15 Jun, 2018 (Updated 21 Jun, 2018)
Can a company be ESG-certified? What are the sustainability risks? And, exactly how on-trend are sustainable investments?
We asked Sasja Beslik, Head of Sustainable Finance, and Cecilia Fryklöf, ESG Expert and Implementation driver, to expound on these questions.
“Companies that manage risks and opportunities related to the environment, social and governance are better equipped because they expose their businesses to fewer risks, and are hence more attractive to investors,” explains Sasja Beslik, adding that companies that drive progress in sustainability present good investment opportunities.
“When we meet customers, we always incorporate sustainability aspects, and we are clearly noticing a heightened need of support for companies and investors wanting to know more about ESG,” explains Cecilia Fryklöf.
Sustainability isn’t a destination – it’s a process
Head of Sustainable Finance, Nordea
Head of Sustainable Finance, Nordea
ESG Expert & Implementation driver, Nordea
ESG Expert & Implementation driver, Nordea
Do most companies know how to work with sustainability and what ESG stands for?
“A growing number of listed companies know the importance of working with sustainability because they are faced with it every day.”
Not everyone knows that Environmental, Social and Governance (ESG) is a term used by investors and financial institutions globally to describe which qualitative aspects concerning the environment, social and governance they look at when investing in a company.
The companies’ response to ESG is that they themselves work with something called Corporate Social Responsibility (CSR). These two terms are actually fairly similar, but differ on a very specific point; ESG searches for added value or added risk in a company, while CSR describes how a company works with sustainability on the whole.
For example, when we look at investing or granting a loan to a company, we look for the tangible financial components associated with environment, social and governance that could affect our investments or lending.
Companies that manage ESG risks and opportunities are better equipped because they expose their businesses to fewer risks, and are hence more attractive to investors.
“We are noticing that both large and smaller companies are being asked more and more sustainability-related questions but still aren’t always used to addressing them.”
Increasing demands are imposed on companies to report a clear sustainability strategy and to know the implications of ESG and CSR.
An example is a company we spoke to recently, which was going to issue a bond. In that process, the company started to receive a lot of sustainability-related questions from major institutional investors and approached us for help and advice.
For us as a bank, it’s important to be able to support our customers with expertise in the field of sustainability, which we already do for many customers today.
Read more about Nordea’s sustainability efforts>
Can a company become ESG-certified, and what are the governing regulations?
“No. However, an initiative is currently under way at the European level linked to the concept of certification.”
Nordea is participating in efforts at the European level, both by contributing technical expertise, and also by participating in an array of different committees and discussing these issues and how the banking sector will be affected.
“As things look now, it’s more a case of ‘doer’ responsibility.”
The interesting aspect of regulations for an investor is that it will be easier to compare different investment products if all companies have to adhere to the same criteria. As things are today, it’s like comparing apples with pears. Investors themselves therefore have some responsibility for analysing the companies in which they invest. Say that you step into the bank and say, “I would like to invest in sustainable funds”; the bank can then produce a declaration of sustainability products based on how they view sustainability. That will change in future with the new regulations, but until then it’s a bit like the Wild West. As long as you have two climate-smart shares, you can call the product sustainable, and that presents a lot of challenges. However, in time that won’t be possible because a product won’t be able to be called ‘sustainable’ if it does not fulfil the sustainability requirements under the regulations.
The EU initiative mentioned by Sasja also includes incorporating sustainability into the new MiFID regulations. When we provide investment advice to customers, sustainability aspects shall be included. It is proposed that we include this when performing our suitability assessment process.
Describe the implications of a sustainable investment. What are the most important sustainability aspects?
“Two things – the sector in which the company operates, and the geographic region in which it operates.”
Based on these two perspectives, we assess a company’s ability to manage risks in these two areas. We look at their code of conduct, just as we ourselves need to live up to such a code, if we take a bank as an example. That is – is there a functioning KYC process? Is it assured that products and services are sustainable? Is there an understanding of the risk inherent in the operations? Are there products and services that could harm the environment and people in some way? Are there clear processes for this?
“The environment, human rights and employment terms are general aspects on which we base our assessment.”
However, what’s important to us might be less important to a company in a completely different industry because we are in different sectors and geographic regions. However, the assessment criteria are fundamentally the same and what we look at is clear.
A transition has been made from merely talking about sustainable investment – and in so doing only taking ethical and moral stances – to a more modern approach, attempting to include sustainability in investment processes based on environment, social and governance, and looking at risks and opportunities for the companies and what could be material aspects. Screening in companies that are leaders, as opposed to merely screening out.
If you wanted to give sustainability advice about a company’s operations and its investments, what would that be?
“Don’t work with sustainability if you don’t mean it. That’s my first piece of advice.”
Sustainability isn’t a destination – it’s a process. In some cases, there are actually companies that work with sustainability in their processes without them knowing.
If you would like to know more about how various businesses such as the European Investment Bank, Stora Enso and Tele2 work with sustainability, you can read about this in the ESG issue of Nordea On Your Mind. It includes interviews with Bertrand de Maziéres, Director General Finance and Eila Kreivi, Head of Capital Markets, on how EIB became a pioneer in green bonds. On the corporate side there are interviews with CEO of Stora Enso Karl-Henrik Sundström and CEO of Tele2 Allison Kirkby on how the companies have embedded ESG and sustainability into their business strategies.
“Sustainability aspects can always be included in investment decisions, no matter how the company chooses to manage its money.”
Concrete aspects include evaluating investments from a sustainability perspective, and considering whether the analysis can be performed in-house, or if assistance should be sought externally. There are a variety of different things that can be done, for instance placing demands on counterparties in the field of investments. Setting criteria, for instance, verifying that the counterparty has signed the Principles for responsible investment, meaning that ESG aspects shall be integrated into the investment process. Which sustainability issues are important to the company? For example, if your daily operations include working with labour rights issues, and if such issues are core to the company, then perhaps that should also determine the labour policies of the companies in which you choose to invest?
Companies need to work towards the UN global sustainability goals to attain a sustainable future.
The UN’s goals by 2030 are no poverty, reduced inequalities, climate action, peace, justice and strong institutions.
Which sustainable investment products are available?
“Lots! We can draw an analogy involving a fleet of cars – petrol fuelled, hybrids and electric cars.”
There is the petrol-fuelled variety, that is – the majority of the products, and then there are a number of hybrids that combine mainstream investments with some sustainability, and then there are pure electric cars, that is – sustainable investment products, of which there are very few on the market.
We are starting to move towards a world of sustainability products that will reflect the mainstream products that exist today, and the progression is rapid. I promise that in five years there will be two options – sustainable baskets or non-sustainable baskets. That will be the choice.
“Individual investments, shares, bonds, funds, mixed products, etc.”
It also depends on how you want to manage your investment portfolio – what your resources are. For example, if the company has a unit that makes investments in different companies, it should ensure including a sustainability analysis in the financial analysis of the companies in which it intends to invest.
If instead you invest in funds, you can place demands on the fund manager to include sustainability in their investment process. You can place the same types of demands on all products, irrespective of whether they are individual investments, shares, bonds, funds, mixed products, and so on.
What is the sustainable investment trend – upward or downward?
“I would say the trend is upward out of sheer necessity for the world, given that we face asymmetrical challenges.”
The traditional investment baskets are food, energy, water, medicine, transport and money. These are areas that make the world go round, and should continue to provide investment opportunities, because in these sectors there will be companies with the ability to manage the asymmetrical risks we face. For example, drought in the Middle East, which will lead to more conflicts which, in turn, will lead to greater flows of refugees, etc. So, climate destruction is one component of the big picture, aggravating many situations in the world. In that situation, different types of solutions are needed, such as in energy supply, water consumption, and so on. And, this means that there is a great amount of money in this in two ways – partly in the risk management, and partly in the investment opportunities presented by companies that are drivers of sustainability progress.
