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7 June 2018, Sweden | Mutual Funds | News

Can a sustainability fund short sell unsustainable stocks?

Sustainability is increasingly important in the selection of shares for fund portfolios. But in addition to using it as a tool for excluding certain companies, it can be employed to choose new shares for a portfolio. This is highlighted by Anna Strömberg, Sustainability Officer and Portfolio Manager for Catella Sverige Aktiv Hållbarhet. 

Catella Fonder began work to transform the old Reavinstfonden into Catella Sverige Aktiv Hållbarhet when Anna Strömberg joined the company just over two years ago. Anna says that an important factor in the design was to remain true to "Catella's DNA" when picking stocks, and to stay close to the companies. As a consequence, there has been substantial focus on how companies are selected for the fund – in addition to clear limits that exclude certain sectors. And two years down the line, a number of cases chosen for the portfolios have contributed to fund performance. Catella Sverige Aktiv Hållbarhet is a pure sustainability fund, but Catella has tried to let these efforts influence the rest of its portfolio management.

Is the idea for all funds to be fully sustainable, or to varying extents?

"The entire industry has been on a journey with this, and different firms have taken different approaches," says Anna, continuing, "There has been nothing wrong with the engagement, and as a hedge house I think we have come a long way compared with our competitors. We have defined different levels. Our long funds have a high ambition. Things look a little different for our absolute return funds, and we do not have the same tough exclusion criteria, but the absolute return funds are also able to short the companies that we have excluded," says Anna.

An important factor is that sustainability thinking should be implemented into the fund management, rather than having a separate team looking at these issues. "Taking account of sustainability improves our accuracy when looking at companies and putting the puzzle together. If we set up an organisation that only looks at sustainability without implementing this into the administration then I believe we would miss out on an alpha-generating process."

Decisions in the industry were previously based largely on ethics and there was a lot of exclusion – perhaps guided the by the church's criteria about avoiding investments in tobacco, alcohol and pornography. Should the exclusions remain static? Sugar kills more people than anything else.

"We think that what we choose is important because this creates value in our funds. What we exclude is a matter of what our clients think. Sugar is something that people are talking about and it is raised sometimes. But what do you do about Axfood and Ica that sell candy in their stores? The limits shouldn't be unreasonable either," says Anna.

With Catella Sverige Aktiv Hållbarhet the fund management company seeks out businesses that have a more sustainability-driven concept, and there are plenty of these.

"Firstly, there are companies that actually have a solution to a global challenge, and some that we often talk about are Nibe, which makes heat pumps, and Tomra, which has technology for recycling cans," says Anna, and continues, "And then there are companies that might not be as obvious, like Atlas Copco, which has its vacuum arm. Novo Nordisk, which genuinely solves a global health challenge. The salmon companies, which provide food that is more environmentally friendly than many other protein sources. Then there are many service companies that help their clients to get better and to streamline their processes – we usually mention Outotec, but there's also Hexagon."

Several sustainability elements have been implemented for hedge funds as a category. "We have drawn a clear line for what we do not invest in: tobacco, alcohol, pornography, coal and weapons. However, we can short these companies and still make money," she continues.

You have not mentioned fossil fuels other than coal. Oil is excluded from the sustainability fund, but not from the hedge fund.

"That's right. Coal is perhaps the worst fossil fuel. When we look at the energy companies, we are aware that this industry is exposed to multiple risks. We try to make an overall assessment. Is this company worse than the average when it comes to managing its risks? Is there scope for improvement? Is there a particular risk that could affect the income statement and balance sheet that we do not want to take – or may want to short?"

In addition to the fixed income component Catella's hedge management works mostly with so-called long/short management. Pair trading is common in long/short management. However, Anna says that sustainability thinking should not make pair trading more difficult. "Many of the companies we exclude are grocery companies in tobacco and alcohol, companies that generally have a slightly lower market risk than others. But if we look at a cleantech fund, that also has lower market risk. We are able to short indexes so that we can have a market-neutral hedge fund," she says. Hedge funds work a lot to gain protection in the form of different index derivatives. In this way, you get the whole market – a question that has been discussed with the Swedish Investment Fund Association.

What is your view of being exposed to the entire market?

"It's a complex issue. We mostly go short, so if we are exposed it's most often on the short side. But it is important for a hedge fund to be able to place its risk level where it wants, and there are currently no liquid sustainable equity index futures. Liquidity is super-important for being able to rapidly move in and out of the instruments we use. But if we were usually long in index products I would probably think it was more important," says Anna.

Asked hypothetically what the portfolio managers would do if one of their companies included on the long side suddenly turned out to be blacklisted for a breach of norms, she has an immediate answer. "We would sell."

Straight away?


Would you not want to enter into a dialogue with the company to put them on a different path?

"We could do that, but our action would be to sell straight away. That might seem old-fashioned, but we do not have the capacity to make our own assessment. We have chosen to be clear with our clients: if a company is blacklisted we have undertaken to sell."

As examples of sustainability issues raised when the portfolio managers talk with companies, Anna mentions various kinds of risk. But what is most profitable − avoiding the risk of negative information or choosing companies that are particularly good at sustainability? "If risks are unknown to the market there can often be a brutal reaction in the share price when they are revealed. You can make a great deal of money from that in the short term if you're positioned right."

But it must be difficult to know about that kind of thing.

"You can have your suspicions. But if it's instead a company that thrives all the time on growth and returns because it has a much better product, then I still think that's a better source of returns," says Anna.

How much is there to indicate that you can actually generate higher long-term returns by choosing to invest in sustainable companies? Anna sees a number of indicators. "I see it as two components. The first is what you exclude, and I think that's neutral. The second is what you include, and this has a number of elements. Are you a good manager or a bad manager? What I believe, and what we can see with Catella Sverige Aktiv Hållbarhet, is that during the years we have focused on this we see that a number of companies we have actively included are among the very best contributors."



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Anna Strömberg

Fund manager / Sustainability Manager
Direct: +46 8 614 25 76

Risk information

Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Sverige Aktiv Hållbarhet and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Hållbart Beta may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Long Short Equity and Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other investment funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at or phone +46 8 614 25 00.
Last changed: 7 June 2018

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