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ESG, Biodiversity, Inflation, Biases & the Rise of China

By Trine Christensen Sy posted 20 Feb, 2023 05:12 AM

  

Stockholm (NordSIP) – Every year since 2019, the CFA Societies in the Nordics have come together to organise the Nordic Investment Conference. After a couple of years of virtual events, the 2022 edition took place in Oslo and was available digitally for a worldwide audience. For those who did not have the opportunity to attend, we provide a rapid summary of a well-curated and thought-provoking programme.

A rollercoaster agenda

For the past year, NordSIP has been operating as the Executive Office for the CFA Society Sweden and, in this capacity, was proud to be able to contribute, albeit very modestly, to the success of this event.

After a short welcome note by Pieter van Putten, CFA, Presidents Council Representative for Western Europe in CFA Institute, the conference programme started with an expected succession of sustainability-focused interventions. Albeit engaging and well presented, the morning sessions didn’t bring up any aha moments the way they would have perhaps just three or four years ago. In the afternoon, inflation came to dominate the agenda before the conference ended on an ominous note, as the last presentation focused on the impending threats of the Chinese empire.

The ambiguity of ESG

Marte Løfman, Senior Analyst, Impact Investments at Grieg Investor, was up first. Attempting to shed light on the current confusion around ESG, following the recent backlash on the term, she provided a list of five key issues with sustainable investing: confusion on materiality, greenwashing, narrow thematic focus, data access and quality and lack of standardisation.

A double crisis: climate & energy

Up next, Melanie Brooks, Portfolio Manager & Responsible for ESG, Fondsfinans Kapitalforvaltning, focused on the climate crisis and presented the role of renewable energy in the current energy crisis. Despite all the alarming figures, she ended her intervention on a positive note, reminding the audience of the recent news that the US is finally back on board in the global fight against emission reductions.

The alternatives of the long-term owner

Bringing a Swedish Asset Owner’s perspective, Hanna Ideström, Senior Portfolio Manager, Alternative Investments at AP4, presented the state buffer fund’s plan to deploy alternative investments sustainably and with the long term in mind. She explained both the sustainability framework developed by the fund as well as examples of current investments, including direct investments made jointly by the sister AP funds and externally managed funds.

The financial risks of biodiversity loss

While climate often dominates the conversation, biodiversity and natural capital claim their rightful space in the spotlight. “Half of World’s GDP is dependent on nature,” paraphrased Idar Kreutzer, CEO Finance Norway, who came on stage just before lunch. The upcoming biodiversity COP should be a watershed moment, he expects, just as the Paris Agreements were to the climate crisis. But most crucially, he insists, it cannot fail. Any delay in preserving our natural resources is not an option. Fortunately, according to Kreutzer, the financial significance of climate change is now well understood and the measures we have taken to fight those risks can be leveraged and applied to natural capital loss as well.

Adapting to the new normal of inferior returns

Taking the stage in the dreaded post-lunch slot, one of the most anticipated speakers of the conference, Antti Ilmanen, Principal and Co-Head of the Portfolio Solutions Group, AQR, presented a comprehensive analysis of the effects of inflation on various asset prices and suggested remedies to investors desperate to protect their returns. From ‘trend-following’ to ‘macro momentum’ strategies, investors should turn to smart quantitative solutions instead of sticking to their conventional domestic equity allocation.

Fighting investors’ flawed instincts

Adding some perspective regarding investors’ behaviour in times of crisis, Emily Haisley, Managing Director, Risk and Quantitative Analysis at BlackRock, presented evidence about the costs human behavioural biases can generate in terms of missed returns. Indeed, her job at BlackRock is to observe and measure portfolio managers’ behaviours to assess whether, among other things, their risk-taking is justified by more than their inherent human nature.

For Haisley, the most pernicious bias is the need for consistency. “People feel (and are judged to be) hypocritical if they move away from previously espoused views,” she explains in her presentation. She urges clients to “free their portfolio managers from the need for consistency” and allow them the opportunity to change their minds and make better, more rational decisions.

Another bias, according to Haisley, which negatively affects the willingness to invest sustainably is the instinctive notion that doing well and doing good are not compatible. People may resent a loan shark for taking advantage of a person facing dire circumstances, but investors working to alleviate poverty while drawing a profit are almost considered despicable, unfortunately. Just like with every other aspect of behavioural finance, fighting this unconscious bias is made difficult by the fact that it is so inherent to our human nature.

The anatomy of inflation insurance

A Norwegian-based conference wouldn’t be complete without the insights of one of the largest owners worldwide. Dag Huse, Chief Risk Officer, Norwegian Bank Investment Management (NBIM), presented the ex-post conclusions of an early internal debate sparked by the organisation’s current CEO, Nicolai Tangen, who believed inflation was on the rise before it became evident to the rest of the investment community. As observed in the options market, inflation risks were grossly underpriced. This market anomaly allowed the fund to take proportionally small and yet meaningful positions, which have proved lucrative when faced with the price increases which unfolded in 2021 and this year.

The impending fall of the West

Perhaps most unexpected of all, the last intervention of the day cast a gloomy atmosphere on the post-conference mingle. Professional speaker David Murrin invited the audience to revisit history to observe the rise and fall of civilisations or, as he calls them, “Empires”. Unfortunately for us, our Western society is hopelessly in decline, as shown by our propensity to become more tolerant and “linear” in our behaviour and strategies, thereby becoming vulnerable to the rise of less mature empires. While the wide majority of the audience agreed with Murrin that China presents a threat to our Western economies, his presentation brought home the irremediable nature of that menace.