NORDEA ASSET MANAGEMENT
and selecting companies or bonds that meet NAM’s ESG standards. Within the ESG STARS strategies, every investment is examined through an ESG lens as well as on financial grounds. Our ESG analysts work closely with the investment teams to identify material risks and oppor- tunities relating to the companies’ medium- to long-term operational performance and market positioning, and the results of their analysis feed into proprietary ESG models that are integrated into the investment process. Active ownership and engagement is an important part of the ESG STARS’ investment approach. We engage in productive dialogues with many of our STARS compa- nies, executed in close collaboration by the ESG analysts and portfolio managers. We believe this collaborative process creates value because it identifies companies that stand to improve strategically and financially from better managing and/or disclosing their key environ- mental, social and governance opportunities and risks. Engaging directly with the companies gives us not only an insight into their ESG risk management that goes beyond the standard external communication, but also the ability to assess the progress the companies have made on our previous ESG requests.
Policy 4 (PAFF). This policy prohibits investments in com- panies that are not adequately making the transition to clean energy and fossil fuel phase-out, while allowing the strategy to invest in companies that help accelerate the transition. Companies with a transition strategy that is aligned with the 2°C target are put on a whitelist 5 . The ESEF is allowed to invest in companies on the whitelist as long as the company also has an investible NAM ESG score. Every holding in the strategy undergoes a parallel fun- damental and ESG evaluation before an investment is made, and this evaluation is continuously updated. Excellent ESG performance or unaddressed ESG risks will impact the financial DCF model, which is the primary tool used for company valuation. The findings from the ESG analysis that are deemed to have financial impact are reflected either in the first 10 years of explicit financial forecasts, and/or in the long-term fading of the profit - ability (ROIC-WACC spread), which takes place between year 10 and year 25. Companies with outstanding ESG profiles are given a larger long-term profitability spread and vice versa.
SASB integration into the NAM’s ESG model
Nordea’s Emerging Stars Equity Strategy
NAM’s proprietary ESG scoring model attempts to identify stakeholder risks at the company level and is conducted from two perspectives. First, we assess align- ment (or misalignment) of business models with the UN Sustainable Development Goals 6 (SDGs). We assess whether the service or product the company offers con- tributes positively to society, how significantly aligned business activities are as a proportion of revenue, how much capex is directed into them, and whether they are a visible driver of growth. This is relevant both because the SDGs present large and durable business opportuni- ties, and because SDG alignment – or the lack thereof – is an indicator of a company’s material ESG impact on the world around it. In this way, our research takes into account both sides of the so-called “double materiality”, e.g. the effect of climate change on companies’ activities
NAM launched the Emerging Stars Equity Strategy (ESES) in April 2011, with the aim of creating a unique emerging market equity strategy in which the stock-spe- cific analysis and valuation fully integrate ESG factors, and therefore drive the level of conviction, the position sizing and portfolio construction. The strategy has fully integrated NAM’s proprietary ESG scoring model, which is built around the SASB Materiality Map. In addition to investing only in companies that have an investible NAM ESG score, the strategy has also implemented certain sector restrictions with a 5% revenue threshold 3 . The strategy’s exposure to fossil fuels is governed by NAM’s Paris-Aligned-Fossil-Fuel
3 Sector restriction: coal mining, military equipment, gambling, nuclear power, adult entertainment, tobacco and power generation from Coal (10% revenue threshold). For more information on the sector restrictions please see: https:// www.nordea.lu/documents/static-links/Equity_STARS_Sensitive_Industries_ Guidelines.pdf/
4 https://www.nordea.com/en/doc/nam-fossil-fuel-policy.pdf 5 https://www.nordea.com/en/doc/nam-fossil-fuel-policy.pdf 6 https://sdgs.un.org/goals
2 | SASB STANDARDS INTEGRATION CASE STUDY
SASB.ORG/INVESTOR-USE
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