“The minimum level is constantly being raised through new regulations and customer demands.”
The trend is definitely pointing upwards. The next generation isn’t interested in investments that have a negative impact on the surrounding world. In the past, the focus was almost exclusively on screening-out in investment processes, such as norm- and sector-based screening, which is still biggest. However, the factors increasing the most are impact investing and sustainability-themed investments.
Does sustainable investment cost more than non-screened products, and isn’t it more profitable to invest in companies that do not focus on sustainability?
“Ask British Petroleum and Volkswagen if not being sustainable costs."
It costs a lot of money to not include sustainability in the business strategy. There are many companies with world-renowned brands that have experienced that.
“Just look at the equity product that generated the best return last year.”
Nordea Swedish Star, which has a clear ESG focus and which has undergone extensive analysis, with an emphasis on the environment, human rights, employment terms and business ethics.
In which part of the world can we see the least and most interest in ESG and sustainability efforts?
“Not enough is happening in developing countries in general.”
For their future development, they really need to consider sustainability in a long-term perspective. However, because they do not have money, very little is happening. We can also see the US lagging alarmingly far behind, while high-export countries like China have actually started to focus strongly on sustainability, and are doing quite well.
“The regions at the forefront are Europe, with the Nordics at the cutting edge.”
Our Nordea On Your Mind report, The death of dirty investing, reviewed Nordic institutions and found that as many as 99% of Nordic institutional assets under management already include some sort of ESG policy, which is very positive indeed.
Why should banks work with sustainability?
“The banks are core entities in the markets, distributing capital where it is needed, like a financial artery system.”
Because of this role they have, they are exposed to the risks, but also to the opportunities, so they play a crucial role in efforts for a sustainable future. We can have an impact, and be impacted. If, for instance, the Gulf Stream were to shift another 200km away from the coast of Norway, a minor ice age would occur, and in that case many of our customers would find it very difficult to repay their loans, and then we need to know which type of customers run a high risk, while at the same time we need to know which customers are the solution.
“We can exert influence and contribute to a sustainable future.”
Nordea has indirect risks and opportunities through our customers and needs to contribute to and enable the transition required to fulfil the climate agreement and create a sustainable future. We work with sustainability in all business areas in different ways, not just in investments. We make engagements in different ways and attempt to influence sectors to which we can have major exposures, and we can see that there are tremendous risks and challenges that are not properly addressed. One example is the pharmaceuticals industry and the supplier chain in India.
How we as a bank can exert influence through on-site visits
The pharmaceuticals industry is one of the fastest-growing segments in the Indian economy and the market is expected to grow to USD 100 bn by 2025. As part of Nordea’s engagement in terms of investigating the effects of pharmaceutical pollution in India, we have, together with Changing Markets Foundation, prepared the report:
“Hyderabad’s Pharmaceutical Pollution Crisis: Heavy Metal and Solvent Contamination at Factories in a Major Indian Drug Manufacturing Hub”.
See films from Nordeas on-site visits
Last of all – what are your personal sustainability goals?
"I want to cut back on my travel!"
"To disseminate more knowledge about how individuals themselves can have an impact on the climate and environment."
Nordea’s six short-term sustainability goals for 2018*
- Sharpen ESG screening for responsible investment, responsible financing and responsible purchasing
- Prepare policy documents for risk management, to identify critical risks in the value chain with an emphasis on human rights, employee rights, combating corruption, and the environment
- Formulate a KPI policy document
- Continue to apply the updated sustainability policy and principles for responsible financing, investment and advice
- Establish a baseline for risks related to climate change and human rights throughout the entire value chain
- Formulate positions and guidelines in relevant areas, such as the defence and shipping industries.
*The first three targets are from 2017, while the last three are new.
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