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Sustainable concepts for the long term

Climate change, diminishing resources, migration and rapid technological transformation. The world is changing and companies have to keep up. Those that look to the long term when it comes to sustainability have proven to be more profitable and generate better returns.

Diminishing resources. Excessive extraction and waste lead to shortages of fresh water, fish and some metals. Companies can secure their long-term profitability through efficient resource management and waste reduction.

Carnegie Fonder is invested in a total of 343 companies. Swedish, Nordic, Asian, Latin American, Russian and African. Shares and corporate bonds. All are carefully chosen to contribute to a good long-term return in some of the 16 funds managed by Carnegie Fonder. But are these companies sustainable? And what does sustainability really mean?

One definition of sustainable development that we like was coined in the 1987 Brundtland commission report entitled Our Sustainable Future. Gro Harlem Brundtland was tasked by the United Nations to investigate the major common challenges the world faced at the time, and wrote the following:

“Sustainable development is development that meets the needs of the present without compromising the ability of future generations to meet their own needs.”

This is a thoughtful declaration, as much now, 30 years later, as it was at the time. And most people would agree that it is more important than ever that we do all we can to help. For fund managers this is about identifying companies that act for the long term in everything they do. This is what we like about Gro Harlem Brundtland’s definition; just like our focused value management investment philosophy, sustainable development can be boiled down to a single concept – the long term.

Maria Andersson, manager of Carnegie Corporate Bond, and property developer Humlegården’s CEO Anneli Jansson ring the bell at the listing of Humlegården’s green bond.

The first step is to try to winnow away the least attractive companies and industries. Carnegie Fonder excludes companies that operate in tobacco and pornography, as well as those that work with controversial weapons like cluster bombs, anti-personnel mines, and nuclear, biological and chemical weapons.

There are other industries that we avoid, but it can sometimes be challenging to draw precise lines. One example is coal production, which we tend to stay away from, but some steel producers extract their own coal and we wouldn’t necessarily want to exclude them entirely.

We also work with norm-based screening, a technique to eliminate companies that systematically violate international conventions like the UN Global Compact. The Global Compact was initiated by Kofi Annan in 1999 and is a framework of ten principles covering human rights, anti-corruption, environmental issues and labour rights. Carnegie Fonder is a signatory to these principles and we urge all our holdings to do the same.

We are also a member of CDP, an organisation that encourages all companies to measure and disclose their greenhouse gas emissions. The majority of our 343 holdings report their carbon footprint, and more are signing up; in order to reduce emissions, you first have to measure them.

If a company has trouble complying with the principles, our first move is to get in touch to find out what has happened and they are doing about it. Perhaps a dam has failed at a mining company in Brazil, or a Swedish telecom operator has become embroiled in a bribery scandal in Uzbekistan…

Thankfully, this is how most professional fund managers operate; they check that their holdings comply with the UN Global Compact, they apply some kind of sector exclusion and, just like us, have signed up to the UN Principles for Responsible Investment (UNPRI).

One thing that sets Carnegie Fonder apart from many of our peers is that we have worked with norm-based screening since 2004, which is longer than most. Another is that we follow up the screening ourselves; we get directly in touch with any companies that are having trouble complying with the Global Compact. Some managers choose to outsource this work, but that is not how we do things.

At the moment we are engaged in three ongoing conversations– three from 343. These are commodities companies BHP Billiton, Mundra Port and Norilsk Nickel, which you can read about on our website. We are also one of the few fund managers to have signed up to the UN Global Compact, the ten principles that we ask our holdings to follow.

We have worked with norm-based screening since 2004, which is longer than most.

But most importantly, and the main difference between us and tracker funds, is that we analyse the companies before we invest. We would never buy a company just because it is included in an index or because someone else thinks it is attractive. We invest in companies because we have done the research, and a critical part of our analysis has always been to identify companies that act for the long term. They should be financially strong, but they should also be prepared for what might be called ESG megatrends.

ESG? This concept also has its roots in Gro Harlem Brundtland’s report from 1987. E stands for environment, S for social and G for governance. ES and G are quite simply three dimensions of sustainability, and ESG megatrends are a more concrete way to describe the challenges that companies have to deal with. As illustrated below, this is not just about climate change, but also rapid technological change, increasing demands for community engagement and transparency, migration issues and diminishing resources.

Posing a number of verification questions in the investment process takes us a long way in identifying sustainable companies:

  • How do you develop products and services that are resilient to the megatrends?
  • How do you optimise resource management to meet new demands and ensure profitability?
  • How do you ensure a healthy business culture that strengthens the brand and attracts customers and staff?
  • How does the board work? How are the board and management team composed?
  • What resources are allocated to the company’s risk and compliance functions?
  • How do you assure the quality of suppliers and resellers?

These relatively simple and obvious questions allow us to identify companies that are able to not only contribute to countering the negative megatrends, but that could also be the winners in the increasingly tough competition the megatrends bring about – companies that are innovative and excellent in resource management (E), that take HR issues seriously and are engaged in the society in which they operate (S), and that have well-developed risk management processes and responsible owners (G).

Active management: Gunnar Påhlson, manager of Carnegie Asia, on a company visit in Hô Chi Minh City.

This analysis helps us to identify well-managed companies with lower risk levels and better potential to create a long-term good return. We are inspired by a range of studies demonstrating that sustainable companies perform better than those with weaker sustainability.

And this is true everywhere – in Europe, in the United States and in the world’s emerging markets, as can be seen in the figure above in which companies with a good sustainability rating have a superior historical price trend. But these ESG ratings, compiled by companies like MSCI and Sustainalytics, do have their shortcomings.

Firstly, they only look at the larger companies and seem to have limited interest in Swedish and Nordic companies. Secondly, they focus primarily on listed companies, and therefore miss the unlisted companies that our fixed income managers invest in.

So, once again, the critical factor is our own analysis. Reading research, articles and everything we can find out about the companies. Meeting with management teams, making site visits and examining the competition. That is how we work at Carnegie Fonder.

 

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