By Hamlin Lovell, NordicInvestor

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

NordicInvestor interviewed Erik Edward, Senior Fund Analyst for FI and hedge funds in Savings and Investment Advice at Swedbank, which has a platform of around 500 funds, of which 20% are recommended and 80% are execution only. He was previously a portfolio manager in the multi-asset team at Swedbank Robur. All Swedbank Robur funds are offered on Swedbank’s fund platform.

ESG priorities and coverage: encouraging liquid and cost effective ESG equity indices

ESG applies to all asset classes and strategies, but the precise approach can differ. Swedbank is engaged in regular discussions with managers about how they integrate ESG into sovereign debt. A baseline requirement for all manager searches is ESG integration, while ad hoc additions include impact investing for clients seeking certain exposures.

At the instrument level, a balance needs to be struck for index derivatives. Swedbank encourages the use of sustainable ESG indices providing they have reasonable costs and liquidity, but does not require ESG indices to be used in all cases.

ESG does not apply to commodities but there is very little commodity exposure, not least because nearly all of the fund range is UCITS funds, which cannot invest directly into commodities that require physical delivery. “One exception is one version of Brummer’s Lynx CTA, which is a Swedish special fund, and has excluded energy futures,” he points out.

A holistic approach to ESG

Swedbank does not prioritise E, S or G separately but rather focuses on all of them. “The selection process includes thorough sustainability analysis and only recommends approved funds while those falling short of requirements can be excluded. Governance is really a hygiene factor about empathy, responsible ownership and transparency. We look at how fund managers consider climate risk, and have a lot of engagement around this. If they do not currently have a climate policy, we would encourage them to start one. Social is more around norms and conventions on human rights and controversial weapons, such as cluster bombs, chemical weapons and nuclear weapons. This leads to more exclusions,” says Edward.

Exclusions, best in class, transition and engagement: exclusion lists consider public and private companies

As with the full picture of E, S and G, a broad approach is taken to ways of implementing ESG: exclusions, best in class, transition and engagement are all useful angles for ESG and none of them can be viewed alone. “If you only look at best in class, you miss a lot of transition and engagement. If you only do exclusions, how are you adding value. Therefore, it is not meaningful to split strategies into different ESG categories,” says Edward.

Swedbank publishes an exclusion list, which covers public and private companies, because Swedbank at the corporate level might be financing both public and private companies. The list is growing. Whereas Sweden’s AP funds only exclude about 30 companies, Swedbank has one of the longest exclusion lists we have seen in Sweden. It excludes: public firms for human rights issues; coal being over 5% of company revenues (including both thermal and metallurgical or coking coal), and controversial weapons, including nuclear weapons and cluster munitions. Some private firms are also excluded for controversial weapons. Currently there are no private firms excluded for human rights issues or coal exposure.

There are no exclusions as such for sovereigns, currencies, or commodities, though some individual managers do have their own policies that may preclude lending to certain sovereigns.

Thematic, impact and SDGs: an evolving area

There is no minimum target for explicit ESG strategies, such as thematics, impact or transition, which are sought out on a case by case basis using specific searches. The SDGs are only one input into fund selection. “We do not select funds based on the SDGs, but we do see some impact funds that are highlighting certain SDGs including climate and environmental ones. We want a broad platform covering all strategies our clients might be interested investing insays Edward.

Active ownership: proactive and reactive dialogue with managers

Proactive engagement with external managers could include demanding climate policies or changing products to fit into Swedbank’s ESG values. “We are a fairly big distributor so managers do listen,” says Edward.

Reactive engagement with external managers will alert them to any investments into prohibited names on Swedbank’s exclusion lists. Swedbank is investing via comingled fund vehicles, rather than separately managed accounts, so the exclusions need to apply to the whole product. Swedbank has not negotiated excusal rights to opt out of exposure to particular companies, but can remove funds from its recommended range if they do not observe the exclusion list, even after engagement.

Though some asset managers (such as BlackRock and Vanguard) have recently started to allow some of their investors to vote proxies, for Swedbank the external managers remain responsible for proxy voting.

Data and reporting: gaps and subjectivity concerns

Data comes from external managers and other external sources. “One concern is that data providers have different ways of calculating ratios, from different sources and have different opinions. Ultimately it is challenging to do a pure quantitative analysis because models are built by people, who will apply different weightings to different inputs. This data needs to become less subjective to become more comparable,” says Edward. Data gaps are another issue, most often seen in smaller companies, private companies and emerging markets as well as in fixed income, where issuers may be private.

Climate targets and reporting: coming soon

Swedbank Robur has joined the Net Zero Asset Manager (NZAM) initiative and in October 2021 published its roadmap to net zero. Swedbank Robur has set a target of its capital being managed in alignment with the Paris Agreement by 2025. This includes a target of net zero by 2040 and a 50% reduction by 2030, relative to the baseline year of 2019. There are also targets for investing in climate solutions including renewable energy.

The Swedbank AB fund platform that Edward works on has not yet finalised its policy.

EU Sustainable finance framework: SFDR is only a starting point

Swedbank expects nearly all of their recommended funds to be SFDR article 8 or 9 by year end 2021 and expects that many others will be labelled as 8 or 9 in early 2022. The SFDR label is a hygiene factor but it is only one part of Swedbank’s ESG criteria used to identify the strongest sustainable strategies. “What is more important is to study what the manager does, what is their credibility in the space and whether or not they believe in it. Just looking at the SFDR label is not enough.”

Edward welcomes the ambitions of the EU framework “The regulation  is very new but we are very hopeful about improved transparency around sustainability. We are already seeing many impact investing launches”.

EU Rules are early stage, take time to apply, and there could be conflicts amongst the SFDR, Taxonomy, and client preferences

But he is cautious about how long it will take for managers to adapt to the new rules. “The taxonomy could create new winners and losers, but we are not sure how long this will take to impact capital flows. Ambitions are high and managers do not want to have article 6 products, but data gaps for fixed income, small cap and micro cap companies are a challenge that will make it difficult to fulfil reporting requirements. This will take time to deal with”.

There could also be conflicts between the SFDR and taxonomy: “A coal burning utility that is transitioning towards lower carbon fuels or renewables might fit into article 8/9 under SFDR, but would not fit into the taxonomy,” Edward points out.

Whether they help Swedbank and its clients to select funds is more uncertain. “The regulatory data may not map onto client preferences, which could be different and subjective, and may not map onto the taxonomy. SFDR 8 and 9 alone are not enough. We want to see how ESG fits into a manager’s process and philosophy as part of how we analyse a manager. And given the data gaps we have to make a qualitative assessment based on their experience and approach. This can become more of an art than a science”.