By Hamlin Lovell, NordicInvestor

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

The Multi Manager Solutions team at Handelsbanken Fonder AB has around SEK 300 billion/EUR 30 billion of total assets under management. The team is mainly a fund-of-fund investor and invest in funds from both Handelsbanken and from external managers. There are currently 18 approved external managers. ESG is becoming an increasingly important part of the process for selecting all funds, including some that are clearly branded as ESG or impact investing strategies.

We spoke to Deputy Head of Multi-Manager Solutions, Tobias Tallberg, for an update on how the firm’s evolving ESG policies apply to its selection of external managers.

ESG, Impact and transition are not plain vanilla, they come in many flavours and definitions, and not all varieties will meet Handelsbanken’s criteria.

Engagement with external managers around exclusions, inclusions and corporate engagement

Handelsbanken’s philosophy is that fund managers need to integrate ESG and sustainability in several ways. “We like to see exclusion of harmful activities, inclusion of positive activities, and engagement with companies to improve their ESG performance. This should generate the potential of a virtuous circle of higher profits with lower risk,” says Tallberg.

“Our current ESG framework was implemented in 2019 and we had some challenging discussions with fund managers, both around exclusions and inclusions. In most cases we found common ground but in some cases we divested from managers who did not correspond to our view. We still see many funds labelled as sustainable, ESG or impact that are not in line with our own sustainability requirements” says Tallberg.

Environment beyond climate: water and waste in focus

The E in ESG is the main focus of the media and most funds because it is easier to design products and report data around metrics such as lower carbon intensity. Within E climate and transition from fossil fuels to renewables get most attention. “We are also looking at water and waste issues, which are relevant to urbanisation,” says Tallberg.

Social and governance priorities: diversity and equality

“Most engagement is also focused on environmental issues, but we also look at equality, diversity and gender equality measures both within fund management companies and at the companies they invest in. For us, equality covers both social and governance,” says Tallberg.

Coverage: all bar currencies

ESG applies to all asset management and manager selection across regions and themes (apart from a pure currency fund, which the team finds hard to evaluate on sustainability criteria).

Exclusion, benchmarks, best in class, and transition: defining the criteria to define transition

Handelsbanken’s exclusion list has grown to around 3,300 companies out of an investment universe of 25,000 that are covered by ISS ESG. “The list is growing because ISS ESG coverage of companies is growing. In some cases, companies previously excluded have become investible again due to their transition away from fossil fuel based energy,” says Tallberg.

Handelsbanken has started to use Paris-aligned benchmarks, which will also make some exclusions.

After minimum sustainability standards have been met, and exclusions are made, peer group analysis is also applied. “We also look at best in class data within sectors and within fund manager peer groups,” says Tallberg.

There are different opinions about how to define transition companies in the market. Handelsbanken accept transition companies that fulfils the following criteria, which are reviewed annually:

  • The company produces or distributes power.
  • The company’s planned development of its business should be in line with a global warming of maximum 2˚C.
  • The company’s current operations must not consist mainly of fossil energy.
  • The company’s current investment pace will underline the transition from fossil to renewable energy.

One company that Handelsbanken Fonder excludes is Finland’s Neste Oil, which is invested in by several managers in the market who view its renewable diesel as a positive development for transition. Handelsbanken Fonder excludes the company because it is not in line with the criteria’s above. Tallberg further explains the current decision: “one of the key aspects here is the focus on scope 1 and 2 emissions for net-zero commitments whereas it is primarily the scope 3 impact they need to address. Neste do a lot of things very well and have a unique position relative to many other oil and gas companies given their focus on biofuels. But we still need more clarity regarding their legacy oil refinery. Looking from a revenue perspective we still see approximately 50% of revenues related to oil. We can also see that the company has made net-zero commitments only for scope 1 and 2”.

Thematic and impact: a growing menu of options

Thematic funds are a growing area for Multi Manager Solutions across all asset classes. “Thematic funds include equity funds focused on energy, healthcare, water and waste, as well as more granular categories such as nutrition, future of transport, sustainable infrastructure or cities. They also include fixed income funds invested in green bonds and other bonds that contribute to the UN Sustainable Development goals,” says Tallberg.

These are not necessarily SDG strategies per se, but most of the strategies can map onto some of the UN SDGs. “We do not prioritise specific SDGs, but do use text analysis to identify which SDGs are being targeted by managers – and also how effectively they are being targeted. We want to see commitment to SDGs but do not tell managers which ones to target,” says Tallberg.

Active ownership: growing engagement

Handelsbanken Multi Manager Solutions does not engage directly with companies, but rather relies on the managers they are invested in to do so. “We evaluate the managers on their engagement processes as an important part of our relationship. For passive index products, proxy voting can be more relevant. We see engagement overall is increasing,” says Tallberg.

Data and reporting: persistent gaps for smaller companies and alternatives, and general inconsistencies

“We expect that ESG data reporting will continue to improve and increase, though it ultimately depends on company reporting. Gaps remain especially for smaller companies. Larger companies may look better just because they report more data,” argues Tallberg. He further explains that, “the lack of data is mostly related to what the companies are providing to third party providers such as ISS ESG, Sustainalytics etc. This means that that the fundamental analysis made by the manager needs to be more granular to understand what the companies are actually doing”.  

“We find that alternatives still have a tendency to be a black box, where very few managers report ESG measures, which also makes it difficult to benchmark reporting against a peer group,” notes Tallberg.

For now, most of Handelsbanken’s ESG data is external, third party data. “We use ISS ESG data on carbon emissions and scenario analysis. We use Morningstar Direct and their data from Sustainalytics in our analysis of quantitative ESG metrics such as portfolio environmental/social/governance score in absolute as well as relative matters. In terms of internal data we have our own SDG model where we can map the companies’ commitments and revenues that contribute to the SDGs” says Tallberg. “The issue is how we evaluate it. ESG data needs some standardisation, on what to report and how to report it. We need more collaboration on data but are not sure how this will happen. We expect that new data providers will also emerge,” says Tallberg.

Climate targets and reporting

Handelsbanken Fonder is committed to net zero carbon emissions by 2050, and a 50% reduction by 2030. Handelsbanken’s sustainability team are pursuing this in part through Science Based Targeting.

Climate reporting standards and measures include TCFD, ISS ESG and Morningstar.

(the parent company has different targets. “Handelsbanken AB, the bank, has its own targets and they state that the bank should be net zero in terms of emissions by 2040. That is related to lending, leasing and investments,” says Tallberg).

EU Sustainable Finance Framework: defining transition and thresholds for fossil fuels

An article 6 strategy will not meet Handelsbanken’s needs on exclusions. Article 8 or 9 could be in line with what the firm seek on inclusion, but not necessarily its overall sustainability requirements. ”For instance they might have exposure to fossil fuel companies that meet their definition of transition, or have a higher threshold for the percentage of company revenues that determines an exclusion. They might tolerate 10 or 20 or 30% in fossil fuels whereas we might cap it at 5%,” says Tallberg.

Even SFDR 9 does not necessarily raise a high enough bar. ”SFDR 9 does not necessary match our own definition of what is investable, and the EU Taxonomy is only one framework. The EU sustainable finance framework is a good start, in highlighting funds that have a sustainability or impact framework, but it needs to evolve further as well,” says Tallberg.

”There is no one size fits all on defining sustainability. SFDR is a good start and especially helpful for retail investors, but we have our own ways of classifying funds,” he sums up.