Investor Beating 95% of Peers Digs for the ESG Gems of Tomorrow

One of Europe’s top-performing equity managers is investing in targets with less-than-perfect sustainability scores, betting on companies with the potential to boost those credentials in the future.

Henrietta Theorell, whose 26 billion Swedish krona ($3 billion) Swedbank Robur Smabolag Sverige fund is up 42% in dollar terms and 30% in local currency this year, says that environmental, social and corporate governance tallies aren’t flawless and that she looks for companies whose business models can propel them to the top of the ESG ladder in future. To make that happen, she works with her corporates on improving their sustainability.

As an example, Theorell points to biotechs such as Q-Linea AB and Sedana Medical AB, which may not have the highest ESG rating right now because they are focused on developing their products — sepsis diagnosis and anaesthetic delivery, respectively. Newer firms don’t always have the resources to improve sustainability, she says, expecting ESG scores for both firms to rise once they publish their 2020 sustainability reports.

“The question is: do you want to fund a business that can diagnose sepsis quickly or do you want it to have a fantastic ESG score on day one of your investment?” the Stockholm-based money manager said in a phone interview. “There’s room for a few companies in my fund that don’t have top ESG scores on the day I make the investment if it is only due to lack of internal processes that can easily be improved.”

Her comments highlight the challenge investors face when considering ESG metrics, which are self-reported by companies, fueling calls from regulators to set up common guidelines. Some emerging-market investors have said they struggle to incorporate ESG factors into their decision making, while also maintaining their funds’ performance.

Theorell works with the companies she invests in to develop their ESG policies and processes, but ultimately takes a longer-term view on their sustainability. In Q-Linea’s case, for example, she is focused on the company’s ability to save lives and its impact on global health care.

At the same time, Theorell has to make sure that her fund, which has beaten 95% of peers this year, is in line with climate goals set by Swedbank Robur. The subsidiary of one of Sweden’s biggest banks, Swedbank AB, aims for its entire managed portfolio to be in line with the Paris Agreement’s target to limit global warming to 1.5 degrees Celsius in 2025.

The Swedbank Robur fund’s outperformance in this turbulent year was also fueled by Theorell’s bet on Swedish communications companies such as Sinch AB, which has more than tripled, and underweight in consumer discretionary stocks. She also highlighted video-game developers Embracer Group AB and Stillfront Group AB, which have both gained more than 120%.

According to data compiled by Bloomberg, Swedbank Robur Smabolag Sverige is the fourth-best performer among Western European stock funds in 2020 that have more than $1 billion in assets.

Looking forward to next year, Theorell says ESG, infrastructure and renovation will dominate investment trends and has 17% of her fund allocated to these bets. The European Union is gearing up for the Green Deal, which aims to toughen the 2030 emissions-reduction goal from the existing 40%, an effort that would need an additional 350 billion euros ($415 billion) per year for investment in energy production and infrastructure.

“The EU budget on the green deal and climate change mitigation will make a huge impact,” Theorell said. “That’s where I think you’ll see the winners next year.”

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