Catella Fonder ("Catella") has had an increased focus on sustainability during the last years. We have taken a number of small steps that together lead to a big leap. Today sustainability is a natural part of our daily work and in our all products. We have a common base in what we avoid and what issues we focus on in our investment decisions and in our owner dialogues with the companies.
The implementation of our sustainability work looks different from product to product given our broad product offering. We posed a few questions to CEO of Catella, Erik Kjellgren, and Head of Sustainability and Portfolio Manager Anna Strömberg to learn and understand a bit more.
Why is sustainability important?
The participants in the financial market fill an important role in Agenda 2030 to allocate capital in a more sustainable and responsible manner. Since I joined the position as CEO in 2014 we have taken big steps towards a more sustainable way in how we handle our portfolio management, in relation to the product and process but also in our role as an owner, says Erik Kjellgren.
We have changed two of our long only equity funds into sustainability funds and today all our funds are fossil free, as well as avoiding investments in controversial and non-sustainable products.
Furthermore, we have integrated sustainability in our investment process for all our funds and increased our ambitions as active owners, Erik continues.
Anna Strömberg also points out that through integrated sustainability aspects in our company research, it is possible to avoid unwanted risks and capture opportunities, with a direct effect on value creation for our investors. We can clearly see that the solutions to today's challenges create innovative and fast-growing companies, out of which some of them will be the big cap companies in the future.
Anna, can you mention a specific area/sector which you think has a strong future thanks to ESG?
The whole value chain around energy companies goes through a giant shift away from fossil and towards renewable and electrification. Companies with solutions to these problems that contribute to this shift grow from a small base and there is considerable room to grow further.
The demand for consultants, technologies and sustainable materials increase consequently.
The trend is capturing momentum across sectors and countries. Even oil producing nations such as the US and Saudi Arabia invest in the renewable space. We see that this will have a prolonged growth path which will be less vulnerable, but far from immune to cyclical swings.
We have a number of investments that are directly focused on renewable energy, for example Vestas Wind and Nibe, as well as a number of smaller companies in niche technologies such as Climeon.
Portfolio holdings in Sweco and ÅF Pöyry are also directly impacted positively by infrastructure investments around this transition together with building material companies Lindab, System Air and Rockwool to mention a few, says Anna.
Which companies are being punished when it comes to ESG issues?
Some sectors lose growth in the transition to a more sustainable world. Erik means that a clear example of this is that fossil is now being replaced with alternatives which are more environmentally friendly. This leads to a structurally smaller sector. A larger part of the car fleet is being replaced with electrical vehicles, electricity production is being generated from green sources to a larger extent and the industry is doing its utmost to show a lower carbon dioxide footprint in its production.
We have chosen to make our funds fossil free, partly as we are supportive of Agenda 2030 and partly as we see that this sector will have a tougher time to show good growth and profitability going forward, says Erik.
Exclusion of sectors has been in place since before in sectors such as tobacco and alcohol which have heavy regulation and restrictions which hampers growth, Anna points out. We also make the same arguments for commercial gaming where during the last years, not the least in Sweden, has introduced heavy regulation regarding the possibilities to market these services.
What is the expected impact on the funds' performance due to the exclusions?
In the short term we believe it will be neutral for our performance to not invest in sectors/companies we deem to be non-sustainable. Our absolute return funds can go short stocks that we exclude from a sustainability point of view which provides a bigger opportunity to make money if the timing is right for those positions, says Anna.
For our relative return products who have these companies in their benchmark indices we see it as neutral in the short term. Over the long term we see it as positive to avoid sectors which have structural challenges, regardless if it depends on the demand for oil or increased regulation around commercial gaming, Anna continues.
We have seen the valuations of some "sustainable" companies increase rapidly. What is your reasoning here? Will the premium valuation remain?
The valuation of ESG-associated companies is something that industry is having a challenge with.
The valuation of some companies has in some examples undoubtedly increased dramatically. This depends on several factors, Eric points out. Many capital owners and portfolio managers are changing the way they manage their money towards a more sustainable and thematic way and when the number of companies is limited, there is a demand and supply situation which increase the price of the underlying asset. It is also due to the fact that we are finding ourselves in a world with limited growth and these companies have proved that they can deliver strong and stable growth, which the market has been willing to pay for. The time factor is another explanation.
The transition may last several decades which the market normally doesn't pay attention to, but here it does to a larger extent, says Erik.
With many countries, legislators and policy makers behind the transition we would like to make the point that the growth has a larger degree of predictability and that the valuation is a reflection of that. This is like putting a price on Amazon in 2010 but with a higher degree of certainty that they would end up where they are today, Anna says. The valuation premium will probably be in place for a while, given the demand for these types of companies, but should normalise further on.
Many companies feel the urge to speak out and prove why sustainability structurally benefits their specific company and solution. There are big hopes and as always not everyone will succeed. With the benefit of hindsight we will be able to conclude that in some companies the high valuation was unwarranted whereas in others we will regret that we did not buy more. Disappointed investors will punish any deviations in delivery of results if the expectations are too high. If the companies continue to surprise the market positively the demand for the share and the valuation will remain high, Anna says. In a way this is not more complicated than any other risk taking, Anna concludes.
We are proud that all our funds are now fossil free, and we look forward to continuing our sustainability journey. Read more on how we work with Sustainability.