To minimize mistakes and avoid torpedoes, the due diligence process in Equities Low Volatility is built around risk control and downside protection, trying to eliminate the downside risk as much as we can. Therefore, the Portfolio Managers are devoted to a deep risk analysis with focus on the fundamental stability of the company and the sustainability of the business model. The risk analysis is decisive for whether we invest in the company and the sizing of our exposure. We have recently increased our focus on integrating sustainability more in our investment process, not least emphasizing that the companies meets basic governance requirements, act as a responsible citizen and have incentive structures that ensure that management is aligned with the interests of minority shareholders. It is imperative that the companies are not involved in controversies that could threaten the sustainability of their business model. The increased sustainability focus is visible on several dimensions:
- ESG score: The strategy has an ESG score – measured by MSCI – that is 7.5% higher than the global equity market (MSCI AC World). This reflects a higher score for all three subcomponents – environmental, social and governance – compared to the global equity market.
- Carbon risk: The carbon risk of the strategy has been reduced significantly this year, which primarily has been driven by changes in stock selection among utility companies. Currently the strategy has a carbon risk that is more than 12% lower than the global equity market and more than 50% lower than a global minimum volatility index.
- Controversies: The strategy has a modest exposure against very severe controversies of 2.6% compared to 2.3% for the global equity market and 2.8% for a global minimum volatility index.
ESG risk exposure – Equites Low Volatility vs MSCI AC World
A controversy case is defined as an instance or ongoing situation in which company operations and/or products allegedly have a negative environmental, social, and/or governance impact.