparency and human rights. ”Over the past 18 months these have been remote but physical meetings should resume,” says Lindqvist.
Environmental targets and reporting: going beyond climate
The whole group targets net zero by 2050, across all asset classes, and a roadmap of interim targets for 2030 is in the process of being finalized by early 2022. ”But the exact year is not the key, because we hope that a low carbon economy could be reached earlier,” says Lindqvist.
The challenge is being pursued from many angles: scenario analysis; direct engagement with companies; investor initiatives; green investment solutions, and engagement with external managers.
Extensive climate reporting includes carbon footprints, scenario analysis, physical and transition risks, and climate VAR. “Scenario analysis looks at how portfolios are aligned versus the Paris agreement, and we expect to report progress and engagement regularly,” says Lindqvist. Aktia publicly supports TCFD recommendations, which is also its main reporting standard, and is a signatory of the 2021 global investor statement on the climate crisis to governments.
Environment also goes beyond climate even though this is not so easy to report on: “more broadly, environmental research covers biodiversity and the circular economy, where reporting best practices and indicators are not yet as advanced as for climate,” says Lindqvist.
EU Sustainable Finance Framework: SFDR 8 is too broad and the taxonomy is too narrow
Aktia expects to allocate mainly to SFDR 8 and 9 funds, but this is relatively easy for long only equity and sovereign debt products.
The SFDR however is only one of many analytical and reporting frameworks. “The SFDR is a challenge for professional investors, and even bigger one for retail investors, and it does not get rid of greenwashing. The SFDR will increase transparency if asset managers report similar measures for article 8 and 9 products, but explaining it to retail investors will be a challenge,” says Lindqvist.
Aktia has identified several external service providers, including The Upright Project, to help with taxonomy eligibility, the SFDR technical standards, such as Principal Adverse Impact (PAI) indicators, measuring the Do No Significant Harm (DNSH) principle for SFDR 9 products. “It is quite easy to have an article 8 fund but very hard to have an article 9 fund,” he argues.
Aktia believes that the taxonomy in its current form is too narrow. “The taxonomy too narrow to meaningfully direct corporate and investment cashflows into sustainable activities and business models. Many companies outside it could be making a positive contribution. For instance many transition strategies will not fit into the taxonomy, and there are also different opinions about how to define transition. The taxonomy is also of limited help in selecting products and is not going to push impact investing into the mainstream,” says Lindqvist.
Going forward the taxonomy could become more useful as it develops and broadens. “It could be expanded to cover a broader range of environmental issues, as well as social issues, such as healthcare for ageing populations, urbanisation and education in emerging markets. These are all very important for the UN Sustainable Development Goals (SDGs),” points out Lindqvist.
Like the SFDR, the taxonomy is only one piece of the jigsaw and there are plenty of other initiatives predating the EU agenda that could be more useful. “For us the Taxonomy is only one of many frameworks, which also include TCFD and Climate Action 100 +, which have driven positive collaboration between asset managers, companies, and investors, long before the EU Sustainable Finance rules were conceived”.
