Engineering a roster of ESG-focused managers and products

Active investment management is often said to sit somewhere between art and science. It is also said that while scientists dream about doing great things it is engineers that actually do them. Having an engineer at the helm of its manager selection team Nordea Investment Management might be onto something.

By Pirkko Juntunen

Gilles Lafleuriel is the head of Real Assets and Alternatives within Nordea’s manager selection team. He started and worked as an engineer within the nuclear business of the French utility EDF. Having completed an MBA just ahead of the global financial crisis Lafleuriel continued working in the energy sector but held several business development roles and later developed direct investment projects within the sector. That ignited his appetite for investments and the road eventually led him to Nordea in Stockholm.

Lafleuriel leads a team of three in what he describes as a part of an investment boutique within Nordea Asset Management. “Our role is not to deliver asset allocation or take investment decision. We simply but thoroughly cater for new investment products for the various distribution channels of Nordea Wealth Management. The final decision on whether to invest or launch a product belongs to the bank, the life and pensions business or the institutional and wholesale distribution units” he said.

At the core of Lafleuriel and his team work is environmental, social and governance (ESG) criteria. A manager would not get a foot in the door without strong ESG credentials, he said. “We tend to have open criteria with regards to the managers’ styles but the one thing we do not compromise on is the ESG credentials and expertise of the managers we research,” Lafleuriel said, adding that it is a priority across Nordea’s businesses.

On top of the agenda is Nordea’s Star Funds where companies that are performing the best according to ESG analysis are proactively chosen as opposed to negatively screening out poor ESG industries. During the World Economic Forum in Davos earlier this year, Nordea Bank was ranked as one of the 100 most sustainable corporations in the world 2018 and was the only Nordic bank on the list.

Positioning itself as an ESG provider is key for future growth in Sweden and the Nordics in general, considering the pressure from regulatory changes brought on by the Swedish government, in addition to Europe-wide regulations. In its fund industry review the Swedish government put consumer protection at its core and new legislation requires further transparency and clear product specific information as well as proving their sustainability credentials.

A key part of the due diligence process is sending out an ESG questionnaire. Managers that are not able to show a level of excellence within the field will not be considered further, irrespective of excellence in other areas.

A starting point of the Nordea’s manager selection process is a research paper on the asset class and then an agreement on a mandate from the team’s clients, i.e. Nordea’s various distribution channels. The team then researches the asset class looking at the pitfalls and benefits which will be translated into mandate details. It may include an in-depth look at the strategy, style, potential risk exposure, regional exposure, track record, capacity issues and risk/return expectations. This research goes to the manager selection board which approves the asset class memo and the mandate.

A short-list is then produced looking at both quantitative and qualitative criteria. This phase also includes calls with the managers to evaluate how they fit with the mandate given. The manager selection board is then again presented with 3-5 managers and once this is confirmed a deeper due diligence process is activated with site visits.

Specifically, Lafleuriel’s team looks at the people, their track-record, retention of key staff, product specific performance, the investment philosophy behind the strategy and how structured and repeatable the process is to ensure implementation of the strategy. In addition, the levels of risk control are evaluated ensuring that the metrics add up. There is also an evaluation of how the business is managed in general and how it has developed.

Once a winner is determined it is again presented to the manager selection board, an operational due diligence is triggered and a recommendation is delivered.

The entire process tends to take a minimum of six weeks but often twice that time,Lafleuriel noted. Some 95% of the work is done in-house at Nordea with parts of the operational due diligence outsourced to specialists, he added.

Nordea has a wide customer base and as such needs scalability as well as products and managers that have room to grow. “Whenever the manager selection team runs a selection process, we focus on the quality of the product from both investment related, operational and ESG perspectives. That’s our responsibility towards our internal stakeholders and more importantly towards Nordea’s customers”Lafleuriel said.

Then an onboarding process starts to introduce the product to the investors, either in house or Nordea’s customers. Once a manager is validated, an ongoing monitoring process is triggered. Lafleuriel’s team is responsible for reporting and reviewing as well as replying to information requests from the various in-house distribution channels.

It is a well-known fact that investors are struggling in the low yield, low interest rate environment which is driving the hunt for not only returns but also new, innovative products and managers who are potentially more likely to beat the odds.

Lafleuriel said investors are currently particularly looking at how to replace traditional long only assets as well as how to catch opportunities within the liquid alternatives sector. The holy grail of investments is to find managers and products that deliver predictable returns on the long term, he noted. “with the risk to be over simplistic, investors are typically not shooting for a 15% annual return, but rather a stable 5-10%. Assets backed by companies such as within the infrastructure sector fits the bill because of the nature of the business with stable cash flows and resilience to market cycles,Lafleuriel explained.

Infrastructure also has lower volatility than real estate and more easily spread across regions and sectors. “Assets within OECD can be evaluated the same way, as a result of the global format of infrastructure investing” he said. So far the issue of deploying assets has not been an issue for Nordea, as there are a number of valuable managers showing capacity and performance.

Apart from scouring the world of managers for Nordea, Lafleuriel also enjoys his family life with his Swedish wife and children aged three and five. When time allows, Lafleuriel is keeping himself busy and fit by running and swimming and occasionally competing in swimrun races.