Sustainability and return: Higher risk in miscreant companies

ESG investments.

Carnegie’s head of discretionary portfolio management Johan Voss-Schrader, on how the bank handles sustainability issues for clients.

What is the perspective on sustainability at Carnegie Private Banking?

- We believe factoring in ESG (Environment, Social and Governance) criteria is essential when considering an investment. From the investment point of view, it is all about reducing the risk. The point is, companies that pay attention to sustainability tend to have good control over their businesses and to be good investments – they do not take unnecessary risks. An example of the opposite would be Volkswagen in 2015. Obviously, there was a toxic company culture that had environmental consequences. And that turned out to be a clear investment risk – the share nosedived 40–45 percent when “Dieselgate” hit.

Do you have to sacrifice risk-adjusted return to invest sustainably?

- Not if it is done right. Our approach is not to exclude entire industries, but to pick the best in class in every sector – companies that are as careful and considerate as possible, even in businesses that are harmful or potentially so.

How do you go about that?

- The challenge for us is that we invest outside Sweden to a great extent via foreign fund managers. We have no direct contact with the companies, in other words, so we have to make sure the external managers we engage understand both the risks and opportunities linked to sustainability.

How do you tick that box?

- When we are considering taking on a new manager, we ask questions about ESG. That gives us a very good picture of their stance. Thereafter, we engage the global consultancy firm ISS-Ethix to perform an ESG screening of the fund holdings and ask the manager to explain any violations. If the manager has an ongoing dialogue with company management, it may still be okay to invest – exerting influence is more effective than exclusion. But if a significant holding cannot be adequately explained, it can present a barrier to investment.

What is the perspective on sustainability outside Sweden?

- Sustainability is advancing on a wide front in Europe and many managers are already very skilled in this area. We are also seeing green shoots in Asia and, to a certain extent, the United States, although there they are most interested in governance and perhaps social issues. The environment is faring less well.

- Equity funds have made the most progress with sustainability, while hedge funds and funds that invest in government securities are less on the ball. Corporate bonds are somewhere in the middle. But these days, sustainable investment is actually possible in all asset classes.

Sustainability at Carnegie

Our perspective: Sustainable investments can generate better risk-adjusted return. We support the principle of best in class and do not exclude industries wholesale, which has proven to have negative impact on risk-adjusted return.

Knowledgeable fund managers: A large share of the assets under management at Carnegie are entrusted to external fund managers all over the world. Consequently, our focus is on understanding the manager’s stance on ESG issues and how they can affect financial performance.

Control: We engage ISS-Ethix, a consultancy firm, to analyse underlying holdings in the funds in which we invest. Violations are discussed with the manager, after which we determine whether the fund should be retained. We encourage the manager to work with exerting influence on the companies concerned.

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