‘ESG’ Provokes Laughter and Nightmares as Funds Faucet New Markets

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(Bloomberg) — There’s a rising variety of cash managers in inexperienced finance turning to markets not normally related to sustainability.

Fund bosses in Europe’s North, the place climate-friendly investing has gone mainstream, have began wanting a lot additional afield to search out low-cost property they are saying will ultimately meet their environmental, social and governance targets.

Nordea Financial institution Abp’s $450 billion asset administration unit is amongst these attempting out the technique, and has simply launched a fund concentrating on ESG property in rising markets.

“We felt it was a compelling concept,” mentioned Thede Ruest, head of rising debt markets at Nordea’s funding administration unit in Copenhagen.

He expects the technique to ship “barely higher yield with out an excessive amount of risk-taking.” He additionally hopes it’ll “make a distinction the place it arguably will matter extra.”

Nordea’s International Inexperienced Bond Fund will make investments no less than 70% in inexperienced bonds, whereas the remainder will probably be in typical bonds issued by sustainable companies, in addition to social and so-called sustainability-linked debt. Of the overall fund, a couple of fifth is at the moment allotted to rising markets.

‘All Nonsense’

Cash managers who’ve already frolicked digging round for sustainable investments in rising markets say ESG is unquestionably gaining a foothold, however from a rocky starting.

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“Up to now, an excessive amount of corporations didn’t even know what the acronym ESG stood for,” based on Burton Flynn and Ivan Nechunaev, fund managers at Terra Nova Capital, which advises the Evli Rising Frontier fund. “After we would clarify, many would push again saying that it’s all nonsense and a few would outright snicker at us.”

The 2 recall a 2019 assembly during which a chief monetary officer “stared at us blankly once we requested about their ESG coverage.” After explaining what it’s, “she burst into laughter.” The pinnacle of a inventory trade in one other frontier market “requested sarcastically, ‘do you guys actually consider in wind power?’”

However issues have already modified and now, it’s “fairly uncommon” to return throughout companies which might be unaware of the calls for being made by ESG traders, Flynn and Nechunaev mentioned.

Greenwashing

Ruest at Nordea says a significant fear now could be that some companies aren’t as clear as they declare.

“It’s a nightmare of mine that we should always expose ourselves to greenwashing,” he mentioned. “That is likely one of the largest fears I’ve.” He says that fixed-income traders are inclined to take pleasure in extra protections than others, however asset managers nonetheless must give you their very own litmus check to keep away from ESG fakes.

“What we at all times search for is to have credibility within the issuer, we wish to see credible plans in the entire transition of the issuer,” Ruest mentioned.

However there’s a college of thought that argues corporations in rising markets are literally much less prone to be responsible of greenwashing than their developed-market friends. That’s as a result of they’ve been below much less strain to reveal ESG metrics, and aren’t used to having to faux they’re extra virtuous than they’re, based on Karine Hirn, founding companion and chief sustainability officer at East Capital in Stockholm.

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Frontier markets have a tendency to supply “superb” alternatives for ESG-focused energetic traders, Hirn mentioned. She’s developed a grading system that measures an organization’s anticipated transition towards a extra sustainable enterprise mannequin to information funding choices.

Reasonably than going with established names she says, “You wish to spend money on corporations which might be bettering when it comes to ESG.”

Mattias Martinsson, chief funding officer at Tundra Fonder, says that “when you actually wish to do in-depth ESG evaluation in these markets, you must spend the time and do it on an organization by firm foundation. The principle problem as we speak continues to be transparency in these markets.”

Flynn and Nechunaev say ESG traders face more and more crowded markets, during which sustainable property fly off the shelf.

“In fact we like best-in-class ESG corporations,” they mentioned. “However we actually like to spend money on corporations with alternatives for enchancment.”

“Investing solely in corporations which have excessive ESG requirements doesn’t repair issues,” they mentioned. And firms with “stellar ESG reputations” are usually costly, which might add to the danger of an “ESG bubble.”

©2021 Bloomberg L.P.

Bloomberg.com

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