The integration of environmental, social, and governance (ESG) into products and processes is a must for asset managers competing in Sweden’s institutional market, according to research and consulting firm Cerulli Associates.
“Managers without an integrated ESG investment process are unlikely to be hired. Large investors are also moving toward impact investing, where they take a more active role throughout the investment process,” says Justina Deveikyte, associate director, European institutional research at Cerulli Associates.
She adds that firms with strong ESG capabilities are benefiting from reforms to Sweden’s premium pension system. The fund platform aims to have a guided, open-architecture offering, similar to those of many of the commercial providers. The reforms also aim to increase the transparency of active share and fees. One of the first niche products to be introduced will be absolute-return funds, which will likely benefit asset managers with proven absolute-return capabilities combined with a clear ESG message.
“Responsible investing is key in Sweden,” says Deveikyte. “This was further emphasised in the revised investment rules for the buffer funds, which came into force at the beginning of the year. The funds have to increase their focus on sustainability and show how sustainable development can be promoted without compromising overall return objectives.”
The sweeping reforms to the country’s defined contribution state pension have led to a reduction of the number of funds on the platform – and further culls are expected. Some commercial providers have significantly reduced the number of funds on their platforms.
“The good news is that managers providing niche capabilities at reasonable prices continue to see inflows. The most recent proposal to redesign the government’s default fund, AP7, is likely to lead to diversification of asset classes, which should benefit foreign managers,” says Deveikyte.
Greater complexity and shrinking returns make innovation key, but to achieve it, institutional investors will continue to need external help. The range of assets classes keeps broadening and local expertise is not always adequate or available; the outsourcing of niche strategies is often essential.
