Storebrand’s ESG Journey from Exclusions to Solutions
When Storebrand first established a sustainable investment team in the mid-1990s, ESG investing still represented largely uncharted territory, with little external data available. In 2001, when the Storebrand pension scheme (which still represents more than half of Storebrand Asset Management’s EUR75 billion AuM) decided to move the entirety of its portfolio towards ESG principles, many investors still rejected the notion that responsible investment was synchronous with maximising risk-adjusted return.
Saugestad recently sat down to discuss the latest changes and future developments, amid a COVID-19 backdrop which is already throwing the ‘S’ of ESG into the spotlight.
How has Storebrand’s approach to ESG evolved over the years?
When we started working on sustainable investing in the mid-1990s, our initial focus was very much around what we should not invest in: products that were deemed harmful by the UN, violations of the UN convention on human rights. We evolved from thinking about avoiding certain activities to avoiding certain risks. For example, bringing down our coal exposure meant that we had less exposure to the decline in energy prices.
Investing in ‘solutions’ has really evolved over the last five or ten years, as a more potent tool to contribute to the types of transition we’d like to see. This initially began with investments in niche funds, in private equity or public equity for instance, with strong thematic solution-oriented teams focused on very specific areas such as water. Now, however, investing in ‘solutions’ has become part of our broader investment portfolios.
The third leg of our ESG approach, which has been a focus for quite a long time, is engagement – our ability to work, especially with companies but also with regulators, politicians and others – to encourage the transition we want to achieve. The biggest impact can be achieved by getting the big companies to change, although divestment is appropriate if change doesn’t happen.
You mention that investment in “solutions” has broadened out from niche thematic strategies to the broader investment portfolio. What’s behind that shift?
To be honest, a lot of that is about the broadening opportunity in this space, across the public markets as well as private markets. There’s widespread involvement in areas such as green infrastructure. There’s a real transition of capital and a real repricing of risk for the more fossil-fuel-heavy investments. Asset managers have now created more scalable vehicles in what we’d call the ‘solutions’ area. For example, we have a low-carbon semi-passive product, which represents about 10% of our capital and has quite strong exposure to renewables and green infrastructure.
We think about “solutions” in four areas. The first is climate, where we see a lot more activity in renewable energy infrastructure, energy distribution, efficient energy usage and so on. The second is sustainable infrastructure, thinking about smart cities and so forth. The third is the circular economy, where there are a lot of business opportunities in the listed as well as the unlisted space. The fourth element is empowerment – bringing services to a wider audience at an affordable price, including healthcare, financial services, communications services and so on. Empowerment is a particularly big theme right now. We need to recover from the COVID downturn, and make sure as many people as possible can participate in that recovery rather than a widening of inequalities.
How happy are you now with type and quality of ESG-related data that you’re able to obtain?
In the mid-1990’s we were trying to find and assess a lot of data ourselves. Today, the very widespread interest in ESG among investors and managers has led to the launch of a range of service providers offering information, such as sustainability ratings or raw data that we can use ourselves. The data isn’t perfect and some issues remain very hard to quantify, but it’s improving. What’s also improved is our approach – our ability to capitalise on that data, transform it, integrate it into the investment process.
One area where I do hope to see good progress in the coming years is on data that captures impact. To a certain extent we can measure that today, but it’s hard to do it thoroughly and in a way that’s transparent and understandable. In carbon reporting, for instance, it’s now getting easier to capture the carbon footprint of a firm’s business activity but much harder to understand how their products are used and what impact that has on overall carbon footprint. Impact, in general, is something we’re thinking more about. For example, when it comes to engagement, we’re trying to be much more explicit about what we’ve achieved – not the number of votes cast or the number of meetings but what’s actually been accomplished through our influence. In order to make that sort of impact we’re finding it helpful to work with alliances – it’s much more efficient than trying to engage on our own.
Can you tell us about the differences in the way that ESG principles are applied in different asset classes?
When we started in the mid-1990s, of course we were focused on the equities space. But quite quickly this became a policy – a way of working – for all of our asset classes. The asset classes are of course very different, but the principles of what we want to achieve are the same. In private equity you get a different type of opportunity than in public equities, for instance, because you have more control over the businesses. In real estate it involves thinking about things like energy usage, water usage, waste handling, the kinds of tenants and businesses you want to cater for, the suppliers and whether they’re adhering to the same standards you want as well.
You manage some assets in-house and other assets via external managers. What’s your approach to assessing managers’ ESG capabilities?
It’s really about assessing the manager qualitatively and moving beyond tick-box exercises. Do they have a clear sustainability strategy and it is it well integrated into their process? Is there a strong commitment among the partners and senior management? Does what they do match up with what they say? We need full transparency into the portfolios to understand them from an ESG data standpoint. It does take time to build the relationship and get comfort that ESG is well integrated. That being said, asset managers have become much better in this area.
The main challenge we have with managers is around quantifying and assessing the impact side of things, but – as mentioned before – that’s a general challenge we have, not just with the external managers.
You have different pools of capital – the pension assets [now 56% of AuM] and the third party assets managed for other clients [majority institutional]. Where has the main driving force for ESG come from – the pension scheme, the external clients or both?
In 2001, our pension scheme assets moved towards the goal of applying ESG principles across all asset classes. In 2005 our mutual funds inherited the same policy. So in some ways the pension scheme has led the way. But at other times the external clients have driven innovations with us. For example, we first developed low-carbon semi-passive investment for the City of Stockholm, and now the pension scheme here has adopted that approach as well.
Looking ahead, what do you think is next for your ESG agenda?
I do think there will be substantial impact from the COVID-19 pandemic. For example, I think the “S” of ESG will be getting more focus. This partly relates to the ‘empowerment’ topic I mentioned before; there could be some interesting opportunities and new risks. More broadly, how companies act right now – how much responsibility they show, how they treat their customers and their staff and their wider responsibilities during crisis and recovery – will be under scrutiny. Companies talk about multiple stakeholders, but this is the time to see the proof: is that really true, or do you only care about the shareholder at the end of the day? To be honest, the ‘S’ part of the assessment of ESG has always been quite problematic: the data is very anecdotal and very hard to get.
Another area where I see increasing focus is deforestation and biodiversity: there’s greater recognition that this is a key environmental challenge, in some ways as imminent as or more imminent than climate.
The other issue where I expect some positive development, as discussed above, is the impact side of things – our ability to understand what impact we’re having more effectively and communicate that to the various stakeholders and clients.
As ESG issues and Impact Investing continue to rise in importance among bfinance clients, we watch Storebrand’s newest developments – particularly on the impact assessment agenda – with great interest. If you would like to find out more about how investors are tackling ESG challenges in manager selection, reporting, engagement and more, contact email@example.com.
This commentary is for institutional investors classified as Professional Clients as per FCA handbook rules COBS 3.5R. It does not constitute investment research, a financial promotion or a recommendation of any instrument, strategy or provider. The accuracy of information obtained from third parties has not been independently verified. Opinions not guarantees: the findings and opinions expressed herein are the intellectual property of bfinance and are subject to change; they are not intended to convey any guarantees as to the future performance of the investment products, asset classes, or capital markets discussed. The value of investments can go down as well as up.
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