SEB Investment Management: Sustainability Score

Provide a short overview of the practice, process or product that is being proposed for the award, including a description of how it is an innovative approach to ESG incorporation and its coverage within your firm.

In 2020, SEB Investment Management (SEB IM) initiated a collaboration across teams and asset classes to create a proprietary sustainability model: SEB IM Sustainability Score (SIMS-S). SIMS-S provides a forward-looking sustainability score on individual companies, as well as guidance on sustainability factors that may affect risks and returns.

SIMS-S is built upon two main objectives: sustainability risks and opportunities.

Risks

1. What the company says it does, using company reported data from two data providers.
2. What it does in reality, using AI-collected ESG sentiment data and UN SDG controversy monitoring.

Opportunities

1. A company’s ability to generate long-term green and sustainable profits within the framework of a 1.5-degree Celsius warming pathway.
2. A company’s current and future operational readiness in relation to a sustainable world (including climate and social perspectives).

The opportunity outputs of the model are unique and divisible. In addition, the model focuses on social sustainability, which is also unique in an era, and area, in which data provision is lagging (but improving). The weight that the model puts on social sustainability, in combination with monitoring and measuring controversies, contributes to its innovativeness.

 

Describe why you decided to undertake this approach.

There were three main reasons for the creation of SIMS-S:

A comparative analysis of well-known data providers showed that each had a different view of Environmental, Social, and Governance (ESG) materiality as a measure of a company’s risk. Many aspects were also missing in the classic ESG ratings. For example, there was minimal emphasis on sustainable opportunities. Therefore, integration of ESG data in investment decision making was highly dependent on the specific ESG data source that an institution was using. Without a detailed assessment, this may be counterproductive to investment decisions and fulfilment of sustainability strategies.

Furthermore, the S in ESG does not receive enough focus within the ratings. That said, the factor is gaining attention from a regulatory (EU Social Taxonomy, SFRD, CSRD, CDDD) and a geopolitical perspective (Just Transition and supply chains). SIMS-S includes aspects such as equal gender representation, the gender pay gap, parental leave, anti-sexual harassment policies, and social impacts of products and services. The model considers the current impasse as well as year-on-year progression to capture both positive and negative developments in individual companies and sectors.

Finally, historically, the external ESG ratings are mainly based on company-reported data, without an assessment of either accountability or delivery. Companies are good at setting policies but can often fail to live up to them in practice. Therefore, the model uses AI technology to monitor sentiment and controversies related to the company-reported data and adjusts the overall assessment based on this.

 

Provide a practical example of how you have applied your approach to an investment (security/issuer/sector/asset class/portfolio).

We can evaluate many more issuers, sectors and asset classes through the SIMS-S methodology than with traditional sustainability data. The model supports portfolio managers across all asset classes within SEB IM in making long-term, sustainable value creation decisions.

Using diversity and controversy monitoring data components from SIMS-S, we were able to create the SEB Global Equal Opportunity Fund, a systematically managed Article 9 fund with social sustainability at its heart. The fund was launched in December 2021, and its AUM on 31 May 2022 was SEK722 million.

In practice, investment decisions for the fund are, to a substantial extent, based on SIMS-S. We identify companies that either promote gender equality and inclusion within their organisation, or strengthen equal opportunities and contribute to sustainability in their business model, including specific themes and UN SDGs. Investments are made in top-ranked companies with business models that contribute to a more equal world. This may be by providing health care or education, supporting digital and financial inclusion, such as affordable insurance, equal access to financial services for men and women, or driving innovation and improving economic opportunities. We also base investment decisions on gender balance and progression of representation in senior positions. For instance, the share of companies with at least one third of their board and management teams consisting of women is almost twice as large in the fund as in the benchmark index (MSCI World Net Return Index). More specifically, the share is 25% in the benchmark and 52% in the fund for senior management. With respect to boards of directors, the share is 55% in the benchmark and 86% in the fund, as of October 2022. In addition, we monitor and have higher standards with respect to controversies, such as labour rights issues, including gender and ethnicity discrimination.

On a general level, the SIMS-S score supports sustainable investing throughout SEB IM. The specific focus on social issues, both within the model and as an investment theme for the SEB Global Equal Opportunity Fund, means SEB IM capital is invested in a more socially responsible way, especially when it comes to gender equality.

 

Provide an example of the outcomes, outline the benefits and challenges associated with the introduction of this initiative, and state what you have learned from this approach that can be applied more broadly. How might you intend to develop the process or practice?

One of the positive outcomes of the SIMS-S model is the SEB Global Equal Opportunity Fund. This was possible by considering the social sustainability-related components in SIMS-S, such as gender diversity, and contribution to UN SDGs, in combination with controversy and ESG sentiment monitoring. Through this fund, we send out a positive signal to investors and companies concerning the importance of promoting equal opportunities and the need to speed up progress. For instance, we discussed the importance of reporting the gender pay gap with SEB AB and have been invited to discuss the fund and the companies we invest in by Dagens Industri (the biggest Swedish financial newspaper). The fund was also part of a large SEB AB marketing campaign around financial equality this spring. The media attention, combined with our engagement activities, encourages companies to move in the right direction, to focus on equality and inclusion, and to strive to become attractive workplaces. This will accelerate the movement towards social sustainability and the creation of an inclusive world.

In addition, we have other Article 9 funds that use the model to a considerable extent. One is the SEB Global Climate Opportunity Fund. Going forward, new funds will be launched and an increasing number of our current funds (Articles 6, 8 and 9) are tweaking their investments based on SIMS-S.

The main benefits of the SIMS-S model, and its broad use by investment teams across the organisation are:

1. Steering our capital towards more sustainable business models. This reduces sustainability risks and increases sustainability opportunities. The model is used in a broad range of portfolios across the organisation.
2. Added transparency in reporting, and an ability to measure the performance contribution of sustainability factors.
3. An objective base to use in our engagement dialogues with companies. The dialogues help companies understand the effect of their behaviour and how we evaluate their actions - for example how they treat their employees.
4. The ability to invest in themes and create thematic products. These include the SEB Global Equal Opportunity Fund, the SEB Global Climate Opportunity Fund, and increasing use of gender equality as a theme in our global equity funds.

The challenges with SIMS-S have mostly been related to data coverage and lack of reporting. Many companies have yet to realise that it is much better to report numbers that may look bad, explain why, and present a clear path to improvement than not report at all. However, data coverage and quality will rise with upcoming mandatory reporting and social taxonomy. Sustainability is not a static matter. Rather, it is continuously evolving, and we will adapt our model accordingly in cooperation with the fund managers. Our goal is to ensure the highest quality and adaptation to both scientific research and changes in legislation. For instance, we are currently researching how specific gender-biased legislation in specific countries can impact companies and how we can add data sets to SIMS-S so that it can model the effects of these changes.