ORGANISATION DETAILS 
Name SEB Investment Management
Signatory type  Asset manager
Region of operation Stockholm, Sweden, Europe

 

COVERED IN THIS CASE STUDY  
Name of fund We intend to implement the taxonomy in our systematic investment process. Our case study was based on a global equity fund with current assets under management of USD 985 million and a taxonomy alignment of 9.1%
Asset class Quantitative equities
Geography Global
Sector All
Environmental objective Mitigation
Economic activity All

 

As one of the leading Nordic asset managers, SEB Investment Management believes the taxonomy has significant potential to provide a definition of environmental sustainability within finance that can help investors to identify sustainable economic activities. Once implemented, the taxonomy regulation will set new legal obligations for asset managers to disclose their environmental impact.

We believe the EU taxonomy can offer guidance on how to improve the environmental performance of our funds. As the taxonomy aims to steer capital towards sustainable activities, it can also be used to provide our investors with future returns.

The potential to measure all listed equities efficiently was a key factor in this project. Therefore, we developed the SEB EU taxonomy model to quantitatively measure potential taxonomy alignment. When we use the term “taxonomy-aligned” in this case study, we are referring to potential alignment as calculated by our model. The benefits of building an internal model included transparency and traceability.

Taxonomy implementation

Principles, criteria, thresholds

We implemented a two-step analysis to:

  1. identify economic activities included within the EU taxonomy, and
  2. assess the technical screening criteria relevant to each individual activity.

Currently, scalable and comprehensive data for evaluating the taxonomy technical screening criteria is limited. Therefore, our model measured alignment with existing sustainability data and approximated the technical screening criteria where necessary. We were stringent in our approach to the approximation of taxonomy criteria. We adhered to current EU legislation and Technical Expert Group (TEG) rationales and ensured the model was dynamic in order to assimilate taxonomy updates. 

Do no significant harm assessment

We are developing a process to measure do no significant harm (DNSH) and minimum safeguards criteria, but it is not yet part of the current model version.

Social safeguards assessment

As above

Turnover/capex/opex alignment

The SEB EU taxonomy model measures turnover (revenue) aligned with the EU taxonomy. The model works alongside our systematic investment process to evaluate how we can increase revenues that are aligned and how the characteristics of a portfolio subsequently change.

Additional comments

We have successfully used our model to evaluate the current alignment of SEB Investment Management’s Quantitative Equities sustainable funds, alongside a peer group of sustainable mutual equity funds. We determined that our funds revealed varying degrees of alignment and that the average was close to that of the peer group. taxonomy alignment was lower than expected for the peer group (6.8% compared to 6.6% for a global equity index), reflecting the fact that the implementation of the regulation will force sustainable funds to reallocate capital to report an alignment that diverges significantly from current benchmarks. We based these figures on the June 2019 TEG report.

The scope of our model goes beyond investment management. Indeed, it can be extended to evaluate our credit portfolio and has been leveraged to advise institutional and corporate clients. Looking forward, this project has strengthened the hypothesis that it is possible to systematically measure environmental sustainability based on an objective model.

Alignment results

For this case study, our Global Quant team examined a global equity fund with current assets under management of USD 985 million and a taxonomy alignment of 9.1%. How could we enhance the taxonomy alignment of this fund while maintaining its current characteristics? If we allowed for moderate active sector and country allocation (+/-2%) and limited carbon emissions in line with benchmarks, we believe we could build a portfolio with 40% taxonomy alignment. These settings are in line with what we use for standard rebalancing. We could achieve similar results by limiting carbon emissions to half of the benchmark (based on the TEG proposal for Paris-aligned benchmark). If we allowed for higher active sector and country allocation (+/-5%) and limited carbon emissions to half of the benchmark, we could build a portfolio with 50% taxonomy alignment.

Based on the positive results from the evaluation phase we believe that we should continue the process of incorporating the SEB EU taxonomy model into our investment process in order to significantly increase taxonomy alignment.

Challenges and solutions

NO.CHALLENGESOLUTION
1 Measuring DNSH and minimum social safeguards criteria from a quantitative perspective.  We used norm-based screening via an external provider and we are evaluating different methods to measure DNSH and minimum social safeguards. 
2 While some sectors show higher taxonomy alignment (utilities, communication services), others have close to zero alignment (healthcare). To what degree investors accept active sector allocation and active risk will be decisive in increasing alignment percentages. Nevertheless, we can significantly improve the taxonomy alignment of sustainable funds by accepting small deviations from benchmarks. Further, we noted that a high level of alignment could also be achieved when controlling for carbon emissions.

Recommendations

The EU taxonomy offers a scientific approach to identifying companies that encourage the transition to a low-carbon economy. It is a useful tool for both investors and asset managers. However, as it is an evolving system, solutions in terms of measurements and implementation must be flexible. Investors and asset managers need to understand that high taxonomy alignment is dependent on factors such as active risk and carbon emissions. While some sectors offer higher taxonomy alignment (utilities, communication services), others have close to zero alignment (healthcare). Therefore, to achieve a high overall alignment, a portfolio needs to compensate for poorly-aligned sectors, resulting in higher active risk. Sectors such as utilities offer high potential for taxonomy alignment but are usually associated with relatively high carbon emissions.