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Photo: Anette Andersson

Published

7 January 2015

Financial sector hears sustainable arguments

Green bonds and funds can ensure that sustainability drives growth. Financial products like these were cited as best practice at a conference on sustainable investments recently held by Mistra for the financial sector. Another message was the need for long-term signals and actions by decision-makers and politicians, so that banks and other investors can help promote a more sustainable society.

The Sustainable Investments conference, held in Stockholm in early December, was part of Mistra’s 20th-anniversary celebrations. This half-day conference was attended by some 150 people from the financial markets, including asset managers and analysts, representatives of several Swedish National Pension Funds, banks, insurance firms, consultants, researchers and government agency representatives. The proceedings were filmed and may be viewed, in their entirety, on Mistra’s YouTube channelexternal link.

Mistra’s CE Åke Iverfeldt welcomed everyone and pointed out that Mistra has been a pioneer in sustainable investments, in terms of both its own asset management and the research it funds. At year-end, for example, the new Mistra Centre for Sustainable Markets (MISUM) will open at the Stockholm School of Economics. In the next few years, Mistra will be investing SEK 55 million in MISUM.

For ten years, Mistra has been actively engaged in sustainable asset management. When it was founded in 1994, the initial capital amounted to SEK 2.5 billion (bn). Since then, SEK 3.5bn has been provided for sustainability research but assets exceeding SEK 3bn still remain. The return, at more than 10%, is above the benchmark index. At the same time, the share portfolio has a carbon footprint 59% below average. Mistra believes in sustainability in its own asset management and, according to Iverfeldt, is keen to share its experience.

The day’s keynote speaker was David Blood, the former CEO of Goldman Sachs Asset Management who, jointly with Al Gore and others, has successfully established the asset management company Generation Investment Management since 2004. What he said is very easy to summarise: integrating sustainability and long-termism in investment decisions makes for better business.

Mistra was the first institutional investor to engage Generation, and Blood expressed great gratitude for this. Today, the company’s operations have grown: with offices in both London and New York, and manages over SEK 9bn for more than 80 institutional investors.

Blood’s youthful ambition was to be a teacher, but for various reasons he went to study at Harvard Business School. A brief job during his studies, at an investment bank (which he did not enjoy at all), made him reflect on the importance of ethics and corporate culture. After his degree he applied to join Goldman Sachs, since the corporate culture matched his own values. There, he built a career on his realisation that, for example, the implications of a corporate culture in terms of how the management both tackles environmental issues and treats its employees and owners, may help to make the company’s future success predictable. These are lessons he has continued to refine at Generation.

Generation actively pursues sustainability and makes environmental and social considerations integral to every investment decision. In the ten years since the company was founded, a great deal has been learnt. One clear conclusion, according to Blood, is that investments based on sustainability criteria are an excellent way of managing financial risk. A company’s reputation is important and, as an asset manager, the aim is to preferably avoid investing in companies that risk falling into disrepute. Blood also stated that sustainability drives growth in companies. By searching for companies that have been well in the vanguard in terms of, for example, managing climate change, health and the work environment, Generation has identified several successful companies. One crucial factor in Generation’s success is its long-term approach: it has an investment horizon of three to five years in all the decisions it takes.

The international financial crisis a few years ago brought a setback for the green economy and investments in sustainable development, but David Blood sees this as a temporary setback. A green market that severs the connection between growth and carbon emissions — a ‘low-carbon economy’ — is approaching, probably faster than we can imagine. The hope, David Blood said, is that changes can already take place by 2020; and he highlighted the recently announced climate agreement between the US and China as a key step forward.

Helene Winch of Principles for Responsible Investment (PRI) presented the latest statistics on sustainable investments. PRI is a UN-supported organisation for promoting responsible investments, based on environmental and social as well as financial criteria. PRI now covers more than 1,300 stakeholders globally, including asset managers, pension companies, analysts and asset owners, jointly accounting for some 30% of the world’s aggregate investments. The survey shows that more than 80% of PRI-affiliated asset managers take sustainability into account, in some form, in their operations.

Klas Eklund, senior economist at SEB and advisor to several Swedish governments, talked about the financial markets’ two faces of Janus. On the one hand, players in these markets very often apply short-term thinking and contribute to financial crises. On the other, they have a crucial role in promoting innovation and growth. The financial markets therefore have an important role to play in helping to ensure that society develops in a sustainable direction.

We face a huge task, Eklund emphasised. Enormous infrastructure investments are required to sever the connection between economic growth and carbon emissions, if we are to be able to achieve economic growth even with low emissions (low-carbon growth). Globally, it will involve an estimated 100 billion dollars between now and 2030. According to Eklund, it is vital to remember that in the basic ‘business as usual’ scenario, investments will cost nearly as much: 90bn dollars.

