BankInvest: The Singular Pursuit of Alpha Powered by ESG

The Nordic markets, including Denmark, have seen a significant increase in the demand for sustainable investment products. Though green bonds and equity products have been widely available for well over a decade, investors have only recently warmed to them. However, the market for ESG-compliant investment products has grown so quickly over the past few years, that transparency is becoming an issue. Investors face mounting difficulties in navigating the expanding universe of products and options, separating those masquerading as green and sustainable from the real thing.

In Europe, Denmark has been pushing hard for the introduction of an ESG taxonomy. As a first step, the country’s monetary authorities plan to launch green certificates tied to existing bonds as a way of determining the exact price of an ESG designation. The German Bundesbank is now considering a similar approach.

At BankInvest, head of responsible investments Mads Berendt Søndergaard notes that companies seem less reluctant to engage on ESG related issues than before: “They know this matter and realise that investors care about this.” Søndergaard prefers constructive engagement to criticism: “It’s one of the cornerstones in our policy. Sustainability is, ultimately, a risk mitigation strategy but can also be used to generate alpha.”

A fund management services company that just celebrated its fiftieth anniversary, BankInvest was set up in 1969 by a group of small- and mid-sized Danish banks to develop a full suite of investment products for their clients. The company is still fully owned by 38 participating financial institutions who distribute BankInvest products and often do so under their own name.

Initially, BankInvest offered only a few Danish mutualised funds. However, the product range has diversified significantly since then. Over the past couple of years, BankInvest doubled the number of products which has increased the administrative burdens placed on the company as well. Søndergaard emphasises that, given the present low-yield environment, efficiency in fund management is key to success.

For investors looking for alpha in today’s market, ESG is key as well. A major research effort by BankInvest has found that companies implementing robust environmental, social, and governance standards consistently outperform ESG laggards. Mapping corporate performance since the dot-com bubble burst in the early 2000s, and over the next seven market downturns or ‘corrections’, BankInvest has found that regardless investment strategy, ESG added robustness and above-market returns.

“We kept noticing that equities with a good ESG profile performed better than other and wondered if this was merely a coincidence. This is when we decided to look a past performance all the way back to the IT bubble of the late 1990s. Tracking ESG markers through the ups and downs of the market, including major events such as the 2011 downgrade of US sovereign credit risk, the 2015 devaluation of China renminbi, and of course the present corona pandemic, showed the superior performance of companies deploying ESG as a tool for risk mitigation. It also dispelled any lingering doubts as to the usefulness of these criteria in the pursuit of alpha,” says Søndergaard.

In 2008, BankInvest became one of the first financial services providers in Denmark to sign on to the United Nations Principles of Responsible Investment (UN PRI). The company has since joined the UN Global Compact – a commitment to adopt sustainable and socially responsible policies – as well.

“We are eager to join such initiatives, and other, because the quest for solid returns is not just a financial one. ESG has been a long journey, and one that is still ongoing. The interest in sustainable investments is increasing exponentially. Investors demand strategies and products that have a positive impact and contribute towards the sustainable development goals. Thanks to this interest, ESG data has also become more abundant, reliable and transparent. Bond issuers know that the trend cannot be ignored, and it is up to us as fund managers to explain precisely what we do, and how, to all stakeholders.”

Søndergaard summarises that transparency has become ‘quite important’: “We disclose as much information and data about our investment portfolios and strategies as is possible so that investors can make informed choices.” It is what sets BankInvest apart. That, and the fact that the company is one of only a handful of cooperative asset managers left – that is quite unique in the financial industry.