By Hamlin Lovell, NordicInvestor

This interview is part of our upcoming report on ESG in the Nordics

NordicInvestor interviewed Janicke Scheele, Head of Responsible Investments at DNB Asset Management in Oslo. The DNB group has some corporate level ESG policies, we discussed the ESG policies of the asset management unit which manages assets of over EU 80 billion for retail and institutional clients.

A holistic approach to ESG

The DNB philosophy is that integrating ESG analysis can both mitigate risks and identify investment opportunities, thereby improving risk-adjusted returns. Beyond this, some products also have exclusions based on ethical criteria.

“ESG policies apply to 100% of assets. We have no non-ESG funds,” says Scheele. E, S and G criteria feed into screening the investment universe, based on international standards and norms and ESG factors, for exclusions, active ownership engagement, standard setting and decision making. DNB is a signatory to or supporter of five different United Nations standards or groups: UN Guiding Principles on Business and Human Rights; United Nations Environment Programme Finance Initiative (UNEP FI); United Nations Principles Responsible Investment (UNPRI); United Nations Global Compact, and The United Nations Sustainable Development Goals (SDGs). It is also a supporter or signatory of the OECD guidelines for multinationals, and two climate-oriented groups: TCFD and CDP.

Benchmarks (and passive investment products) include standardized and customized ESG indices

Some managers effectively carve index products and derivatives out of their ESG framework, but DNB is applying ESG to passive investment products, such as enhanced index products, which have exclusions covering areas including controversial weapons. Benchmarks include standard MSCI indices, and MSCI Paris aligned benchmark, which exclude some companies and sectors and overweight others. “We have also asked MSCI to create some tailor-made indices on passive sector funds within industrials and materials with our own exclusions,” says Scheele.” For all funds, DNB avoids the biggest emitters within coal and oil sands who are not reducing emissions or have no plans to transition to a low carbon economy, and engages with companies to set targets to reduce them,” she adds.

Exclusions criteria and list mostly in line with NBIM

Exclusions cover controversial weapons (cluster munitions and nuclear weapons); environmental and human rights; environment; corruption; tobacco, coal; oil sands; unacceptable greenhouse gas emissions and pornography. For coal the policy is more nuanced than many ESG policies. “Thermal coal is excluded both above an absolute threshold for large emitters and above a 30% threshold, but metallurgical coal could still be investible because we take a transition view,” says Scheele.

DNB’s exclusion list has an overlap with the widely followed Norges Bank Investment Management (Norwegian oil fund) list but there are also some differences. “We have a broader benchmark containing more companies, and therefore also have a few more published exclusions. NBIM, like us, also does risk-based divestment, and has sold over 300 companies, based on their sustainability risk. However, their names are not disclosed,” says Scheele.

However, DNB is mainly an active manager and does not actually have to formally exclude companies in order to avoid investing in them. Since DNB is running relatively concentrated portfolios it can simply select 70 companies from a benchmark universe of 1,600.

Thermal coal, transition and renewables

An active approach is taken to transition. For instance, there is some flexibility to own companies that have only a small portion (below 30% threshold) producing or using coal, if they are transitioning towards lower carbon business models such as renewable energy. An example would be Italian utility Enel, which is mainly using renewables but has a little left in coal and clear ambitions to be net zero.

And if an excluded company divests its coal business, it can become investible again. One example here was Anglo American, which spun off its thermal coal producer Thungela.

Transition is a complicated and fluid area. “There are many dilemmas. We spend a lot of time with companies to set net zero 2050 targets for companies, preferably science based. This could cover scope 1, 2 and 3 emissions. We aim to determine if companies will be aligned with a net zero 2050 world,” says Scheele. DNB encourages companies to use the SBTI framework, though some companies also use other frameworks for their carbon reduction.

Carbon footprints are amongst multiple climate risk metrics 

These targets will be at the individual investee company level rather than the DNB level. Asset owners are setting overall carbon footprint targets for their investments, but asset managers have a different approach. DNB has some funds with carbon reduction targets, both absolute and relative to benchmarks, and DNB Klima has a Paris-aligned benchmark. However, these are product specific rather than firm-wide.

DNB Asset Management has so far not set any explicit target for the carbon footprint of all its portfolios and funds, because unlike an asset owner, it does not have complete control over where the assets are invested. If clients chose to invest in traditional index funds, it might be difficult to dramatically reduce the carbon footprint,” says Scheele.

The goal is instead to offer more thematic products that focus on transition, investment opportunities and active ownership engagement, which could prove to be another route towards lower carbon footprints.

Thematic offering projects rapid growth including DNB Renewable Energy and Future Waves range, geared to selected SDGs

Currently, DNB assets in thematic strategies are around 7-8% of the total, but this is expected to grow very fast. “We expect that it may triple or quadruple over the next three years, and could make up 50% of net inflows by 2025,” says Scheele.

The UN SDGs are one framework for categorising opportunities, around themes such as consumer behaviour, infrastructure, and sustainable cities. DNB has launched a fund called Future Waves, which focuses on the blue economy, the green economy and quality of life, altogether covering 11 the 17 SDGs. “All of the SDGs inform DNB’s approach to active ownership, but the reality is that some SDG themes are easier to invest in line with than others,” says Scheele.

