What companies need to know about sustainable investment in Scandinavia
While there are differences between the Nordic countries in the way that they apply sustainable investment (as there are between different investors within each country) there are also a number of common features that set Nordic sustainable investment apart from other parts of the world.
We identify these 'Nordic anomalies' as features that differentiate sustainable investment within Nordic markets from the practice elsewhere in the world. (Of course the factors are not unique to the Nordic region, but we believe that they are more prevalent here than elsewhere).
Understanding these features should help companies in their engagement with Nordic investors and also help them predicting the 'direction and pace of travel' for sustainable investment in other parts of the world.
Motivation: Public preferences and economic considerations
Scandinavian investors' interest in sustainability issues tend to be motivated by a mixture of genuine concern about the issues and particular local considerations. Notably, investors’ sustainability priorities echo the concerns of their clients, which – are, themselves, representative of a majority of society’s views.
Nordic anomaly #1: High levels of social concern and low tolerance of corruption
The first way in which Nordic countries stand out sustainability-wise, is in their preference for social and economic egalitarianism. Denmark, Norway, Finland, Sweden and Iceland are the top five countries in the World Economic Forum's (WEF) Social Mobility Index. The five nations were also among those with the top 10 lowest income inequality levels (Gini Coefficient) in the OECD. This is why we find Scandinavian investors participating in initiatives to ensure good working conditions. If investee companies are perceived to abuse their workers, institutional investors will face widespread public scrutiny and criticism.
The next Nordic anomaly is the region’s lack of tolerance for corruption. According to the surveys conducted by Transparency International the five countries are consistently ranked among the least corrupt in the world. This attitude echoes in the investment community as a commitment to transparency, accountability and good governance practices.
Nordic anomaly #2: High levels of environmental concern
Environmental concerns are also a priority in the region. According to a Eurobarometer survey, 84% of Swedes, 83% of Danes and 76% of Finns think climate change is a ‘very serious’ problem. Although the issue has risen up priority lists around the world since the 2015 Paris Agreement, concern with climate change in the Nordics long predated this recent surge of global concern.
Then, the structure of Nordic countries pension systems serves to bring these preferences to on the attention of asset owners. The fact that Nordic retirement systems[1] (both public/national and private) are set-up on a defined contribution basis pension in both public/national and private pensions means that the public is incentivised to keep a close eye on what is happening within their pension savings.
Nordic anomaly #3: National economic incentives for sustainability.
Beyond these preferences, there are also economic considerations. It is impossible to disentangle environmental awareness in Sweden and Finland from the significant (historic and current) contribution of the forestry industry to the countries and their economies. Equally, the geothermal energy at Iceland’s disposal allow the small nation to generate the vast majority of its electricity needs from renewable sources.
In Norway, Norges Bank Investment Management (NBIM), the company responsible for managing the country Government Pension Fund Global, explained a somewhat different motivation for focusing on environmental investments: risk diversification. In 2019, a report warned that “the Norwegian economy is vulnerable to oil price risk. A permanent petroleum revenue reduction will have implications for Norwegian production and employment.” Based on the report, the Norwegian government proposed the outright exclusion of “companies classified as exploration and production companies within the energy sector from the Government Pension Fund Global to reduce the aggregate oil price risk in the Norwegian economy.”
On that occasion, the Minister of Finance, Siv Jensen, commented that “the objective is to reduce the vulnerability of our commonwealth to a permanent oil price decline. Hence, it is more accurate to sell companies which explore and produce oil and gas, rather than selling a broadly diversified energy sector.”
Nordic anomaly #4: Sustainability concerns spill readily into the investment arena
It is perhaps for these reasons that there appears to be a higher awareness amongst Nordic populations of the impact that finance has on environmental and social issues and that financial actors are more readily seen as having responsibilities in this regard.
Investment strategies deployed
Reactive stewardship and engagement
Nordic anomaly #5: More engaged 'asset owners'
Nordic attitudes to sustainability take different and complementary shapes in financial markets. Unusual among other European institutional investors, Nordic asset owners tend to be more engaged with their investee companies.
In Sweden, AP7 and the Council on Ethics of the AP Funds[1] provide useful examples of how responsible asset owners play a role in correcting inappropriate corporate behaviour.
