By Hamlin Lovell, NordicInvestor 

Norwegian investment consultant Grieg Investor’s Head of Sustainable Finance, Lars Erik Mangset, advises asset owners, including pension funds, trade unions, foundations and family offices, managing around USD 16 billion on a wide variety of sustainability matters: formulating investment strategy, setting guidelines for sustainable investing, management of sustainability risk, investing, sustainability analysis & reporting, and putting a lot of emphasis on digitising and automating processes. There can be multiple stakeholders involved.

“We need to ensure alignment with owners, sponsors, municipalities, corporate pensions, labour unions and foundations, which can all have strong sustainability preferences,” he explains. Mangset was previously Chief Climate Change Advisor at KLP. He is also part of the Global Expert Group for Science Based Target Initiative (SBTI)

With more than 100 clients it is hard to generalize and the client base shows a wide spectrum of views: “some are extremely ambitious and some are not so concerned, but most are becoming more aware and setting higher sustainability ambitions as they move from sustainability 1.0 to 2.0 and set shorter term targets as well as longer term objectives to balance sustainability and financial objectives. Clients vary in terms of how much if any risk and return they may be prepared to sacrifice for sustainability and net zero objectives. There is also a backlash against greenwashing,” observes Mangset.

The Ukraine war has made asset owners realize that they need to worry about energy security, and high electricity prices. “Some clients want more defence exposure due to geopolitical tensions and increasing militarization. Foundations can be especially worried about Gaza related exposure,” Mangset finds.

Proliferation of labels demands proprietary analytics

Labels such as SFDR disclosure categories are less important than Grieg’s own assessments of asset managers, fund strategies and holdings, though Mangset does generally find European managers are more advanced on sustainability.

“Harmonisation and standardisation are worthwhile goals, but SFDR cannot always be standardised due to sector specificities. Some aspects are relevant to some sectors but not others,” in Mangset’s opinion.

He constantly encounters a proliferation of new funds and labels including private capital transition funds. “We want to work with market players to help them manage the journey,” he says.

Grieg’s analysis goes beyond managers’ or regulators’ labels to look at how responsible, ethical, sustainability oriented and impact-driven funds and managers are.

In different situations absolute or best in class performance can be more relevant for particular industries or sectors. “We still see asset owners wanting to exclude coal, gambling, alcohol and controversial weapons. For high-emitting sectors such as steel, utilities or oil and gas they can be more interested in benchmarking sector performance using science-based methods,” says Mangset.

Grieg has just revised its own net zero methodology to incorporate both absolute and sector relative performance, as well as current and projected future performance including capital spending.

Engagement with asset managers to improve transparency around voting

For Grieg, engagement is not so much about investee companies, but more about helping asset owners to engage with asset managers. “Our role is to help our clients, where needed, to engage with asset managers. One example is that we do norms-based screening of all funds, and if a company gets flagged for potential violation of client policy on e.g. human rights, we will follow that up with the asset manager. Another example is dialogue around policy aspects on behalf of clients, such as questions on whether the fund manager adheres to a net zero ambition. Generally speaking, we have a collaborative approach, where we are not trying to “arrest” the fund manager, but rather to understand their selection processes and view on certain holdings,” says Mangset.

Climate risk data, including for regulatory reporting

Grieg helps clients with climate risk data for a variety of regulations, including Solvency 2 and IORP2 and other reporting frameworks. “The SFDR does not require quantitative reporting of the potential loss from climate risk but requires disclosure of climate risk guidelines. The Norwegian financial supervision authority set out general expectations for the climate risk analysis, such as scenario testing and stress testing over longer and shorter periods. TCFD is probably more prescriptive in its recommendations for governance and climate risk management, but we find many pension funds prioritized the regulatory reporting over TCFD,” observes Mangset.

