Nordic ESG and SRI
8.10.19
Insights

Higher ESG level in the Nordic investment universe?

Dag A.D. MESSELT

How does the ESG (Environment, Social and Governance) level in the Nordic investment universe compare to other regions and can we expect higher Nordic performance coming out of it?

Comparing Nordic ESG levels to other regions

Having a long history and a good reputation for Socially Responsible Investment (SRI), the Nordic region is an investible universe with high ESG scores. That is what we have been saying since some time, but how is it really? Are Nordic companies really scoring better on ESG metrics than elsewhere?
How can we measure this? On number of ESG controversies per company? On number of pages published per companies on their sustainable activities? Or on the average rating by ESG rating companies?

There are many ways to attack this, and the most comprehensive way as I see it, is based on deeper individual company ESG analysis.

Without going into the debate on how to ESG rank companies it is clear that a sensitive way to do this is to rank within sector and potentially only within global region, this to make the ESG ratings reflect best in comparable class and this way sort out regional bias and sector bias. I am therefore showing MSCI ESG rating data transformed to numeric scale by Nordea Markets to compare the Nordic investment universe to the European and the US universe.

FIGURE 1 – Historic average rating per region, based on MSCI data, calculated by Nordea Markets

Insight 2019 10 - NORDIC ESG rating - Figure 1
Source: Nordea Markets and MSCI

As can be seen in the above FIGURE 1, the Nordic universe ESG ranked by MSCI is ranking in average higher than the European Universe that again is ranking higher than the US universe.

What does the higher Nordic ESG levels mean?

First of all, as expected, companies in the region are taking ESG very seriously. Not that surprising, please see here how socially responsible business has historically been dealt with in the Nordics and how this has led to a very high ESG ranking of countries in the region.

Secondly, is it “easier” to exercise SRI in the region? Well, to the extent that companies are very transparent on their ESG governance and actions, it is of great help and enlighten the job required to do ESG analysis. Maybe the ESG analysis can be done with lesser resources?

Thirdly, as some research indicates, high ESG ratings can be an explanatory factor for higher performance, see MSCI article in the Journal of Portfolio Management here. Combined with the higher Nordic ESG rating, this is maybe the most powerful finding here and worth dwelling with for some time.

A natural question is then, can we expect the ESG lead (bases on the above MSCI data) to continue in the Nordics as the focus is increasing a lot globally on ESG as we speak? Hard to say, but the FIGURE 1, shows us that the levels have been quite stable for some time.

With regards to studies showing that performance is better for high ESG rated companies, it is worth highlighting that this may be context dependent; if more and more assets are redirecting investments in the direction of highly rated ESG companies, this may lead to a flow effect increasing the relative valuation for these companies. The fact that substantial money is being managed more and more by passive strategies increases the market impact from this phenomenon.

Conclusion –  Nordic ESG levels is yet another argument to be exposed to the Nordic market

If high ESG rating for companies leads to higher performance, this would be yet another reason to be exposed to the Nordic markets. It is time to define the Nordics as a separate asset class bucket, and no longer just a corner of the European market?

The Nordics is a highly innovative, sustainability focused and historically strong performing region.

*Environment, Social and Governance

On the same subject:

Nordic sustainable and socially responsible investing – an old habit in a strong ESG* environment

The Nordic region is widely known for having adopted socially responsible investing (SRI) very early, although we did not have a specific designation for it back then. SRI has a long history in the Nordics, where the first funds saw light in the 1980ies. Where does this come from and what does this mean for an investor?

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Investments in funds are always related to risk. Past performance is no guarantee of future results. Performances are calculated net of fees. Investments in funds are subject to market fluctuation and risks inherent in investing in securities. The value of investments and the revenue they generate can increase or decrease and it is possible that investors will not recover their initial investment.