(Bloomberg) -- The woman running this year’s top-ranked ESG funds has developed a series of tests she says offer a reliable path to picking the best sustainable stocks.
Caroline Forsberg of SEB Investment Management has trounced many of her peers, delivering her clients a 30% return on two funds. That’s more than double the industry average, and better than all ESG funds tracked by Bloomberg across Europe, the U.S. and Japan.
The 25-year veteran of stock investing says she’d never buy shares in a company without first getting to know its management. Forsberg also says she’s happy to travel across continents to inspect production facilities away from a firm’s headquarters. And companies that assume they can make do with a powerpoint presentation to persuade SEB of their commitment to sustainability should think again, Forsberg said.
“The most important thing we do is a lot of company meetings,” Forsberg said in an interview. “Understanding the whole ecosystem around a company, that’s a very important edge.”
Forsberg's investment strategy isn't necessarily rocket science, but she does the leg work that a lot of others touting “engagement” don't do. “It is very much fundamental analysis, a bottom-up approach,” she said. That includes making sure supply chains aren't exposed to ESG risks.
“We are pushing hard for companies to look at sourcing and who is actually producing the parts, and how,” Forsberg said. “A lot of businesses have operations in emerging markets and we see a lot of challenges for these companies outside of their headquarters in Sweden.”
With environmental, social and governance investing set to make up well over a third of the $140 trillion global asset market by 2025, fund managers, banks and corporations are eager to make sure they don’t get left behind. But as cash pours in and the specter of greenwashing mounts, finding the devil -- when it comes to ESG -- requires delving deep into all kinds of detail.
Forsberg says she’s sat through meetings with management teams who “can’t really talk about sustainability, despite having great slides on green initiatives and goals.”
So the “most important” test of a company’s prospects of living up to its ESG promises is to “speak to management, to see how committed they really are,” she said.
Companies that have passed Forsberg’s ESG tests include Volvo AB. It’s a “good example,” she said. The Swedish truck maker is “a transition company with a good grip on ESG.” Volvo’s management, led by Chief Executive Officer Martin Lundstedt, has persuaded SEB of its “strong commitment to sustainability,” she said. And right now, Volvo is “stepping up big time.”
At the other end of the spectrum is one of Sweden’s best-known international brands, clothes retailer Hennes & Mauritz AB. “Even though the company is doing a lot of work in ESG, we don’t see them as having the greatest long-term potential,” Forsberg said.
For the SEB fund manager, H&M represents another rule of thumb when it comes to ESG investing. “The business is built around fast fashion. A question I often ask myself is, would the world be better off without this company? Products or services that a company provides should also be beneficial for society.”
And finally, Forsberg says SEB doesn’t invest in companies that are prone to volatility, or unpredictable growth trajectories. “We don’t like lots of fluctuations in earnings,” she said. The focus, instead, is on “long-term factors.”
In general, Forsberg says her SEB funds are overweight industrials, health care and technology, and underweight the consumer discretionary sector and financials.
And if a company really wants to impress SEB, it should link C-suite remuneration to ESG targets.
“We’re pushing for more science-based ESG targets with our companies,” she said, “And to tie that to long-term incentives of top management.” For now, though, there are only “very few companies doing that.”
(Adds comments from fund manager in fourth and fifth paragraphs.)
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