Banking expert: Opportunities abound for the responsible investor

Focus on the United Nations-backed responsible investment principles may offer opportunities for any financial institution with an interest in creating a more sustainable future, says Antti Savilaakso, Chairman of Finland’s Sustainable Investment Forum.

“I would encourage all financial institutions to find out how they could benefit from the responsible investment practice,” says Savilaakso who is leading a forum of more than 50 Finnish institutional investors working on responsible investments. A large number of these are also signatories to the UN-supported PRI initiative.

Launched in 2006 under the guidance of then-UN Secretary General Kofi Annan, the Principles for Responsible Investment (PRI) Initiative brings together more than 1,260 institutional investors from around the world aiming to integrate environmental, social and governance (ESG) factors into their investment management. The principles for responsible investments are defined as an approach to investment that explicitly acknowledges the relevance to the investor of ESG issues, and of the long-term health and stability of the market as a whole.

Savilaakso claims that responsible investment is long-term by nature.
“The investment industry is increasingly becoming more short-term. A few decades ago, the average holding period in different stock markets could be years, whereas today it is better measured in months. I think responsible investors stand out as longer-term investors, as they worry about risks and opportunities that will materialise over years and decades rather than in the next quarterly figures.”

Savilaakso is also Director of Responsible Investments and Governance for Nordea Investment Management in Finland. He has previously worked with ESG analysis and corporate engagement in Singapore, Brussels and Amsterdam.

Sustainability is relative
How does PRI-defined responsible investment differentiate from conventional approaches to investing?
“I would say it is complementary as responsible investing considers environmental, social and governance issues in addition to analysing the financial metrics as in traditional investing.”

Naturally, having a methodology to find and analyse the appropriate cases is key also when it comes to responsible investments. However, “what ‘constitutes’ sustainable in one region of the world may be insignificant in another.”

“A lot of the values that resonate well in the Nordic countries like nature, equality, transparency and democracy, tend to be prominent in responsible investments here but not necessarily that much elsewhere on the planet,” Savilaakso says.

“Although the Nordic countries are very similar, there are smaller differences such as the climate and fossile fuel debate being more prevalent in Norway, and with forestry issues dominating in Finland.”

Savilaakso perceives Swedes as tending to be more active in responsible investments than their neighbouring nationals.

“That’s not necessarily because they are more value-oriented than other Nordic investors. It has more to do with regulations regarding the Swedish pension system that integrates ESG aspects into the investment decision to a larger degree than anywhere else in the Nordic region.”

What compromises and sacrifices are frequently made when investing “responsibly”?
“You don’t necessarily need to forego any profit, because ESG-responsible companies tend to be good investments, as shown in numerous academic studies. But you need to make a strategic decision about whether or not to become a responsible investor, and then develop a thorough ESG analysis that improves your investment decision and that certainly requires time and money.”

Danish exodus
Recently six Danish pension companies—ATP, Industriens Pension, PensionDanmark, PFA, PKA and Sampension—decided to delist from the PRI, citing governance concerns in the private organisation behind the UN-backed Principles for Responsible Investment. The Danish exit came in response to PRI taking away some rights from its signatories. Ole Buhl, head of responsible investment at ATP, commented on the exit to the Financial Times in December 2013, saying that “This is not about destroying the PRI, but about fixing it. We want our old PRI back.”

Savilaakso, who took the initiative of having a roundtable discussion on the Danish exit, doesn’t hide that the governance changes at PRI might have been rash.

“The origins of the PRI organisation were very entrepreneurial, meaning that there’s a lot of initiative and things going on. I’m convinced, however, that PRI is committed to coming up with a governance model that fits all members.”

The PRI has appointed a third party to scrutinise its governance and is currently consulting among its members. The organisation is expected to present an alternative at its forthcoming global meeting in October 2014.

Reasons for ESG focus
Savilaakso says financial institutions should consider ESG issues in their investment management because of a growing client demand for it, because many stakeholders think it is the right thing to do, and because it may simply improve investment decisions.

Still why should private financial institutions care about precisely ESG issues? Isn’t it enough for them to follow national and international legislation and regulations?
“It’s a fair point, and I think that in order to make all financial institutions live and breed ESG, one would indeed need legislation. Again, that view doesn’t really highlight the opportunities that including ESG issues into investment decisions brings with it,” Savilaakso says.

Brag value
Being “green” or “responsible” gives a certain kudos to a company and many critics also say that the UN-backed investment principles are more symbolic than practical. For instance, the first and most important of the six PRI principles only states that: “We will incorporate ESG issues into investment analysis and decision-making processes”. The other five principles are about how to achieve this in practice.

What is your response to this kind of criticism?
“There is a certain trust deficit towards large banks, especially after the financial crisis, and yes, making responsible investments helps them in this sense. However, while signing up with the ESG principles is easy, PRI membership comes with an obligation to report according to certain principles. My advice would be that everyone buying into responsible investment products should read the small print and find out what responsible investment means in practice,” Savilaakso says.