DThe greenwashing scandal surrounding Deutsche Bank’s fund company, DWS, is a wake-up call to the asset management industry. Being exposed to the accusation of greenwashing, i.e. classifying investment products as greener or more sustainable than they actually are, may not only lead to prosecution and supervisory investigations into suspected capital investment fraud, as in the case of DWS, but also involves with huge damage to reputation. Nordea Asset Management (AM), an investment company of a large Scandinavian bank, knows this.
Since the late 1980s, asset managers have focused on capital investments that are geared towards environmental protection, social development and good corporate governance. The abbreviation ESG dominates the capital market in the English terms environment, social and governance. For Nordea’s asset managers, these three concepts are closely intertwined, and sustainable development without social goals and respect for human rights is inconceivable to them.
At a conference in Copenhagen to which Nordea AM invited journalists earlier this week, Eric Pedersen, head of the responsible investment department at Nordea AM, emphasized the importance of ESG for the investment strategy: “The VW diesel scandal showed how the risks associated with sustainable development can cost investors. “In the past, ethical investments came with costs for investors. Now they offer a higher risk-adjusted return. Sustainable investment was first used by Nordea in 1988 when such products were introduced to the Swedish market for church and trade unions. It is striking how much Scandinavian asset managers try to avoid any suspicion of greenwashing.
Three safety nets
According to Hilde Jenssen, Head of Fundamental Equities, investors are offered full position transparency. In addition, the greatest risk of the company’s sustainability is investigated. A troublesome technical term is “Principal Adverse Impact” which examines how investment facilities such as joint stock companies can impact the environment, social development, work and human rights.
Finally, Jenssen listed internal evaluation methods (scoring) as the third safety net. In her opinion, the Ukrainian war proves that ratings may change over time. This showed how important old fossil fuels are. “Nor can we underestimate the security of energy supply in our sustainable investment strategies,” said Jenssen.
controversy over nuclear energy
The European Commission is also trying to further define sustainable investment strategies and protect investors from greenwashing. Thanks to the taxonomy, it created an extensive set of rules that also showed how different opinions can be about nuclear energy. While nuclear energy is rejected in Germany, it is considered sustainable in France. The Commission has followed suit and classified nuclear energy as a transition technology and therefore suitable for sustainable systems. However, the European Parliament is now resisting.
The disclosure regulation and the classification of funds in accordance with article 8 or 9 are important to fund management companies. Funds falling under article 8 shall include ESG criteria in their investments. Funds under Art. 9 want a lasting effect that is much more complex and difficult. Nordea AM manages a total of EUR 273 billion, of which EUR 175.2 billion is invested in accordance with responsible criteria. Only a few funds, such as the Nordea 1 Global Climate and Environment Fund, aim to achieve lasting results. The Article 9 fund had to close to new investors in February 2021 after increasing by around 500 percent to a total volume of over € 6 billion in the previous two years. The soft close was to protect the interests of the existing shareholders.
More important in Nordea AM are the Article 8 funds which take into account the ESG objectives but leave a little more freedom. As Nordea AM also wants to consciously invest in the transformation of the economy, explained Dan Sauer, Managing Director of the German unit Nordea AM: “This gives us the opportunity to take advantage of opportunities that the market has not yet noticed. In addition, we can have a greater impact on the transformation of companies. “