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Managing ESG as a Multi-Manager

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Stockholm (HedgeNordic) – The Nordic countries might well have been at the forefront of worldwide sustainability efforts in recent years. With Brummer & Partners being one of the leading players in the Nordic hedge fund industry since its early days in the 1990s, the Stockholm-based hedge fund group has also played a major role in pushing sustainability forward in the industry.

Brummer & Partners, which has built – and is continuously reshaping – a family of funds through strategic relationships with hedge fund managers from different corners of the world, has a unique ability to encourage its underlying fund managers to develop and embrace sustainability efforts. “Thanks to the partnership structure, we are striving to always be aligned in our sustainability ambitions and we support all investment managers in the group on policy development, ESG strategy, screenings and measurements and also client dialogue and reporting,” says Ann-Sofie Odenberg, Head of Sustainability at Brummer & Partners.

“Given the diverse range of investment strategies managed in the Brummer group and constituents of Brummer Multi-Strategy (BMS), there cannot be a one-size-fits-all policy.”

The level of environmental, social and governance (ESG) integration varies from manager to manager, particularly in the highly heterogenous hedge fund industry. Therefore, there is no one-size-fits-all responsible investing approach that Brummer & Partners can ask from and enforce upon all its investment managers. “It is important to note that given the diverse range of investment strategies managed in the Brummer group and constituents of Brummer Multi-Strategy (BMS), there cannot be a one-size-fits-all policy,” emphasizes Odenberg. “Hence the policies include some minimum criteria but are otherwise tailored to the specific investment strategies managed.”

Evaluation Process

In the evaluation of new investment management teams, Brummer & Partners looks for investment strategies that complement the group’s existing strategies and that are expected to contribute to Brummer Multi-Strategy (BMS)’s risk-adjusted return. Brummer & Partners continually works with all investment management teams in the group to develop, cultivate and promote responsible investing efforts. “All new investment managers joining the Brummer group must commit to supporting BMS’s sustainability work,” says Hampus Hårdeman, Sustainability Manager at Brummer & Partners. This commitment involves adhering to the group-wide exclusion list of companies that could have Principal Adverse Impacts.

“All new investment managers joining the Brummer group must commit to supporting BMS’s sustainability work.”

The commitment restricts all exposure to controversial weapons and long exposure to companies in breach of international norms or involved in thermal coal. “It also includes transparency and disclosures on sustainability and ESG, expectations on ESG integration and continuous learning in the field of sustainability and ESG,” adds Hårdeman. “Apart from the exclusions mentioned above, they are also screened for exposure to ethically sensitive sectors.”

In addition to meeting the minimum requirements laid down by the Brummer & Partners group, each fund manager tailors its approach to sustainable investing depending on its investment strategy. “All new investment managers are expected to formalize Responsible Investment policies that suit their investment strategies and the financial instruments traded,” Hårdeman points out.

Continuous Monitoring and ESG Risk Rating Matrix

Brummer & Partners regularly monitors its investment managers to ensure that all investment strategies continue to meet the group’s and the managers’ own policies. “All underlying investment strategies are screened quarterly to ensure compliance with their own and BMS’s policies,” says Ann-Sofie Odenberg. “Thanks to our partnership structure, we have a deep relationship and continual dialogue with all investment managers in the group,” claims Odenberg. “We screen all strategies at least quarterly to ensure compliance with the Responsible Investment policies.”

“Thanks to our partnership structure, we have a deep relationship and continual dialogue with all investment managers in the group.”

“While the result of the screening is one part of the dialogue with the fund managers, we also are continually, as partners, in dialogue with the fund managers to support the development of their approach to sustainability, discuss emerging sustainability themes and global best practices, among other topics,” elaborates Odenberg. “We also ask them to complete and submit ESG questionnaires, which are followed by formal due-diligence processes by the Risk and Compliance teams.”

Brummer & Partners is also in the process of developing a new tool that will assist its evaluation and monitoring activities. “We are currently also in the process of implementing additional so-called Principle Adverse Impact metrics and measurements, EU taxonomy alignment measurements, SDG impact ratings and WACI measurements (weighted average carbon intensity),” elaborates Odenberg. “The results are and will be used in our dialogue with the fund managers.” The results from the screening and engagement with the fund managers will feed into an ESG Risk Rating matrix.

“The ESG Risk Rating matrix is a new tool currently being developed.”

“The ESG Risk Rating matrix is a new tool currently being developed,” Odenberg tells HedgeNordic. “It will be updated quarterly by the Sustainability Working Group (“SWG”) with representatives from BMS’s investment team, the Risk team and the Sustainability team,” she explains. Brummer & Partners aims to have its ESG Risk Rating matrix fully operational by the end of the year 2021. “A repeatedly poor ESG Risk Rating or ignorance of BMS’s recommendations regarding sustainability practices will be considered in the investment decision,” says Odenberg.

Increasing – Non-Uniform – ESG Demand

Investing based on ESG factors, investor awareness and demand for sustainable investing show no signs of slowing down, yet there is a lack of uniformity in regional approaches to ESG. ESG awareness and demand among investors have “intensified even more over the past two years although the ESG approach among investors seems to differ,” Odenberg points out. “The Nordic investor base favours negative screening and exclusions of companies with exposure to ethically sensitive sectors including fossil fuels apart from ESG integration and generating sustainability outcomes,” she elaborates. Meanwhile, “our international investor base does not typically want exclusions but rather prefer us to focus on ESG integration and sustainability outcomes.”

“The consideration of ESG risks and opportunities will hopefully result in more well-informed investment decisions and hence, stronger risk-adjusted returns.”

There may be many ways to incorporate ESG into investment decisions. However, at the heart of all ESG investing sits the simple idea that companies are more likely to generate strong risk-adjusted returns if they are well-governed and consider all stakeholders involved rather than just company shareholders. “The consideration of ESG risks and opportunities will hopefully result in more well-informed investment decisions and hence, stronger risk-adjusted returns,” concludes Odenberg.

 

This article features in HedgeNordic’s 2021 “ESG & Alternative Investments” publication.

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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