The Danske Invest fund European Corporate Sustainable Bonds accommodates an increasing demand from both private and institutional investors for sustainable investments. The fund invests in corporate bonds from European companies with a sustainable profile, and the volume of assets under management has been steadily increasing since its launch in June 2016.
Assets under management currently total around EUR 830m, and when chief portfolio manager Andreas Dankel talks to investors they often express enthusiasm for three particular characteristics of the fund:
“Investors place a lot of emphasis on our prioritising investments in companies with good ESG scores, and also that we are in regular dialogue with companies to try and push them in an even more sustainable direction. Furthermore, they appreciate that we also focus on companies that are not yet best in class in terms of sustainability but who are moving in the right direction,” explains Andreas Dankel.
Morningstar has currently assigned the fund five globes, which is the research agency’s highest rating for sustainability.
Focus on top-rated companies – and those with potential
Various sustainability factors are included as a fixed, integral aspect of the overall evaluation process when the portfolio team is selecting the fund’s investments. The majority of the investments are in bonds issued by companies that score highly on ESG criteria – ie, environmental and social factors together with corporate governance. The bonds can be either with or without a so-called green classification, also known as green bonds.
However, as mentioned, the fund can also invest in companies that are not yet highly rated with regard to sustainability but who are on the right course, according to the portfolio team’s evaluations. These companies, along with companies facing some form or other of controversy, are placed on the portfolio team’s watch list, which can account for up to 30% of the fund’s investments. In these cases, the portfolio team will engage in additional dialogue and pay extra attention to see if the companies are making improvements.
“We call them ESG turnaround cases, and investing in them can make good sense both from the point of view of promoting sustainable corporate development and from a purely financial perspective. The risk premium – in other words the excess yield – can fall when a company improves its sustainability profile and so produce a capital gain for investors,” notes Andreas Dankel.
Financial criteria also important
The fund’s portfolio comprises at least 75% investment grade bonds and up to 25% high yield bonds. When selecting individual investments, the portfolio team naturally does not do so purely according to a company’s level of sustainability, but also assesses its financial position as a borrower.
“Our financial assessment is based on a fundamental analysis of the individual companies and a deep understanding of the catalysts that can trigger a shift in risk premiums,” explains the chief portfolio manager.
The portfolio team pre-screens investments for companies that derive much of their income from tobacco, alcohol, military equipment, gambling, pornography or the extraction of oil, gas or coal. To be included in the fund’s investment universe, companies may generate a maximum of 5% of their income from each of these industries, with the exception of pornography, where the limit is 1%. Companies involved in the production or sale of controversial weapons, such as nuclear weapons, cluster bombs or landmines, are completely banned from the portfolio.
Disclaimer: Danske Bank has prepared this material for information purposes only, and it does not constitute investment advice. Always speak to an advisor if you are considering making an investment based on this material to establish whether a particular investment suits your investment profile, including your risk appetite, investment horizon and ability to absorb a loss.