The European small cap universe is underrepresented among equity analysts as they rarely give smaller companies much attention. The lack of company data is also a challenge when it comes to ESG analysis.
Before any investment decision is taken by the European Small Cap team, any given company is subject to a thorough sustainability analysis. Normally, the foundation for such an analysis is data from various ESG data providers combined with data from the company itself. However, for the European small cap universe, only around half of the companies do that kind of reporting, meaning that the investment team more or less needs to build the sustainability analysis from scratch. They do a bottom-up analysis and contact the companies to get the data they need.
“As an ESG Analyst I find it very rewarding to engage with the companies, and learn where they’re coming from. Once we have that understanding, it is easier to explain what type of ESG information we need and why we need it. In almost all cases, they listen to us, understand our needs and use us as a sparring partner when deciding on their own sustainability journey,” says ESG Analyst, Camilla Adamsen Nielsen.
How sustainability is integrated in the investment process
According to the SFDR regulation that came into force in March 2021, the Danske Invest Europe Small Cap fund is categorized as an ESG fund (Article 8) through its promotion of various environmental and social characteristics, for instance by seeking to influence investee companies’ impact on sustainability matters through engagement and voting on material sustainability topics.
Investee companies’ impact on sustainability matters is applied through an active engagement strategy. The fund hence commits to engage with companies on material sustainability topics and vote on environmental and/or social proposals. This includes topics such as board gender diversity, disclosure of carbon footprint/GHG emissions and CEO salary.
“Topics such as these are of extra importance for the European Small cap universe. It has been important to us to find topics that are applicable across the much diversified investment universe in terms of geography and sectors. By systematically focusing on these in our analysis and active ownership activities it is our conviction that it will help us finding the most attractive investment opportunities while also promoting ESG characteristics”, says Camilla Adamsen Nielsen.
In general, these three ESG topics are not new to the companies. They understand and appreciate the importance of them but at the same time they are often puzzled by where to start. So, in many cases, the companies welcome the input they get from Danske Bank Asset Management. The fund also favours companies that demonstrate sound sustainability practices and sound environmental stewardship. She adds that most of the investments are considered ‘new economy’ companies with relatively low carbon risk rating.
“One of the advantages of being a small cap investor is that the companies we invest in see us as a sparring partner, especially when it comes to sustainability. Management teams often contact us to get our view and guidance on strategic decisions,” says Christian Rasmussen, Lead Portfolio Manager of Danske Invest European Small Cap.
Read more information on the sustainability-related aspects here
The Sustainable Finance Disclosure Regulation (SFDR) in brief
By 10 March 2021, EU’s new Sustainable Finance Disclosure Regulation (SFDR) took effect. As a consequence, financial market participants and advisors are now obliged to disclose added details of their investment products within the sustainable financing space, and products must be categorised according to their level of sustainability.
The aim of the new regulation is to offer further transparency on sustainability within the financial markets, and in a standardised way ensure comparability and prevent greenwashing.
Learn more here
Article 8 and 9 funds
An Article 8 fund is defined as a fund that “promotes environmental and/or social characteristics”. We call it ESG investment funds.
An Article 9 fund consists of products, which have “sustainable investment” as their objective. We call it sustainable investment funds.
The statements in this article is neither investment advice nor an offer or solicitation of any offer to purchase or sell any financial instrument. Always be aware that investment involves risk and that historical performance information is not indicative of future performance or investment returns, which can be negative. Please consult with your professional advisors about the legal, tax, financial or other matters relevant to the suitability and appropriateness of an investment.