  • The Quality of Life theme pursues the SDGs: (2) Zero hunger, (3) Good health and well-being, and (4) Quality education.
  • The Climate investments theme pursues the SDG s: (7) Affordable and clean energy and (13) Climate action.
  • The Green Economy theme pursues the SDG s: (9) Industry, innovation, and infrastructure, (11) Sustainable cities and communities, (12) Responsible consumption and production, and (15) Life on land.
  • The Blue Economy theme pursues the SDG s: (6) Clean water and sanitation, and (14) Life below water.

There is also a renewable energy fund that is more geared to the EU Taxonomy, in terms of energy efficiency, energy sectors, materials and industrials.

Active ownership, voting, engagement and collaboration in the Nordics and globally

DNB decides how to vote all of its proxies, and provides voting guidelines, though ISS implements the mechanics of the process (based on tailor made research).

For Norwegian companies and holdings in actively managed funds we engage with the company directly. This includes engagement with global companies in areas such as technology.

For smaller company holdings, engagement takes collaboratively together with our consultant (GES, which is now part of Sustainalytics) also working on behalf of other investors, or through other investor collaborations,

DNB works with Climate Action Plus and other investor collaboration forums for instance through UN PRI. “We have also been part of collaborative investor engagement projects around soy, palm oil, cattle and forestry,” says Scheele.

Research and engagement tailored to each company

There is also more proactive engagement around climate, human rights, biodiversity, emerging market supply chains, oceans, water, and sustainable food systems. Research focus areas have included emerging market supply chain risks for technology; data security, and privacy.

The ESG analysis is tailored to each company, because each one faces different ESG risks and opportunities. We look at every company differently however it is based on sector specific materiality analysis.  We dig into the underlying 100+ E, S and G issues and metrics and not only consider a single ESG score for each company. DNB does not follow a best in class approach within sectors as such, but would rather focus on engagement to improve companies’ reporting, sustainability and ESG performance and financial performance.

A constructive dialogue with companies

ESG data is a complex area. “The data is full of errors and inconsistencies but companies are becoming more aware of this. Some investors use the scores passively, but we use them as an input for in house analysis and into our discussions with companies,” says Scheele

DNB monitors over 100 data fields for each company, including data security and privacy. We evaluate the scores and dig into the details which you would not see in the overall score. If a company has a low score due to its anti-money laundering (AML) policy, we will have an ongoing dialogue with the company.

Reactive engagement focuses on ESG incidents, while proactive engagement aims to improve companies’ ESG performance.

We also use our own research to plug gaps in the data.

DNB has engaged with companies on a range of issues including: climate change and greenhouse gases; other environmental matters such as oceans and biodiversity; human rights; other social issues; board structure and independence, remuneration and governance issues including tax and corruption. Our expectations documents forms the basis for these discussions.

Carbon data gathering, and evolving climate exposure, risk and scenario analysis and reporting

DNB has been reporting carbon footprints since 2016, using reporting standards including TCFD. “We mostly use carbon data from CDP and MSCI ESG and fill the gaps on Norwegian fixed income with In house  gathered data and estimated data from smaller issuers,” says Scheele.

As part of the TCFD recommendations DNB has been working on scenario analysis of companies and portfolios. One method is Climate Value at Risk. “We think that Climate VAR is quite challenging to measure, with many assumptions, and much granularity around different physical risks and also technology opportunities. We think that the method that we developed through the Investor Pilot with UNEP FI has continuously improved and is one of the best so far, but it can be further improved and we are very much part of this dialogue,” says Scheele. DNB was among a group of global investors, including the Government pension fund in Norway, who worked with Carbon Delta (which was later bought by MSCI ESG) to develop the Climate Value at Risk (VaR) methodology. “We are now also a part of the follow up UNEP FI pilot discussing best practices in scenario testing,” she adds.

The EU Sustainable Finance Framework

Awaiting guidance on minimum standards for SFDR 8, and other clarifications

The SFDR currently applies to DNB funds distributed in the EU, though it has not yet been implemented in Norway.

DNB funds include a mix of article 6, 8 and 9.

Scheele agrees with the widely held view that article 8 is a very broad church. “We have seen very different approaches to article 8 funds so far. We expect to see the EU develop more standardised definitions of minimum standards applying to article 8 funds”.

More clarity is needed on the SFDR. “The SFDR will increase transparency, but there may be challenges in digesting and interpreting large amounts of data,”.

Different definitions of “green”, “impact” and “transition” and some evolving technologies, will not all fit into the EU taxonomy

The taxonomy is subjective, and what is defined as “green” may differ in France compared with Germany. “Some transition activities or strategies may not fit into the taxonomy, and technology is moving so fast that not all solutions will fit into it. The taxonomy might not adapt fast enough to allow for more forward-looking equities, different regulatory approaches and definitions” says Scheele.

There are also different end uses for the taxonomy. It can be used to categorise investment strategies, but it can also be used as an investment decision tool.

Data harmonization would be welcome

The overall EU sustainable finance framework is not yet useful to help clients select products, and anyway there are big differences between data providers. Some data harmonization would be welcome to make it easier to compare different products.