It is now possible to invest in corporate bonds selected on the basis of sustainability and responsibility criteria. Danske Invest has just launched a new fund, ‘Danske Invest SICAV European Corporate Sustainable Bonds
’, which is an investment fund comprising corporate bonds from European companies where bonds are selected according to two main criteria – a financial assessment of the company and an assessment of the company’s sustainability and responsibility credentials.
“Customers increasingly want their money to be invested meaningfully relative to the trends and challenges they perceive in the world and in relation to the values they espouse – and here ‘sustainability’ is a key word,” says Thomas H. Kjærgaard, Head of Responsible Investments at Danske Bank.
“The product’s philosophy is to have a sustainable profile that is clear about what it does not invest in, that sets the bar high in terms of what it does invest in, looks to the future and actively dares to support sustainable development,” he adds.
European Corporate Sustainable Bonds are different to so-called Green Bonds, which have attracted considerable attention in recent years. Green Bonds only concern sustainability in relation to CO2 emissions. In contrast, European Corporate Sustainable Bonds occupy an area of increasing interest and demand – namely where there is a much broader focus in terms of sustainability and which thus includes many different factors within environmental and social development. Investments in the fund could, for example, include the development of new, sustainable technologies, water purification or biotechnology.
Certain sectors barred
A number of sectors are already ‘pre-barred’ before the actual work of selecting the bond-issuing companies begins. These sectors are alcohol, tobacco, armaments and military activities, pornography, fossil fuels and gambling.
“Hence, ‘European Corporate Sustainable Bonds’ is different to other, similar funds, where fossil fuels traditionally are not screened out,” says Thomas H. Kjærgaard.
Companies must have signed up to the UN guidelines, the so-called UN Global Compact, before the team behind the fund even considers investing in them. The UNGC lists 10 guiding principles within the areas of human rights, labour rights, the environment and anti-corruption.
Once a company has signed up to these basic principles, the team drills down to the sector level and analyses how individual companies score with respect to the so-called ESG criteria. ESG is a central concept of sustainable and responsible investment and stands for environmental, social and governance. Based on these factors, every potential investment is rated with an ESG score from 1-100.
Thomas H. Kjærgaard explains that the ESG criteria vary from industry to industry.
“For example, environmental standards in the pharmaceutical industry differ from environmental standards in the mining industry. It is also important to stress that a manufacturer of, for example, windmills will not necessarily hold investment interest if the company does not continually strive to optimise its production in relation to energy-efficient standards,” says Thomas H. Kjærgaard.
At least 90% of the portfolio will always consist of companies that are placed in the upper half of the ESG scores within a particular sector – in other words, companies that are already highly rated with regard to ESG factors.
At the forefront of development
Up to 10% of the portfolio can consist of so-called delta cases within the ESG regime, this refers to companies that are not yet in the upper half of their sector in ESG terms, but which the team behind the fund estimates are on the right track with respect to ESG.
“These companies could, for example, at the forefront in the development of a new form of sustainable technology or be in the process of switching to sustainable production,” says Thomas H. Kjærgaard.
The team behind the fund are in active dialogue with the companies they invest in and in this way attempt to influence them to pursue an ever more sustainable business strategy.
The portfolio consists of at least 75% corporate bonds of investment grade, which is the term for bonds of high creditworthiness, while up to 25% can be ‘high yield’, which are bonds with a higher credit risk but which, on the other hand, offer higher yields.
The expected annual return for ‘European Corporate Sustainable Bonds’ is 1-1.5% after costs. Around 97% of the FX risk is hedged.