Nordea Research this month launched its proprietary environmental, social and governance (ESG) rating system, publishing ESG scores and one-page analyses for around 240 Nordic companies. The ratings assess companies on a full ESG spectrum, giving investors a toolkit to compare firms across several dimensions of sustainability.
Recent years have seen a proliferation of ESG ratings providers, from MSCI and Sustainalytics to RobecoSAM and most recently Bloomberg. What differentiates Nordea’s new offering is its unique combination of quantitative and qualitative components, according to Marco Kisic, Head of ESG Research at Nordea.
We caught up with Kisic, the brains behind the new ratings, to find out more about the methodology, the aim and how investors and companies alike can benefit.
Marco Kisic, Head of ESG Research, Nordea
Why the need for ESG ratings?
Sustainability is a very sensitive and pressing topic these days. Companies, especially in the Nordics, want to be ahead of the pack and best-in-class. However, when they turn to investors for guidance, they find that the traditional investor base is often also on the learning curve. Companies are left in the middle: navigating between public opinion, their own ambitions, a market still coming to terms with sustainability and regulators.
With these ratings, we aim to help by providing an extra voice, saying, “We think these factors are important.” We hope to translate what the market is expressing into a more structured form, to provide guidance and to serve as a speaking partner to both companies and investors.
We’ve seen rapid growth in the ESG data space in recent years and the emergence of numerous ESG ratings providers. What makes Nordea’s new framework different?
That’s right; there are already a bunch of ratings out there. I think we differentiate ourselves in three main ways:
- Quantitative and qualitative metrics that leverage our equity analysts’ knowledge
Often ESG ratings are very quantitative in nature and leave limited space for interpretation or a deep understanding of the company behind the reported numbers. We’ve tried to go beyond that by extracting and distilling our analysts’ knowledge and integrating that into the rating. Our biggest asset is our analysts’ knowledge: that knowledge is incorporated and a very important part of the overall rating.
- Looking ahead and in the rear-view mirror
Traditional ESG ratings focus on classic ESG metrics. Those tend to have a retrospective view, based on backward-looking numbers the company reports. That’s very important and a key part of our rating. But there’s also a whole other aspect: what’s going to happen in the future. We’ve tried hard to bring in that focus as well, coming up with ways to assess that future trajectory – both quantitative and qualitative.
- Unique modelling by Nordea’s ESG team
Our ESG team has done some unique work and modelling, such as our estimations related to the EU’s new Taxonomy for sustainable activities. The Taxonomy gives very specific definitions about what economic activity can be considered truly green. We have developed our own estimates for Taxonomy-aligned revenues for Nordic companies. We believe we’re among the few in the market with these type of estimations, which tell us something about what can happen in a company’s future.
We hope to translate what the market is expressing into a more structured form, to provide guidance and to serve as a speaking partner to both companies and investors.
How do we decide which companies to do these ratings for?
The aim is to have a rating and one-pager for all companies we cover in Nordea Research. We’re very close to that target, covering roughly 240 companies. We’ve left out investment companies because they’re a different type of company, but we want to cover those in the next month.
Where are the ratings available, and how often will they be updated?
The ratings and one-pagers are all available for customers on our Nordea Equities Research site (subscription required). Going forward, all of our research produced by our traditional analysts will also include the one-pager with the rating, furthering the integration of ESG into our traditional equity research. The major update will come each year when the company reports its new set of ESG numbers. In addition, when there is material news flow or something that would change our rating, we’ll publish interim updates.
How do we intend for investors to use these ESG ratings?
Our rating system caters to different investment approaches. It has a modular framework that allows investors to tailor the output for specific preferences. The ratings are composed of different layers, and within each layer there are separate modules. The headline rating, for example, is driven by three engines: the quality of the company’s disclosure, the backward-looking “ESG footprint” and the forward-looking “Opportunity set”. Maybe an investor is only interested in the forward-looking component and wants to focus on a company’s future trajectory. They could just focus on that module or drill further down and select certain sub-drivers. Investors can slice and dice the layers and modules as they wish.
Was anything surprising to you in preparing this first set of ratings?
I was struck by the fact that every company is thinking about sustainability. In plotting the trends and dynamics, we can clearly see that the whole group is moving upwards, very significantly and meaningfully. Companies are putting their efforts behind it, and that’s visible in the numbers.
In addition, large caps used to be much better than small caps due to available resources. But small caps are increasingly catching up, devoting effort and resources. There will always be a disparity, but the gap is closing.
With these ratings, we show what metrics we’re going to be looking at in the coming years when assessing companies’ ESG performance.
What were some of the main trends you uncovered in going through Nordic companies’ ESG performance?
In general, for the environment, there’s good improvement across all metrics. But when you look at emission trends, you can see the whole group has been flatlining over the past few years. That is a bit worrisome. We read it as the low-hanging fruits having already been reached. Now the hard part is coming where companies are going to need to make significant investments and commitments to further reduce emission intensity.
Disclosure has also improved a lot. What started at 30% disclosing 10 years ago is now at 70%, so the improvement has been quite steep. Specifically on the social and governance side, it’s interesting to see that injury rates at companies have been coming down, but employee turnover has been going up.
How have companies reacted to the ratings so far?
I just recently presented one of our ratings to a Finnish corporate. Perhaps it’s because they did well, but they appreciated it a lot. A lot of corporates are trying to find their way when it comes to sustainability. They’re looking for guidance to find out what the market is interested in and what they should disclose. With these ratings, we show what metrics we’re going to be looking at in the coming years when assessing companies’ ESG performance.
What about on the investor side? Have you gotten any reaction there?
So far, the ratings system has been very well received. I’ve heard from numerous investors, and the reaction has been very positive. It’s interesting because while all of these investors have access to the big ESG data providers, they understand that we come from a slightly different angle. They trust us and the quality of our research.