The Nordic countries have long been at the forefront of balancing market economics and social issues. In recent years, that so-called “Nordic model” has even turned the region’s financial sector into an international powerhouse for Environmental, Social, and Governance (ESG) — the criteria for investments that are sustainable and socially conscious.
ESG is increasing in international popularity, with investors all over the world racing to join in. That puts Nordic ESG investing in an interesting (and worthwhile) position. Understanding its current landscape can be incredibly insightful, as well as potentially profitable, to a lot of different people.
So, here are some major trends in the Nordic ESG investment community that you should know.
1. EU regulations are shaking things up
Like everyone else working in finance within the European Union, Nordic-based firms are affected by EU regulations on reporting and classification of sustainability efforts. There are three key ESG regulations that continue to stir the pot:- Sustainable Finance Disclosure Regulation (SFDR):
Approved by the European Parliament in 2019, the Sustainable Finance Disclosure Regulation (SFDR) is a landmark statute that attempts to prevent greenwashing by increasing market openness around sustainability. It compels all financial market participants (FMPs) in the EU to publish information on their sustainability policies and indicators, even if they don’t have an ESG focus. Aspects of SFDR already went into effect in early 2021, but the periodic reporting requirements commence on January 1st, 2022. - EU Taxonomy:
The EU Taxonomy determines whether particular economic activities are sustainable. It gives FMPs and major corporations a toolbox for evaluating their sustainability and promoting and selling themselves as such and is, therefore, an essential component of many sustainability reporting systems. The first disclosure obligations for the Taxonomy kick in at the start of 2022. Additional reporting requirements will also be announced, but they won’t go into effect until 2023. - Amended Delegated Acts for Investment Managers and Firms:
Both the EU Taxonomy and the SFDR are significant pieces of the European Commission's Sustainable Finance Action Plan, but there’s another considerable component: a collection of amendments to regulations for fiduciary duties, along with investment and insurance advice, in the AIFMD, UCITS, MiFID II, IDD and Solvency II frameworks. These regulate how certain investment companies incorporate public and investor-facing ESG disclosures. They are not expected to be enforced until the fall of 2022.
And while you may think that Nordic ESG’s leading position would mean those in the region are well prepared for any ESG regulation requirements, that’s not exactly the case.
The EU Taxonomy is reportedly more rewarding in classification for companies that have future-oriented initiatives, like investing in green transition. An analysis by the Carnegie Investment Bank found under the Taxonomy guidelines - according to an article in World Finance by Jonas Predikaka, Carnegie ‘s Global Head of Wealth Management and Private Banking - “several companies that the market previously considered green did not perform as well, while others that had been overlooked suddenly became green darlings.”
The requirements of SFDR, meanwhile, are forcing financial service groups to rebrand some of their funds. A prominent example was when DNB announced in May 2021 that it was removing ESG from the names of its Global ESG and Global Emerging Markets ESG funds to better align with the EU’s defined sustainable investment methods.
2. More funds are saying ‘NO’ to investing in companies with ESG shortcomings
More and more private equity and venture capital firms throughout the world are recognizing the significance of sustainability. In a recent study conducted by the auditing behemoth PWC, approximately 56% of the private equity funds questioned had pulled out of or initially abstained from investing in companies deficient in their ESG efforts, and nearly 40% of the venture capital funds claimed that they refused an investment because of ESG concerns.
And that trend is especially strong among Nordic investment funds, which according to a recent report by Danske Bank, are also significantly more focused on “innovative startups working to create a sustainable impact in the world”.
Probably the most famous example is when Nordea’s investment division delisted JBS, the world's largest beef producer, from its portfolio in the summer of 2020. According to reports, the Danish financial titan specifically cited the Brazilian-based company’s lack of ESG commitment as the main reason.
3. Fund managers are feeling pressure to be more transparent on ESG integration
ESG investing requires transparency. It hinges on organizations sharing internal information like ESG data and ESG-scoring methods. How freely that information is provided can affect an investment’s valuation and continuation. And while the pressure for transparency has traditionally been applied to companies and CEOs, fund managers are now starting to feel it too.
In a recent interview, a fund selector for Danske Bank told the Nordic Sustainable Investment Platform (NordSIP) that a fund manager’s ability to explain how they integrate ESG into their investment strategy is now just as important as their ability to identify good investments.
Meanwhile, the investment arm of Handelsbanken publicly announced that it would begin requiring all of its portfolio’s external fund managers to comply with its sustainability reporting framework, as well as adopt and present a plan to reach net-zero carbon emissions. The news was just the latest in a series of similar announcements by other Nordic financial institutions, including Nordea Life & Pension and Storebrand.
4. Nordic pension funds are prioritizing ESG
Pension funds make up a significant portion of the Nordic investor base. So any shared direction or common strategy among them can seriously affect the market. And they’re serving as a vanguard for ESG.
According to an analysis by the international asset management company Robeco, the Nordic nations' biggest pension funds seem to all agree on the significance of ESG, though all with their own unique policies and approaches. Swedish and Danish pension funds noticeably emphasize climate change and divest the most from businesses that pollute the environment. And for industries traditionally excluded from such investment portfolios — alcohol, tobacco, and gambling — only tobacco seems to be widely banned across the board by all of them. Most notably, the Government Pension Fund of Norway, the world's biggest sovereign wealth fund, has also made ESG its cornerstone.
5. Human rights are becoming more of an ESG issue for Nordic funds
When most people think of ESG investing, they often overlook the components related to social justice. Although human rights are still a part of the ESG definition, climate neutrality and fair labor get the lion’s share of attention. And some Nordic funds are trying to change that and make human rights just a prominent component.
Most notably, Denmark's Institute for Human Rights has started working with Swedfund, Sweden's development finance institution, performing due diligence regarding human rights in its indirect funding activities through the funds it puts money into. And the executive board of Norges Bank Investment Management, the investment division of Norway’s central bank, voted in May to remove three businesses from the Government Pension Fund’s portfolio due to unacceptable risks they contributed to human rights abuses in Myanmar and Israel.
Like many things, there’s no guaranteed predictability in the world of investing. However, as international markets are catching on to the importance of ESG, one thing seems clear. ESG has become a force in the market and can’t longer be ignored. In the world of Nordic ESG investing, this means to stay aware – and stay in line – with the new, international regulations and demands of tomorrow.
Related blogs you might like:
