As a Nordic asset manager, understanding environmental, social and governance (ESG) issues allows NCP to reduce risks and capture opportunities in investment management. A focus on ESG issues supports NCP’s core business model and corporate responsibility strategies and ensures living up to corporate values, demonstrating responsibility in decision-making and interactions with all societal stakeholders. By scrutinizing investments and insurance projects from an ESG perspective, NCP extends its understanding of risks and seizes potential business opportunities for the benefit of its investors.
NCP’s conviction is that companies with a structured approach to sustainability become more successful in the long term and thus will be more attractive investments with lower default risk. The aim of our business is to create long-term value from an economic, social and environmental perspective and to be successful in this, we have developed our proprietary Sustainable Return Model (SRM), built on sustainability across four pillars: Market, Operations, Financing and ESG
The Sustainable Return Model (SRM)
The SRM framework serves as a basis for the due diligence process, focusing on sustainability across all four pillars.
Pillar I: Market
The Market pillar strives to identify whether a potential investment operates in a sustainable market with healthy competition, independence of tariffs and without temporary beneficial characteristics or foreseeable shifts negatively impacting the sustainability of the market. The analysis is focused on:
- Fundamental market characteristics: Relative market position, market conditions and outlook, macroeconomic influences, industry structure, continuity, sustainability of barriers to entry, trends, legislation and regulation
- Competitive environment: Competitors, substitution, new entrants, recurring revenues, price pressure, suppliers and customers
- Technology: New technologies, dependence on limited natural resources, position in the value chain
- Key metrics: market growth rate, relative market share (RMS), volume and price trends, input prices, switching cost and cost of substitution, demographic trends and macroeconomic indicators
Pillar II: Operations
The Operations pillar strives to identify whether a potential investment conducts sustainable business operations with a well function value chain, established and predictive regulatory environment and a balanced approach to suppliers and customers without foreseeable shifts negatively impacting the sustainability of its operations. The analysis is focused on:
- Products and services: major customers and applications, strategic relationships, distribution channels, production facilities and footprint, pipeline analysis, research & development, and product pipeline
- Sales & marketing: Marketing programs, customer relationships, principal avenues for generating new business, sales cycle, sales force productivity
- Employees: Key personnel, compensation/ benefit plans. Significant employee relations problems, past or present. IT, personnel turnover, lawsuits, material patents, copyrights, licenses, and trademarks
- Key metrics: customer and employee net promotor score (NPS), productivity and efficiency, utilisation rate, returns, customer and employee turnover and order book
Pillar III: Finance
The Finance pillar strives to identify whether a potential investment delivers healthy and correctly represented revenues, margins and cash flows, is well invested and presents an appropriate capital structure without foreseeable shifts negatively impacting the sustainability of its financial profile. The analysis is focused on:
- Revenues, gross margin and cost (including split of recurring/one-off), cash flow generators, capital expenditure, working capital. Split by geography, product, business unit customer group
- Margins, cost pass-through, asset liability management (ALM), commitments and contingent liabilities
- Taxation, transfer pricing, management information system and control environment, internal control, risk & compliance, audit, accounting practices
- Key metrics: underlying sales, earnings, and cash flows, organic growth, capitalizing vs. expensing. Quality of earnings discontinued operations and adjustments/normalisations
Pillar IV: ESG
The ESG pillar strives to identify whether a potential investment raises any direct ESG related issues apart from what has already been analysed above. The analysis is focused on:
We work with sustainable investments in a variety of ways – from actively influencing companies to encompassing sustainability, to choosing companies based on a number of sustainability themes. The framework for NCP’s high ambitions regarding sustainability is built on the three pillars of include, engage and exclude.
We attach great importance to identifying and seeking exposure to important sustainability themes. By integrating sustainability into our investment’s thesis, we believe that we will benefit our long-term investors and contribute to the development of sustainability in society at large. We have a process for integrating sustainability into all types of investments we do, and we are especially looking for companies that actively reduce environmental impact such as carbon emissions, water utilization and handling toxic waste.
NCP has been a signatory of the United Nations-backed Principles for Responsible Investment since May 2017. As a signatory, NCP engages to promote the principles within the Group and amongst industry peers. All investment-related ESG integration activities by NCP entities are in line with commitments to the Principles.
In addition to integrating ESG into core investment practices across the company, NCP has committed to the following principles:
- We will incorporate ESG issues into investment analysis and decision-making processes.
- We will be active owners and incorporate ESG issues into our ownership policies and practices.
- We will seek appropriate disclosure on ESG issues by the entities in which we invest.
- We will promote acceptance and implementation of the Principles within the investment industry.
- We will work together to enhance our effectiveness in implementing the Principles.
- We will each report on our activities and progress towards implementing the Principles.
As part of principle 6, NCP publishes the PRI Transparency Report on an annual basis.
In addition to having a close and regular dialogue with our portfolio companies, we work together with one of the market’s leading consultants who screen our portfolio twice a year, both a negative screening (identifying red flags) and a positive impact screening. Standards that are particularly taken into account are the UN sustainable development goals. Among the UN goals, we attach particular importance to:
- Gender equality
- Affordable and clean energy
- Decent work and economic growth
- Climate action
Through our role as an active investor, we strive to influence companies in their sustainability work, thereby encourage change and safeguard the interests of our investors.
The companies we invest in are typically in the small to midcap segment and as such we can have a direct access to management. If we have identified any red flags and have raised concerns, we will seek answers from the company and for them to take action. Issues that can be addressed include management, risks and opportunities related to the environment, social aspects and business ethics.
We place great emphasis on compensation programs and diversity on boards, for example to include female board members.
As an active manager, NCP takes a position on corporate governance issues, including sustainability issues. This is done partly in the portfolio managers’ ongoing work, partly in the Board/ Investment Committee and in the dialogue with our industry advisors. The Board / Investment Committee regularly discusses sustainability issues, quality assures the managers’ sustainability issues and keeps the managers well educated on these issues.
If we receive information that a holding does not meet our requirements, the Investment Committee will act. We have several options:
- The portfolio manager looks for more information and discusses the holding with the investment committee
- The manager contacts the company and asks the questions we have
- NCP’s CEO makes a more formal contact with the company’s CEO or chairman of the board.
- Consult with other owners for a joint ownership dialogue.
- If we do not receive a satisfactory response or the company does not show a willingness to change, we may choose to divest the holding.
We exclude investments in companies operating in specific sectors or business areas that are deemed to meet major sustainability challenges, or engage in activities that violate international guidelines and conventions.
All NCP funds comply with our basic sustainability criteria and therefore do not invest in companies that conduct the following:
- Exploration and production of fossil fuel, i.e. oil, gas and thermal coal
- Oil services companies
- Manufacture, development or sale of controversial weapons including landmines, cluster weapons, chemical weapons and biological weapons
- Development or production of nuclear weapons
- Violations of international norms and conventions on human rights, the environment, anti-corruption and labor rights
- Production or distribution of pornography
- Production or distribution of tobacco
- Max 10% of revenues from distribution of alcohol