Higher expectations and requirements
The regulatory engine of the EU continues to run, and it has been a busy year for responsible investments. There is rapid development in sustainable finance, but at the same time we see a clear need for data. In some areas, such as unlisted Norwegian bond issuers, we have to do a lot of the work ourselves because it is not covered by external data providers. At DNB, this is done via questionnaires, through which important input is identified. This is enormously important for both companies and investors, even though it is complex.
Given the difficult data situation, DNB Asset Management set up an ESG Lab three years ago, a platform where sustainability data is collected and processed centrally. For example, all activities and contacts DNB has with companies are recorded in the ESG Lab. The establishment of the ESG Lab helps us to continue to improve the integration of ESG criteria in our investment decisions.
The DNB ESG team consists of six people who primarily work on four key ESG tools:
1. Establishing standards: DNB Asset Management formulates and publishes documents relating to expectations that describe what is considered best practice in a number of areas. The team also participates in investor collaborations and working groups.
2. Active Participation: These expectations documents serve as a framework for active participation, the goal of which is to monitor the behavior of portfolio companies in the best interest of their shareholders.
3. Exclusions: Serious violations of standards and rules, for example, may result in exclusion. These exclusions apply to all DNB funds, including index funds.
4. ESG principles: Systematic application of environmental, social and governance principles in investment analysis and decisions.
Anti-ESG movement in the US.
As a result of the EU, Europe is in many ways a global leader when it comes to ESG, and clients will have to ask more questions about their relationship with responsible management in the future. Regionally, there are differences in the various ways of looking at responsible investing between Europe and the US. Currently, Europe has moved ahead of the U.S. in sustainability development. Asia is following the sustainability trend with some delay behind Europe.
In the USA, the greater involvement of shareholders has been generally welcomed, but has also encountered resistance. Various U.S. states have repeatedly criticized the reluctance of financial institutions to invest in fossil fuel companies. This has led some U.S. asset managers to abandon the goal of net-zero emissions by 2050. Such boycotts are not yet seen in Europe.
There are differences of opinion in Europe as well, but these are more related to individual aspects than to the general consideration of sustainability risks. DNB does not generally exclude the energy sector, for example, even though companies here often still have a poor carbon footprint. We think more of sitting down with these companies and helping them transform. So instead of exclusion, DNB is driving an active ownership approach. While we also use exclusion as a means to reduce unacceptable risks, the more companies we exclude, the greater the tracking error with regard to our benchmark becomes and our influence on the companies decreases, which in turn would be a concern for our investors.
However, the growth of sustainable investment opportunities is expected to continue, and PWC projects that the share of sustainable funds will reach 22 percent of global invested assets in just five years. The U.S. Inflation Reduction Act is a historic commitment to energy and climate change adaptation. Of the total $740 billion package, $369 billion alone will go to clean energy and the green transformation of the economy. The ambitious goal is to reduce greenhouse gas emissions by around 40 percent as compared to 2005. The subsidy package is giving a massive boost to green sectors, and the EU needs to step up its game here.