ESG Fundamentals can be a key driver of returns

Hilde Jenssen, Head of Fundamental Equities at Nordea Asset Management
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ESG investing has not only become mainstream, but is increasingly in the spotlight. In the past, the perception was that ESG investors would compromise on performance, but now it is becoming clear that investing responsibly does not have to mean giving up returns.

At NAM, we believe ESG integration is the key to reconciling financial returns with responsible investment standards. Here, the manager not only ensures the investment adheres to strict ESG standards but incorporates the results of ESG analysis into the investment process.

Our in-depth research highlights which ESG risks are most material to each company; these may be as important to share price performance as financial risks prove to be. A deeper analysis of companies’ ESG performance and dialogue with company managements enable our portfolio managers better to understand not only a company’s ESG status, but also its direction of travel. This helps us to identify tomorrow’s winners, as companies that manage their ESG risks effectively may also be better positioned to manage their business risks in general.

This risk assessment is factored into the fundamental investment analysis that any active manager performs. We believe this marriage of ESG with the fundamentals in the investment process can be a key driver of returns: this is the philosophy behind NAM’s STARS ESG-enhanced funds. The STARS funds aim to beat their benchmarks, invest in companies living up to certain ESG standards and drive change by engaging with companies to improve ESG aspects of their business. These latter two aims are not only consistent with our performance ambitions, but can be part of the performance driver.

At NAM, we see active ownership as a powerful way to foster positive change, protect shareholder value, and enhance long-term returns. Active ownership includes voting as well as engagement activities performed by both our ESG dedicated team (RI Team) and investment team. Within our STARS portfolios, we have worked with many of our holdings to help them minimize their ESG risks and maximize their ability to create value for shareholders.

We’ve seen the potential benefits of ESG investment in the extreme volatility of recent months, during which our STARS portfolios have held up well. The STARS funds have benefitted from their underweight position in energy stocks and materials — STARS strategies do not currently invest in conventional oil & gas producing companies due to the high ESG risks and their limited achievements in contributing to a low carbon transition. At the same time, bigger positions in areas such as technology, where we consider the companies’ management of risks such as data privacy and cybersecurity, have also proven helpful.

I am very pleased with the performance of our STARS products. The portfolios are based on our high conviction stock ideas where our view on how much the company is worth differs from the market. Therefore, our ability to select individual companies continues to drive performance, which our clients should expect from an active manager.

When managed with a close eye on ESG factors, funds like NAM’s STARS range demonstrate the ability to generate attractive risk-adjusted long-term returns.

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