Sauli Hämäläinen: ESG – the rear-view mirror becomes the GPS

29.11.2017

The culture of responsible investments at Etera has some distinguishing characteristics – the most distinct being that it stems from the initiative of the individual portfolio managers at Corporate investments unit. Nurturing this kind of a culture, by support rather than imposition from the top management, has enabled responsibility (or ESG from Environmental, Social and Governance) to become a key element for how the whole team works.

Due to our limited resources, our investment organization does not have a designated spokesperson for commenting ESG issues. Rather it is up to each portfolio manager to observe ESG aspects when making investment decisions. This implies a wide spectrum of tasks, such as taking part in the continuous development of the investment process and assessing how good handling of responsibility matters at a company impact its profitability and valuation.

Etera is a signatory of United Nations-supported Principles for Responsible Investments (UN PRI) since 2010. To ensure our adherence to these principles, we have - like most other institutional investors - made use of so called blacklists. Thus, we have excluded from our investment universe companies that do business in the most controversial areas.

Over the past years we have focused the development of our responsible investment efforts from maintaining simplistic backward-looking blacklists to more nuanced, forward-looking framework. Through ESG analysis provided by our partners and ourselves we can effectively monitor companies’ ESG risks, their possible impact on profitability and valuation as well as the strength of companies’ risk management systems. At least equally important is to identify investment opportunities arising from ESG; were it from the improvement in a company’s risk management systems or a proven effort for a more responsible business model. 

The most important development step for our investment process this year has been the incorporation of an ESG component into our global quantitative equity factor models. This has been possible thanks to cooperation with MSCI, whose ESG data we make extensive use of in our models.

The formulation of our quantitative equity models is based on research conducted by ourselves and our partners, but also peer-reviewed academic research is relied on. High-quality quantitative ESG data still has quite a short history and thus conclusions drawn from it should be taken with caution. Nevertheless, we find the initial results encouraging. We believe that combining ESG data with other, more traditional quantitative factors will further improve the risk/return ratio of our equity portfolio. It is reasonable to assume that taking a forward-looking stance to ESG matters will help to drive better investment returns. This is especially likely as more and more investors allocate their investment into responsible companies. 

Sauli Hämäläinen
Head of Corporate Investments
Etera

« Go back