Nordea AM: Identifying winners in the ESG space

Jun 14, 2019

An interview with Johan Swahn, Manager of Nordea’s Global Stars Equity strategy

What is your investment philosophy for Nordea’s Global Stars Equity strategy?

JS: Nordea’s Stars range – which includes our Global Stars Equity strategy – embody true ESG integration, with thorough research undertaken to identify companies displaying sustainable and responsible business models. We firmly believe businesses on the right side of change are more likely to be tomorrow’s winners.

What are the initial steps in your process to identify these winners?

JS: The first stage in our process is to seek out companies displaying compelling ‘expectation gaps’ – these are fundamental value drivers where we have a materially different view from the market. The next step is to make assessments of a company’s strategic positioning, focusing on businesses with sustainable competitive advantages – or moats. Finally, we perform extensive work based on proprietary discounted cash flow models to determine the upside potential of a stock. While we carry out rigorous bottom-up fundamental analysis, we think the key differentiator for the Stars investment process is ESG integration and analysis. ESG analysts from Nordea’s Responsible Investments team work alongside us every step of the way, providing invaluable insights into possible risks and opportunities to our current and potential investments.

What work do the ESG analysts primarily undertake?

JS: Each company we invest in, as well as every potential new holding, is assessed on whether it conducts business responsibly in relation to its stakeholders – across employees, suppliers, customers, investors, the environment and society at large. The team examines whether a company’s products or services are well-positioned in relation to broader sustainability megatrends, such as climate change or changing demographics, as well as how a company incorporates ESG challenges into its business model. Our team then uses its proprietary rating model to assign a forward-looking rating to the company, which determines whether there is a positive or negative trend. Each company is given an A, B or C rating. Our fund, as well as all other strategies in the Stars range, is unable to invest in any C-rated business.

Engagement with companies on ESG issues is becoming increasingly important; do you have a brief example of this?

JS: This is exactly right; we believe engagement is incredibly powerful. What we are trying to do is create an engagement roadmap, which identifies the most relevant and material ESG topics for each company we engage with. A good example of this roadmap can be seen through the investment in global food ingredients leader Kerry Group. On our first engagement in October 2015, our ESG analysts noted some weakness in labor practices within Kerry’s agricultural supply chain. At this point, the company was given its first rating, of B+. Our Responsible Investments team continued to engage with Kerry over the next 18 months and it witnessed substantial improvements when visiting the company in April 2017. Kerry was then given an A+ rating, the highest rating available. Kerry is still part of our portfolio today.

One of the most high-profile engagement cases of recent times came from Facebook, can you explain how your team worked through this?

JS: Data security and privacy are sizeable and material ESG issues, especially in the case of technology companies. This is well reflected in our ESG analysis when assessing such group. Our ESG analysts identified a number of concerning issues surrounding large American tech groups, which included Facebook, in the middle of 2017 – ahead of the Cambridge Analytica scandal in early 2018. We undertook several meetings with experts and company officials at that time and decided to downgrade the company. This downgrade was primarily due to the company not initiating any changes at senior management level in terms of accountability in data security and privacy. In our view, Facebook did not take the data privacy and security seriously enough – while not being fully aligned with the European General Data Protection Regulation, or GDPR.

What did that mean for your position in Facebook?

JS: The downgrade meant Facebook subsequently became ineligible for investment in our fund and we sold our entire position. Coincidentally, we did not have to wait long to see how powerful ESG analysis can be, as we exited our position just weeks before the social media company’s share price plummeted 19% – which wiped $120bn off its market value. While the company is actively trying to steer the ship in the right direction, our Responsible Investments team is still reluctant to change the ESG-view on the company, which remains below our minimum threshold.