Creating value through ESG engagement
Johan Swahn, Portfolio Manager of Nordea’s Global Stars Equity Strategy
Nordea’s STARS range – which includes our Global Stars Equity Strategy – embodies true ESG integra-tion, with thorough research undertaken to identify companies with sustainable and responsible business models. We firmly believe businesses on the right side of change are more likely to be tomorrow’s win-ners.
The first stage in our investment process is to seek out companies displaying compelling ‘expectation gaps’ – these are fundamental value drivers which 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 sus-tainable competitive advantages – or moats. When assessing a company’s moat, we consider the impact of various ESG risk factors, which are quantified in the final valuation model.
While we carry out rigorous bottom-up fundamental analysis, we think the key differentiator for the STARS investment process is the ESG integration and analysis. ESG analysts from Nordea’s Responsi-ble Investments Team work alongside us every step of the way, providing invaluable insights into possi-ble risks and opportunities to our current and potential investments.
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 – including 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 de-mographics, 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 strategy, as well as all other STARS strategies, do not invest in any C-rated business.
We believe engagement is an incredibly powerful tool to bring about positive change. Before engaging with a company, we seek to identify the most relevant and material ESG topics. 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 labour 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 wit-nessed 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.
As for recent additions to our portfolio, during the third quarter of 2019, we took a stake in research-driven biopharmaceutical company AbbVie – a leader in areas such as immunology, oncology and neuro-science. Attention towards the healthcare sector has spiked over the past two years on the back of the opioid epidemic in the US. In our view, the opioid crisis is in large part explained by excessive selling practices.
Although AbbVie is not involved in the opioid crisis, the issue has highlighted the importance of under-standing a company’s culture and incentive structure. When discussing business ethics – one of our ESG pillars – we found the AbbVie was generally aligned with global best practices.
We have given AbbVie an A-rating, reflecting in part its best practices around the governance structure to tackle perhaps the most material risk to its business – mis-selling. In addition, the company overall has strong policies and procedures in regard to product quality and safety.
For our Global Stars Equity Strategy, we are pleased to note our portfolio’s carbon footprint is 63% low-er than the benchmark (MSCI ACWI)*, while the strategy’s contribution to the eight environmental ob-jectives within the United Nation’s Sustainable Development Goals is 2x higher than the benchmark.