Multiple data sources, methodologies and frameworks can feed into Mangset’s climate reporting, net zero analysis and assessment: “We have started using the Net Zero Investment Framework issued by the IIGCC group for climate change. Our role is to deliver the solution to this framework, i.e. the applied methodologies and data sources used to assess individual companies’ level of alignment with the Paris agreement’s mitigation target. Rather than relying on one or a few, we apply an orchestra of methods and data sources ranked based on our view of their confidence strengths. In short, it means that sources are science-based and others are not, and we are conscious about the confidence strength of the analysis when applied in investment strategy and portfolio context”, Mangset explains.

Having a view on uncertainty and degree of confidence is extremely important as there can be seemingly crazy and bizarre anomalies in the data. “Companies with a great SBTI pathway well below the curve could have an implied temperature rise score of 4 degrees and we see this all the time!” says Mangset.

He also adds: “Asset owners could have great ambitions for Paris alignment and use for instance financial emission intensity indicators, but none of them are scienced based, meaning none of them actually measure Paris alignment”.

Not all of this gets published as analysis needs to be distinguished from reporting. “Reporting is partly based on regulations but analysis does not always get published externally,” reveals Mangset.

Data coverage gaps, errors and missing context

Erratic data quality is a challenge and coverage can be poor. “We have clients heavily invested in Norwegian equities and bonds as well as unlisted companies, and this can mean we only have good data for 50-70% of their portfolio. In any case, Scope 3 carbon data estimates are often inaccurate as we do not have the production data to gauge carbon intensity,” says Mangset.

His biggest headache is a lack of good data in the green solutions space: “We might only have data to capture some of the dark shaded green activities such as renewable energy, energy storage or various energy efficiency solutions. While this is very useful, we do not have sufficient data to identify all the green activities taking place in a portfolio, such as ability to identify companies further down in the value chain, or generally speaking which and how companies contribute in avoided emission in their value chain.

Comparing an index fund and a green solutions fund can also lead to perverse conclusions. “The energy transition implies that green companies’ emissions will increase as their production grows, while high emitting companies in the index emissions may typically decrease over time,” points out Mangset.

Grieg Investor’s main data sources for company data include Bloomberg and Morningstar but no single source is sufficient. “We may combine multiple ESG data sources, such as company ratings; children’s rights; deforestation data from NGOs, TPI, Climate Action 100 Plus and SBTI. We need to supplement ESG data providers’ output to increase explanatory power,” he explains.

Data provision has made great advances with more players using data driven machine learning and web-scraping methods as well as life cycle assessments at regional sector levels. Data should continue to get better and new sorts are coming on stream according to Mangset.

The danger of gathering more data is that it is easy to collect but harder to analyse, which leads to problems of comprehension and communication. “New technologies may be helpful for collecting the data but opaque on analysing it. The data scraping looks great at the top level but its sometime hard to understand and especially compare companies,” Mangset complains.

The good news is that data is improving and regulatory reporting requirements should improve it further. “We hope that better company reporting will reduce uncertainty in these models and enable more strategic integration into portfolios and asset management. A combination of regulations and investor demand should drive improvement,” Mangset predicts.

Climate targets, green bonds and impact private debt

Clients are moving from words to actions on Paris alignment and setting short term targets, as well as adjusting investments. “There is most focus on ensuring that green corporate bonds are really dark green and ambitious. Private markets and growing interest in private debt in Norway can be seen in green infrastructure, green hydrogen, and zero emission transport ferries.

Meanwhile it is harder to implement sustainability in equity portfolios where US technology has been the main performance driver,” he observes.

Clients are generally not setting targets for thematic areas (such as recycling) because these ignore the big picture of the whole portfolio and net zero Is about the whole portfolio. Clients need the flexibility to align portfolios without moving too far away front the market. Clients also need to balance their alignment goals with financial returns.

“Longer term sustainability goals should go beyond regulatory compliance to more strategic implementation to balance sustainability and financial goals. Asset owners need to balance risk and returns and allocations amid a very uncertain future, and implement policies properly,” sums up Mangset.

This article will feed into NordicInvestor’s upcoming special report on Sustainable Investing