Nordic SRI and ESG
30.08.19
Insights

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

Dag A.D. MESSELT

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?

 

Why did the Nordics start so early with sustainable and socially responsible business?

It is difficult to find a point in time, but the people’s relationship with and dependency of the nature seems to be a good place to start. At times, it was a very hard struggle in the north with harsh winters could be one factor.
This led to community interests being prioritised over individual interest, despite being a region where individual freedom developed early. We can still see this in the Nordics, particularly in Sweden where the consensus decision model is very developed. We also have a phenomenon called “the law of Jante” that is hitting down on the individual interest to the benefit of the group interest. Although the author vas ironic when writing it, it describes well a Nordic societal element.

How did the Nordic sustainable and socially responsible business develop?

The political attitude towards sustainability and social responsibility has been strong for a long time. In the Nordics, we have been early with women’s right to vote, with creation of same opportunity for all, with combatting bribes and indifferences, and with environmental protection. The result is that we in this region have old habits and strict laws regulating behavior in a sustainable and socially responsible way. The Nordic politicians and NGOs have always been very vocal on the international scene, whether it was to stop apartheid, fight pollution or to negotiate peace deals.

This has led to Nordic official and semi-official institutions having very strict requirements on their providers in terms of sustainability and responsibility.

So no surprise that most Nordic companies have adopted since a long time practices and governance that ensures their high-level delivery on sustainability and social responsibility. This has transmitted over to private business at large, as many companies are providers to both the public and the private sphere of the economy. This is clearly visible in the annual report of Nordic companies, a delight for an ESG analyst.

Due to the high innovation capacity in the Nordics, companies in the region are also making substantial contribution to a sustainable and responsible future, for instance renewable energy through windmills or efficient protein transformation with salmon farming. There is also a wide range of mid to smaller size innovative companies with sustainable solutions.

The Nordic people are also used to serious communication on sustainability and responsibility matters. We sort our garbage at home since a long time, we use energy efficient heating solutions, we are used to taking a diverse environment in to account, and we are used to a life where the balance between work and family is good; at least we have the option to choose so. Norway has close to 50% of new cars sold being electric, a level seen nowhere else in the world.

As this is a topic for all layers and dimensions in the society, there is no wonder the Nordic press is interested in this. It is considered a serious problem if your fund or company ends up on the first page of a newspaper with headlines indicating that you are not respecting ESG criteria when expected to do so.

Where did this lead the Nordic ESG compared to other countries and regions?

As an example of how the Nordic countries rank globally in ESG, ISS published a report recently called “ISS ESG Country Report 2019”. The rankings are based on 100 quantitative and qualitative criteria. From the report:


The Best -Performing Countries
As in previous years, Scandinavian countries are at the top of the ranking this year. For the first time, a non-Scandinavian country – Switzerland – is amongst the three most highly rated countries. Switzerland’s rating is the result of good performance in governance and fundamental freedoms in combination with a solid performance across most other important rating topics, such as labor rights, climate policy, and agricultural and industrial production. Sweden and Finland score particularly high on education, healthcare, and social security infrastructures. As countries with a high proportion of renewable energy sources and a relatively strong climate performance, Sweden, Norway, Finland, and Iceland score well in the rating area of “Climate Change and Energy.”

Insight 2019 08- Nordic SRI - Table ISS

How did the Nordic sustainable and responsible investing develop?

Alongside the development throughout the society, the investment community also picked this up very early, partly because it was a strong trend, but also because some clients started to require this plus the fact that the people working in the industry had a positive attitude towards this new direction.

It is interesting to see how Nordic portfolio managers individually since quite some time have considered ESG factors when discussing with companies and making investment decisions without making a big fuss out of it. With other words, many Nordic portfolio managers have considered for a long time ESG factors as any financial factor and have seen no need to separate this out with a separate focus. As an example, in the Nordics, you can find funds that in reality are respecting some strong ESG labels, like for instance the Belgian Febelfin, without having any ESG, SRI or sustainability tag in the fund name. For instance at Alfred Berg (100% BNP Paribas AM) in Norway we have screened for a long time our funds in line with UNPRI on norm and also on sector, but none of our funds carry SRI, ESG or Sustainable in their names.

See more about our local way of doing it here: Alfred Berg sustainable and socially responsible investment. Our local SRI action is in addidition to the SRI methodology that all BNP Paribas AM’s entities have to comply to.

It should be said that the Nordic investment universe is very good for an investor as that ESG standard among companies already is very high and very transparent. This makes is much easier for an investor to analyse and understand. As an example, if we look at the approximately 65 Nordic companies present at the MSCI ACWI index, Sustainalytics categorize around two thirds as Leaders or Outperformers. This is within the “best in class group”, so a very strong standing.

The model that has developed in countries that have picked this up much later is very different; they have started separate teams doing the ESG work alongside the portfolio managers that are given the ESG research conclusions almost as external input. This is probably to be able to introduce the ESG aspect in a quicker and more demonstrative way to catch up, good for marketing.

We have seen though, as the bigger international investors build up larger explicit ESG research capacity, the trend is also coming to the Nordics. This seems to be the model going forward, either through internal teams or through buying external services.

*ESG – Environmental, Social, Governance

On the same subject:

The Nordic high yield market – H1 2019 review

High Nordic high yield primary activity After record years in 2017 and 2018, the primary activity in the Nordic High Yield market remained strong in the first half of 2019. The Communication sector was one of the most active, including a NOK 7 billion issue from the telecom company Nokia Oyj. Real estate also stood among the bigger contributors, followed by industrials and financials.

Higher ESG level in the Nordic investment universe?

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?

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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.