By Hamlin Lovell, NordicInvestor

This article is a part of our 2021 Nordic Insurance Report. The full report can be found here

Storebrand Asset Management manages captive capital for Storebrand Life in Norway and SPP Pension and Life in Sweden, alongside capital for distributors, wealth managers and institutions in and beyond the Nordics. NordicInvestor interviewed Jan Erik Saugestad, CEO of Storebrand Asset Management, who was previously CIO of the group, to highlight his views on the Covid working environment, asset allocation and ESG.

Storebrand’s growth has continued unabated throughout 2020 with net inflows of EUR 2 billion in the fourth quarter taking assets to EUR 92 billion. “We are amongst the fastest growing Nordic asset managers. We follow a multi-boutique approach and have grown partly through acquisitions, such as SKAGEN in 2017 and Cubera Private Equity in 2019. Managers benefit from our shared operating and technology platform and Nordic and international distribution. Our captive portfolios and our clients want a broader range of strategies, including alternatives such as real estate, private equity and infrastructure. Sustainability and sustainable solutions are key, which has been core to us for over 25 years”. Storebrand has already started to win new mandates outside the Nordics, such as a GBP 400 million low carbon mandate from a UK local government, and have clients in all Nordic countries.

The Pandemic: Remote Working, Volatility and New Manager Engagement

Efficiency needs to be balanced against human costs: “Working from home has the benefit of closer integration and connectivity across geographies in different markets. When the whole company share the same digital platform for all communication it levels the playing field and brings everyone closer. Clearly it is more efficient than travelling. Feedback from employees indicate that  engagement is higher than ever and the digital platform has energized the organization. Equally, we do not underestimate the personal costs for employees and their families. Many may experience some sense of isolation and several employees do not have enough space for their family and children at home. We have tried to accommodate the social and personal strain, and are happy to now see light at the end of the tunnel”.

The investment and operational process has run smoothly and continues to improve thanks to investments in the joint platform, shared business practice and different projects including digitization: “We have not seen any disruption to our investment process. In response to the increased market volatility, we have taken steps to speed up the process of shifting collateral and margin for FX derivatives and hedges between counterparties. We have also digitized more of the settlement processes. We have continued to interact with our existing and new clients using digital tools.  Some of the digital client experience will be developed further, but we are also looking forward to meet them in person again”.

A Lower for Longer World

  • Rebalancing from fixed income to illiquid alternatives and expanding infrastructure

The search for yield continues to require illiquidity premia: “the low yield environment has led to reduced fixed income allocations and increased demand for alternatives, and higher yielding assets such as private debt, real estate, and parts of infrastructure. In general, there is increased recognition of the fact that as a significant part of the value creation in the economy happens in the private, unlisted sector and this underpins alternatives in general but infrastructure, value-add real estate and private equity in particular. Real estate and private debt have been growing for a while and we are now adding capacity and capital to infrastructure and private equity. Overall alternatives are around 15% of portfolios in Europe.  It clearly varies across Nordic clients but we do believe many clients are below this average. Of our total AUM we are roughly in line with 15%. Our private debt allocation is constantly growing, and in addition to our own capacity we deploy capital through strategic partnerships with European and US private debt managers as well as in house capabilities”. 

“We really stepped up our infrastructure allocations last year, with two partnerships. In 2020, we joined AIP, which also includes two Danish pension funds, PKA and PENSAM. Joining forces with AIP has many advantages. They have a large pool of capital, a team of 25 people to source and evaluate relevant investment projects, and shared ambitions and perspectives on sustainability. In 2021, we also partnered with Nordic infrastructure boutique, Infranode, which is also strong on sustainability”.   

“In private equity we have a well-recognized boutique providing both Nordic and international private equity solutions. We have a strong track record from both our primary and secondary strategies and integration of ESG and creating positive impact is important to us”.

Corporate Credit Risk

The firm is broadly sanguine on credit risk: “It is natural to assume some credit downgrades, and we do not want to reduce credit quality, but the real economy is moving in the right direction. Fears of massive broad downgrades in credit have not materialized, and may now be less likely as economic stimulus starts to take hold”. 

Tactical Asset Allocation

“2020 was a good year for tactical asset allocation, we were able to take advantage of the selloffs. In 2021 we have recently trimmed risk exposure and sold some equities due to inflation fears”.

Liquidity and Cash Management

Some liquidity needs to be maintained regardless of yields: “Our short-term liquidity and cash management needs to safeguard liquidity and credit quality.  Even though we face negative rates in Sweden a sizeable part of our business in Norway still earn positive rates on cash. We accept low or negative real rates and do not compromise on credit quality, and we would rather earn yields in alternatives through our strategic asset allocation”.