If the financial markets are to cope with their share of society’s readjustment, powerful long-term signals and measures from decision-makers and politicians are absolutely essential. Examples of what they must use are inflation targets, taxes, policy and statutory instruments, and R&D funding. Eklund also pointed out the need for a new way of measuring GDP. Research inputs of this kind are under way worldwide but, he stated, it may take at least ten years before they are completed.

Despite the major challenges we face, Klas Eklund places great hope in a more sustainable economic system. He maintains that in history to date, capitalism has contributed to a series of technical breakthroughs that have developed and reshaped society.

Fredrik Wirdenius, President of the property company Vasakronan, introduced the second part of the conference. Examples of practical sustainability efforts in four different companies were given. Wirdenius described how, five or six years ago, he took the initiative for a broad sustainability initiative in the company. His advice at the conference may be summarised in three points: (1) Start changing what you personally can influence; (2) Don’t listen too much to your customers’ wishes; and (3) inspire the organisation with lofty ambitions.

Green corporate bonds, a relatively new form of funding in which the capital raised is allocated to environmental projects, have become a key way for Vasakronan to fund sustainability initiatives. To date, these bonds have provided SEK 3.3 billion in funding for environmental measures. Green tenancy contracts are another way of promoting sustainability, according to Wirdenius. Under the contract, both the property owner and the tenant undertake to keep environmental load down. Any gains that arise are shared between the landlord and the tenant.

Aims adopted by organisations need shaking up, Wirdenius thinks. When he set the target for Vasakronan that, in the long term, energy efficiency should be 50% below the sector average, it was initially perceived as impossible. But it has since become an important source of inspiration for all the staff. To date, the company has reduced energy use in its properties by an average of 25%.

Jan-Eric Sundgren, a senior advisor in Volvo Trucks, related that the company is now the world leader in hybrid buses (driven by both a traditional combustion engine and an electric engine) and that it is also far ahead in terms of ‘plug-in’ buses, which are charged from the electricity grid. This position is a result of a long-term decision taken back in 2005. Since then, heavy investments have been made; but, according to Sundgren, this long-term decision has also been a profitable one both for Volvo and for its customers. Today, the customers have access to buses with considerable lower fuel consumption than conventional buses.

The company is now also working on new business models, and the trend is from selling technical products alone to supplying, to an ever growing extent, whole transport solutions. It is still, however, essential for a company like Volvo Trucks to develop innovative technology, Jan-Eric Sundgren said.

Magnus Borelius, the City of Gothenburg Financial Director, related how Gothenburg was the first city in the world to start issuing green bonds as a way of funding its investments in the environment and sustainability. The first green bonds were launched in 2013, since when they have aroused great interest. Today, bonds for SEK 3.2 billion have been issued.

The green bond initiative has brought in-depth collaboration between the municipal financial and environmental administrations. Borelius pointed out that these were sections that had not previously had very much to do with each other.

Reporting back to the investors has proved challenging. All information in the City of Gothenburg is public and it is vital, Borelius said, to find a workable level for the information. He also emphasised that green bonds have become a driver, making the whole organisation more sustainable. The City of Gothenburg has other bonds for about SEK 35 billion and where these too are concerned the green bonds have exerted pressure on the municipality to manage environmental and sustainability aspects better, according to Borelius.

Carina Lundberg Markow, Head of Corporate Governance at the Folksam insurance company, spoke about managing the company’s pension assets in a secure way for its customers. Folksam has a vision of a society that is sustainable in the long term. Undertakings on sustainability may often sound like mere fine words, but Lundberg Markow told us that the work is fundamentally based on universal human values. In practice, however, it is important to stick to shared notions of sustainable development based on the United Nations’ and PRI’s definitions. This also increases the scope for measuring and evaluating asset management.

Folksam, an active owner, votes at shareholders’ meetings and maintains a continuous dialogue with its component enterprises. Standards and joint agreements are important because they afford strength for changes. Lundberg Markow thinks that corporate governance, for example, needs changing to bring sustainability into business on a broad front.

When Märtha Josefsson, Chair of Mistra’s Asset Management Committee, summarised the conference she pointed out that a great deal has happened since this century began. What used to be a list of various companies in which, for ethical reasons, people were unwilling to invest is now giving way to a movement towards active dialogue with companies about sustainability. Sustainable asset management is not about ‘number-crunching’; instead, it is very a matter of corporate culture, how companies manage their environment and their employees, Josefsson said, and referred to David Blood’s address.

Text: Henrik Lundström, Vetenskapsjournalisterna

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