Approach to sustainability
Economic growth is essential to sustainable development. A key ingredient is access to capital for companies and other stakeholders so that they can grow, develop new technologies and innovations and compete in an international market. Carnegie has unique knowledge about Nordic companies and brings investors together with entrepreneurs and companies to enable clients, owners and society to generate returns and grow sustainably.
EU Sustainable Finance Disclosure Regulation
As part of the European Green Deal, which EU has launched to fight climate change and be carbon neutral by 2050, several key areas are being addressed including sustainable finance through an action plan which will be implemented in several stages, which started in March 2021.
The EU Sustainable Finance Disclosure Regulation (SFDR) is a new set of EU rules for increased transparency and comparability among financial products. The intention of the new regulation is to increase the information available to investors about the potential positive and negative impact of their investments and related ESG risk.
Integration of Sustainability Risks in Investment Decision-Making Process
As a participant in the UN Global Compact (UNGC), Carnegie Investment Bank commits to the ten corporate sustainability principles in the areas of environment, labor conditions and anti-corruption. In the investment decision-making process, we screen all our discretionary portfolios and funds for compliance with these principles.
Carnegie Private Banking, as a signatory of the UN Principles for Responsible Investing (PRI), is committed to incorporating environmental, social and governance (ESG) issues into our investment analysis and decision-making process and to seek appropriate disclosure on ESG issues from the investments we make.
Part of the analysis and due diligence on a new company or investment manager includes an examination of their sustainability policies and practices.
Carnegie offers clients a choice of portfolios ranging from discretionary portfolios and funds which are screened for compliance with the UNGC environmental and other principles, including controversial weapons, as well as portfolios which also specifically exclude fossil fuels, alcohol, tobacco, pornography, military equipment and gambling. We also look to proactively invest in sustainability themes – which are often related to the UN Sustainable Development Goals – such as investments in renewable energy, sustainable food and agriculture and sustainable water usage and technology.
For investment analysis and screening, Carnegie subscribes to and uses MSCI, a world leading provider of company and fund screening and monitoring for responsible investing policies and practices to monitor portfolio holdings. If flaws are suspected in sustainable practices, we question further and without sufficient progress are prepared to exit the investment.
The key to sustainability risk management, as in general portfolio risk management, is diversification. All our portfolios are highly diversified where our biggest funds, Luxembourg based AIFs, invest in many securities or many active and passive funds which in turn own many underlying securities. Direct investments in companies are made in our Nordic stock portfolios and we typically invest in 30-40 different companies per portfolio.
Funds
Within the advisory offering, we have a list of selected funds and ETFs where we offer specific thematic strategies which contribute to the achievement of the UN’s Sustainable Development Goals. The list is intended to give advisers a wide selection of components for building advisory portfolios. It includes both active and passive options within different asset classes, as well as sustainability themed strategies. The objective of the list is to offer the best alternatives we can find in each category, based on a global selection, including sustainability focused options.
Index funds/ETFs
Index products are aimed at tracking the underlying index as closely as possible (low tracking error). Accordingly, when we assess an index product, we look above all at how well it tracks its index after costs. For ETFs, which will be traded in the market like a stock, liquidity is also a key factor. Here, we look for ETFs with the lowest bid/offer spread possible.
Thus, ESG is not a factor in relation to most index products. To put it simply, we try to find the products that track their indices as cost-effectively as possible.
There are, however, some indices that are structured based on certain ESG criteria. This might, for instance, involve a stock index that is based on the ordinary index, but excludes companies that do not meet certain ESG requirements. When we include this type of index product, we look at these criteria and then compare the product with other index products in the same category. In these cases, we include brief commentary and append a fact sheet that specifies the criteria.
Active funds
We look at several different factors when we assess active funds, including the approach to ESG. All active funds included on the advisory side will undergo ESG screening using external ESG tools and an internal due diligence framework. This will for example show whether the fund is exposed to high-risk sectors or owns companies in which ESG incidents have occurred. This is analyzed and documented in a separate report. Existing funds will be rescreened every year. On the advisory side, we will also indicate whether the active fund complies with the UN Global Compact and UN Principles for Responsible Investment.
As regards funds that we also own in any of our discretionary portfolios, we will also engage actively with the manager concerning their sustainability work and, when this is unclear, ask questions about how the manager factors in sustainability risks in the following areas: environmental, social and governance issues, as well as any exposure to specific risk sectors.
If the ESG screening identifies a holding that does not meet sustainability requirements in these areas (red flag), we contact the manager and ask them to explain why this holding is included in the portfolio. As the ESG screening is retrospective, there can be situations where the company has already taken action to correct the problem or is about to change in the right direction. In those cases, it can be acceptable to own the company even though it is red-flagged at the moment. If, on the other hand, we do not get a good explanation from the manager or we see that the company has failed to take the necessary actions, we choose to exclude the fund from the list. But there is no hard-and-fast rule; the process is rather a matter of case-by-case assessment.
PAI – Principal Adverse Impact
Is defined as the negative impact an investment has on environmental, social and governance matter from activities in investee companies.
The principal adverse impact statement (PAI) is intended to show investors and prospective investors how investment decisions made by a financial market participant have or may have adverse impacts on sustainability factors.
As of today, Carnegie considers ESG impacts in our discretionary portfolio management and investment advice. We continuously assess investments and external fund managers against problematic sectors and use data from ISS ESG. The data from ISS ESG includes norm-based screening against UN Global Compact incidents/controversies incidents having a negative impact on the environment, human rights, labor rights and business ethics as well as sector screening.
We are implementing the EU PAI requirements in our discretionary portfolio management, investment advice and insurance advice step by step since the EU regulation is being implemented in several stages.