(Set up following a reform of Swedish public pension system in 2001, the AP Funds manage the state income pension system’s buffer capital. (AP7 is one such fund and is responsible for the default fund alternative in the Swedish premium pension system. The Council on Ethics of the AP Funds is a collaboration between the First, Second, Third and Fourth AP Funds which encourages companies to address environmental and social issues.)
Two examples of reactive stewardship in practice are instructive:
- Following the January 2019 accident at Vale’s mine in Brumadinho, in the Brazilian state of Belo Horizonte, the Council on Ethics partnered with the Church of England Pensions Fund to push for tailings dam reforms in the global mining industry. Their efforts resulted in the creation of the Global Industry Standard on Tailings Management.
- Following reports of sexual harassment at Google, AP7 participated in a January 2019 lawsuit against Google’s parent company, Alphabet, which sought to address the company’s executives’ failures. In October 2020, AP7 revealed a settlement with Alphabet, which committed to take several measures and invest US$310 million to improve diversity and inclusion within the group, over the next ten years.
At the end of 2019, AP7 had 14 ongoing lawsuits, which it used to criticise and discourage companies from inappropriate conduct. In most cases, the process ends with a settlement.
Proactive engagement and transparent expectation setting
In Norway, NBIM is accountable to the Norwegian Parliament and the Finance Ministry. The public scrutiny entailed by this relationship creates the need for the fund to develop thorough and transparent engagement processes.
As a result, the first step in NBIM’s engagement process is the disclosure of the explicit expectations it has of its companies regarding a range of sustainable issues. NBIM expects companies to integrate climate change, human rights and anti-corruption considerations into their policies and strategy and to consider material climate change risks into risk management.
Discussing investment stewardship and engagement shortly after taking office, NBIM’s CEO announced that he would continue to “strengthen the fund’s ownership work in the years to come. This is a rapidly evolving field, and we aim to be a global leader. We will work with our expectations to companies, and we will strengthen our ownership dialogue.”
Exclusions and screening
Nordic anomaly #6: Exclusions applied to all portfolios
Looking beyond their dialogue with investee companies, asset owners in the Nordic region also have a track record of proactive exclusions. Nordic institutional investors appear to stand out by applying exclusions to their entire balance sheet and by publishing exclusion lists.
Nordic anomaly #7: Publication of exclusion lists
AP1, AP2, AP3, AP4 and AP7 all disclose the companies that they exclude from their investments, as do NBIM and Storebrand in Norway, PensionDenmark and Finland’s VARMA. Exclusions are so prevalent that Länsförsäkringar decided to go a step further and enhance its exclusions list with a “Transitions list” for companies at the edge of acceptability.
Integration
The next level of sustainable investing focuses on integrating ESG factors into investment decisions. As signatories to the UN Principles for Responsible Investments (UN PRI), the vast majority of Nordic asset owners commit to “incorporating ESG issues into investment analysis and decision-making processes.” Whilst, in public markets, there are similarities between the approaches adopted by Nordic investors and their international peers, two differentiators are notable:
Nordic anomaly #8: Early adopters of 'impact'
- Nordic investors were amongst the first to accentuate the importance of real world 'impact' in sustainable investment
Nordic anomaly #9: Application of sustainability to capital allocation in private markets
- In private markets, companies like AMF Insurance and VARMA may focus on forestry, renewable energy and sustainable real estate.
These two factors combine in a way that means the region’s responsible asset owners are playing a prominent role in funding the energy transition via sustainable bond markets. In 2020, Swedish Krona issuance mainly targeted at local institutional investors, ranked in third place behind euro and US Dollar, while Nordic asset owners played an important role in funding COVID-19 mitigation efforts.
Authors
This 'perspective was written jointly by Filipe Albuquerque of Nordsip and Mike Tyrrell of SRI-Connect.
[1] Sweden has a mixed three layer approach to its pension system. At the top, the Swedish state provides a mixed guarantee and notional defined contribution (NDC) pension, which aims to mitigate old-age poverty while smoothing consumption over time. On top of this, every Swedish worker is also covered by a private occupational pension sector agreement. Last but not least, Swedish workers can save or buy individual pension accounts. The AP funds are buffer funds for the state premium pension (NDC) pension.
For reference: