The fund house merges a proprietary performance matrix with ESG criteria to filter out what they expect to be next generation, sustainable, market-leading companies, said Jorry Rask Nøddekær, lead portfolio manager of the Emerging Stars Equity Fund.
ESG practices have comparatively little take up in emerging markets, particularly among companies on a fast growth track, which tend to view it as a cost.
However, in assessing investments, Nordea views ESG as a tool to mitigate risk.
Emerging markets are rife with ESG pitfalls. Corporate governance risk is high, and nearly all companies will be exposed to environmental issues, particularly in manufacturing and mining.
Nordea is unusual in that a 9-person team is dedicated strictly to ESG assessment, which Nøddekær believes is perhaps the largest such team among asset managers.
Even though the fund has turned away opportunities based on an ESG profile, Nøddekær emphasised that the fund house is not a charity and “we are not out to save the world”.
“We use this [ESG filtering] process because we believe companies that take advantage of sustainability trends grow strong,” he told to the audience at FSA’s Fund Selector Forum in Hong Kong.
“We’ve been able to generate a decent level of high absolute return in a market that has been slightly negative. The level of alpha generated has been quite significant and we’re pretty well placed in the best decile since launch.”
Last year, Transparency International scored 100 of the fastest-growing companies based in 16 emerging markets in terms of transparency.
Three-quarters scored less than 5 out of 10, where 0 is the least transparent and 10 is the most transparent.
China accounted for the most number of companies among the BRICS and had the weakest overall performance.
Concerns about emerging market investments have also impacted on institutional investors. Some pension funds have a preference for allocating capital to funds with an ESG strategy.
They are increasingly attracted to investments in ESG-vetted assets because they want to avoid vulnerability to scandals such as a company violating child labor laws.
“The old style of EM investing — buying commodity futures in Brazil and Russia and you were home safe — is not coming back for the foreseeable future,” Nøddekær added.
Nordea’s Emerging Stars Equity Fund has outperformed several emerging market indices: