Nordea Asset Management’s Responsible Investments Team: Using ESG Engagement to Create Value for Investors and Companies

Nordea Asset Management’s Responsible Investments Team is tackling climate change one investment at a time.

As sustainability increasingly becomes a critical issue for business risks and opportunities, many investors are gravitating toward those with strong ESG (Environment, Social, Governance) performance.

Katarina Hammar, co-head of Responsible Investments at Nordea Asset Management (NAM), believes that positive ESG selection can have strong influence on sustainability factors.

Engaging with companies is one of the best ways to create value for investors and holding companies, Hammar says. It’s her job to establish and maintain dialogue between NAM and the companies in which it invests.
Exclusion of a company is a last resort, she stresses. “We do not give up so easily, because we do not think it solves the problem to just sell the shares in the company. If we do that, we just pass it on to another investor.”

Instead, Hammar and her team work with companies to address ESG factors and help them to improve in areas such as pollution, worker compensation and transparency. When a company does not meet NAM’s standards, engagement is her first line of action.

NAM’s Responsible Investment (RI) Team team has travelled to Indonesia to evaluate the sustainability of palm oil plantations, engaged with a food and beverage producer to establish fair labour practices in agricultural supply chains, and worked with a major fashion label to address fair living wage concerns.

If a company that is otherwise considered a reasonable investment shows willingness and ability to improve its ESG practices, it can still be included in NAM’s strategies.

Talk Isn’t Cheap

Engagement begins with dialogue. The RI Team has two goals: to listen to the companies and to talk with stake-holders, including company representatives. This is an important part of the responsible/sustainable investment process.

Every year, ISS Ethix, which provides norm-based screenings, studies the investments in all NAM strategies. If a company is seen to violate international norms in ESG, the RI Team seeks dialogue.

“We first try to hear the company’s version of what has happened,” says Hammar. “Then we try to find out how, and within what time horizon, the company plans to rectify the situation. It might take months or even years to change things in more complex cases.

“We have different types of dialogues with the companies and choose to do them in collaboration with other investors or on our own. We can be one of the 10 largest shareholders in a company, and we really want to ensure that it handles its ESG risks in the best way possible, and develops its business strategy and capital allocation from it.”

Most companies welcome NAM’s RI Team. “Questions regarding a company’s ESG risks and opportunities are rarely black and white,” says Hammar. “Companies are happy to draw on our experience and advice. The talks also give us some answers that allow us to better assess the company’s future prospects.”

Striving for Strong ESG Profiles

NAM is a significant shareholder in many companies — particularly in the Nordics, where the asset manager is the largest fund company. This gives the RI Team a unique opportunity to engage in business strategies and ESG considerations. The asset manager has also created a range of solutions focused on companies that have already embraced ESG practices; it’s called the STARS.

STARS strategies select companies with strong ESG profiles and sustainable business models, running in a responsible manner. Dialogues with companies in the STARS range aim to influence the companies to improve their already strong ESG profiles.

NAM has developed proprietary ESG research models, which are continuously developed and upgraded. ESG analysts use a risk model to assess companies and assign them a score based on the ability to responsibly conduct business and whether its products or services are well-positioned with sustainability megatrends such as climate change and demographics.

This risk-modelling integrates external ESG data and scores from several data providers. This offers coverage of over 6,000 companies globally, in terms of their practices and in tracking controversial issues. It also uses spe-cialised thematic brokers’ ESG reports to underpin analysis. Combining internal and external analyses enables NAM to identify tomorrow’s winners.

And while data are essential, the final and most important part of NAM’s ESG analysis is engagement. Going beyond the numbers and engaging directly with company management allows NAM’s RI Team to enhance its as-sessment — and steer companies towards meaningful change.