Active versus Passive Management

“Alternatives and fixed income are all actively managed. In equities we have a spectrum ranging from pure index strategies through factor-based approaches, smart beta to high conviction active management”.

In House versus External Management

“We run our own index solutions, partly driven by our strict sustainability policies and existing scale in this area Infrastructure and private debt are mainly run through strategic partners, and even in private equity we predominantly invest with external private equity managers”.

ESG

ESG – Coverage

“Our ESG policy covers all asset classes, but is clearly applied differently in different areas.  The tools at our disposal is different in for instance real estate, private equity, and listed equity. We also assess sovereign debt and are do exclude certain countries based on international norms and conventions”.

“Our ESG policy started with exclusions, avoiding certain businesses and risks.  Over the years we spend more and more resources in finding sustainable solutions – investing in companies that are relevant to climate change, sustainable infrastructure and cities, the circular economy and empowerment and social inclusion. A lot of companies provide good investment opportunities, and infrastructure investments are clearly part of this solution space”. In terms of negative screening, in listed equities, fossil free funds have grown to EUR 33 billion at the end of 2020. In terms of positive solutions, assets in solutions are 9.6% of the total as of end 2020.

In between these extremes, most companies that Storebrand invests in are in the middle – neither needing negative screening, nor contributing positively to solutions.

ESG – Engagement, Deforestation and Biodiversity

“Here the priority is to engage with the companies, and increasingly we work in larger investor alliances. We have taken a lead role on deforestation, co-chairing a group to focus on Brazil and deforestation risk in other countries as well. Outside of the Nordics our engagement activity is increasingly happening in larger initiatives and alliances such as Climate Action 100+, Net Zero, TCFD and TNFD.   In addition to engaging with companies we also engage with governments, who have the real power to set regulations and price in externalities”.

“Climate is increasingly well understood, but we do not see enough attention paid to nature and biodiversity risks. We are part of a larger working group, the TNFD, similar to TCFD but focused on nature”. The focus is on companies’ dependency on nature and of course impact on nature.  One example is crop pollination and water purification, which are worth more than 1.5 times global GDP according to the OECD.

“In social, we are trying to develop relevant strategies, which could be empowerment and social inclusion and also investments in social infrastructure”.

ESG – Carbon Reporting

Data coverage and quality needs to improve: “Carbon data reporting has reasonably good data coverage for equities, but is more challenging for unlisted assets where data is not available. On real estate we can track energy use and emissions of specific properties. In all asset classes, we need to improve the quality of data, including scope 3 carbon emissions data. The scope 3 data is still very weak on quality and completeness, compared with scope 1 and 2”.

Future climate alignment targets are important: “Forward looking measures are developing with net zero commitments now a gold standard for many investors and asset managers. We are committed to this and urge other companies and investors to establish more near-term targets and ambitions, whether for 2025 or 2030, to set specific milestones and track progress. For instance, we target carbon emissions in 2025 to be 32% lower than in 2018. This target is based on the IPCC 1.5 degree scenario for future temperature rises”.

ESG – Regulatory change

  • New rules must leave room for change and carbon transition

“Data transparency and quality needs to improve, but standardization should not go too far. Definitions of what is sustainable today might change in future. The definition needs to be flexible enough to allow for evolving standards”.

“If the EU taxonomy is too narrowly defined and too static it will be a challenge. It needs to allow for transition – investing in companies in “the middle” that are on a journey to improve”.

“For instance, onshore wind was seen as very sustainable some years ago, but these investments are now challenged due to its environmental impact on wildlife such as birds. We have no exposure to onshore wind in Norway”.

“We expect our various strategies will include category 6, 8 and 9 under SFDR”. As of Q1 2021 69% of Storebrand Asset Management’s AUM is classified as article 8 or 9 according to the SFDR (including the Boutiques SPP Funds, Delphi Funds and SKAGEN Funds).

“It is too early to assess the detailed SFDR reporting, because the underlying data for the 32 KPIs is not yet readily available”.

Solvency II Framework and Reforms

“Solvency II should leave more freedom for alternative investments, which provide an important diversification in a portfolio”.

“Regulations may also be used to encourage more ESG investing through preferential treatment for sustainable investments. Of course, it is difficult to decide on a clear definition of sustainable investment, but this might be an opportunity as standardization improves.  The EU Taxonomy and EcoLabel may prove useful here”.

Outlook

“We are putting more effort into sustainable research and use of data in order to be even better to  demonstrate the client value of sustainable investments and the impact of choosing different sustainable strategies for clients. Clearly, we need better data on ESG – not only in carbon but also in areas like biodiversity and nature, and the social dimension. This will help us to demonstrate impact to clients and improve our investments processes further”.

“We are digitizing the client experience for both retail and institutional investors to meet increasing digital maturity among clients”.