Governance, risk minimisation and long term horizons were among key takeaways from a seminar on ESG issues attended by the full portfolio management team at Sweden’s Carnegie Fonder recently, the manager says in a note to its investors.
The ‘G’, Governance, part of ESG was highlighted for its central role in enabling the other two parts of the acronym – Environmental and Social – to function. “Environmental questions are important as are social questions, but without proper governance it doesn’t matter,” Carnegie Fonder notes.
“Everything is decided by leadership, evaluation and control, not just in questions of sustainability. There are plenty of companies with great sustainability policies, but is there leadership and incentives to follow and develop the policy? If you as an active manager wish to influence a company it is necessary to identify the individuals who have the mandate for change, and, if the opportunity arises, through active preparation towards general meetings to put forth individuals to the board.”
In regards to the question of risk, the seminar looked to the example of Volkswagen’s emissions scandal as evidence of why poor governance can cost investors money, and why sustainability analysis must be integrated into traditional analysis. It is as important to avoid the ‘mines’ as finding the long term winners, Carnegie Fonder notes.
Sustainability also requires thinking around investment term horizons, the manager adds: just because the Earth takes a year to go round the sun does not mean that this is a suitable period for evaluating management of assets. The same applies to sustainability, but here the industry is facing a time dilemma because of the pressure for change. Investors need to dare to maintain holdings where they are convinced of the outlook, despite any near term challenges. Carnegie Fonder notes H&M; results in recent years have disappointed investors, but the manager says it is difficult to find a company that is better run and that does more on sustainability issues than H&M, and which therefore improves its odds for long term profitability.
Finally, evidence from indices suggests that investors who are serious about governance should invest in the Nordic region. Carnegie Fonder cites the 9.4% annual return, rebased in dollars, over the past 50 years from the stock market in Stockholm. This compares to 5.3% for a global index and 5.8% for the US. Carnegie Fonder says it believes this outperformance comes down to governance and the ownership model that is prevalent in the Nordic region that is significantly different from both the Continental European and Anglo-Saxon models. “Only in the Nordic model is there a clear hierarchy, where the company meeting elects a board that is totally segregated from the management group. A Nordic board has a clear mandate to act in the interests of owners, something it achieves by deciding on company targets and strategy for the management.”