By Hamlin Lovell, NordicInvestor

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

NordicInvestor interviewed Toni Iivonen, Chief Investment Officer of Elite Alfred Berg (EAB), which manages around EUR 3.5 billion in equities, fixed income, infrastructure and real estate.

ESG priorities and coverage: some flexibility for external managers

EAB has defined ESG priorities as carbon emissions, water usage and waste under E; labour rights and workplace safety under S, and share classes and boards under G.

ESG is integrated into all asset classes, which include equities, fixed income and infrastructure globally, and real estate in Finland. Though the firm invests directly into equities in Finland and Europe, most of its investments – around 80% are made via mutual funds. “For external managers, the aim is to form a view on their ESG policies, though these do not have to be exactly the same as ours,” says Iivonen.

The rough split between ESG approaches is 60% exclusions, 30% thematics and 10% impact investing.

Exclusions, benchmarks, best in class and transition

The EAB exclusion list is based on two sources: the Norges Bank list of around 130 firms and some additional names from EAB’s major shareholder BNP Paribas. The list adds up to about 200 names and has been growing as more sectors, such as coal mining and oil sands, are excluded. Best in class analysis is also carried out, using a Morningstar database among other sources that EAB has access to.

EAB is considering its options for benchmarks. “we are currently using mainly standard benchmarks but are currently investigating the possibilities to transfer to ESG and/or climate transition or Paris-aligned benchmarks,” says Iivonen.

Future transition is an important part of EAB’s ESG approach and sometimes transition can outweigh concerns about current carbon footprints. “For instance, Finland’s Neste Oil has the one of the largest carbon footprints in the Helsinki equity market but is also making a huge contribution to energy transition through its sustainable biofuel and aviation fuel,” says Iivonen. EAB owns Neste, which is excluded by some other investors.

Companies on the exclusion list can become investible again if they change their activities or behaviour. “A couple of examples would be Rio Tinto Plc that had environmental problems related to some of its mines and Walmart Inc that had problems with human rights violations,” says Iivonen..

Impact and thematic investing

Thematic strategies include mainly clean water and renewables, which are managed externally. They include BNP Paribas Climate Impact and BNP Paribas Energy Transition. So far, the firm has not prioritised any of the UN SDGs.

Active ownership

Engagement is direct with European companies and also collaboratively through groups such as the Carbon Disclosure Project (CDP).

Climate targets and reporting

”There is no commitment to net zero at the firm level yet, but we are working towards it,” says Iivonen. He expects that 2050 would be the latest target for carbon neutrality.

Funds and portfolios provide TCFD reporting, and dedicated benchmarks are intended to be used for climate friendly portfolios.

ESG fund reports are several pages long. They include a total ESG score based on Morningstar Sustainability scores, which are based on Sustainalytics ratings. The scores are broken down into E, S and G factors; carbon footprints, carbon exposures and special areas such as Arctic oil drilling. Controversies are broken down into severe, high, significant, moderate, low and no. Real estate funds have a separate sustainability report.

Morningstar ESG ratings for EAB funds currently range between two and five globes. One fund with the highest rating is Suomi Fokus. “This is partly due to it scoring lower (i.e. better) than the benchmark on both Social and Governance levels and only a little bit higher on Environment. Also there is a low number of controversies in the portfolio,” explains Iivonen. In contrast, Elite Alfred Berg Osake is rated “below average”. “This is partly due to it being invested in US domiciled funds and partly due to other data coverage issues, but we are looking into ways to improve the rating,” explains Iivonen. EAB is considering whether to set a minimum of 3 globes for  Morningstar ESG ratings across all funds.

Real estate funds have a separate sustainability report, which is only available in Finnish.

Data and reporting: in house analysis essential

The biggest challenge faced in expanding ESG policies is a lack of uniform data. “External data is not standardized and the biggest data providers such as MSCI and Sustainalytics both have different approaches. The biggest hurdle is getting consistent data from external asset managers. Smaller companies, emerging market companies and scope 3 carbon emissions are also challenging. Therefore, we need to apply a look through approach and do the analysis and calculations in house, though 80% of our data is still external,” says Iivonen. Going forward, the situation with regards to harmonisation is not clear but various solutions may emerge.  Artificial intelligence may be helpful. “ESG score predictor algorithms are one solution,” he adds. New IFRS sustainability accounting standards could also be another solution,

EU Sustainable Finance framework: awaiting clarity and finality, concerns over subjectivity and Eurocentricity

EAB will allocate to all SFDR categories. “We expect to allocate 50% to article 6 funds, 40% to article 8 and 10% to article 9. The split will be the same for internal and external management,” says Iivonen. “We are familiar with the draft SFDR technical standards and expect they will increase transparency around sustainability. We also expect that the taxonomy will make it easier to choose products. But the rules are not yet finalized and the timeline maybe too ambitious,” he adds.

For instance, it is still not clear what threshold the SFDR applies to fund of fund managers. “We believe that 75% of a fund of funds’ holdings would need to be article 8 for the fund of funds to also be article 8, but we are waiting for finalized decisions on this. Hence our fund of funds is article 6 for the time being,” he points out.

The early indications are that the taxonomy could help to create new winners and losers, and that the SFDR does allow some latitude for climate transition strategies. It is not clear whether the EU sustainable finance legislation will achieve a bigger ambition of pushing impact investing into the mainstream: “impact investing can involve sacrificing returns,” argues Iivonen.

The Europe-centric nature of the SFDR is a possible problem. “It only applies to funds and fund managers based in the EU. We are not sure if US asset managers will follow the same approach”. Ultimately even if the EU harmonises data and reporting within the EU, there could still be challenges in comparing and harmonizing data from managers and companies outside the EU.