After the Paris Climate Agreement and the UN Sustainable Development Goals it has became more evident that companies and financial institutions will be among the critical drivers in implementing sustainable economic activity. Capital markets possess great power to catalyze change, innovation and entrepreneurialism to meet the demands of a sustainable economy. To encourage dialogue between companies and investors, SEB with the assistance of corporate responsibility network FIBS organized a seminar to enable thought-sharing on the role of capital markets in a sustainable society at Clarion Hotel Helsinki on November 8th.
Banks cannot save the environment - but it cannot be saved without banks
Over the next decades, there are growing categories of strategic risk originating from unsustainable deployment of environmental and social resources as well as bad governance. Stranded assets may cause significant financial losses representing a systemic risk to the financial industry.
“To be profitable in the long run, companies have to fit their business plans into SDGs, as well as change their corporate culture”, stated Senior Economist Klas Eklund from SEB.
Sustainability is likely to be the “next long wave” in the economy, representing major opportunities for new technologies and businesses, and thereby profits to companies seizing these opportunities. In the future, we may need to measure economic performance through some other measures than GDP growth, which will take into account natural capital and other forms of sustainable wealth.
According to Eklund, the financial sector must shoulder greater responsibility. SEB wants to be a role model within the financial industry, involving green finance, sustainable investments, supporting entrepreneurship and reducing emissions. SEB has developed the green bond product together with the World Bank in 2007, and since the start there have been over 500 green bonds and ca. 100 issuers in all parts of the world. Over 120 billion USD have been issued. In less than three years, SEB has become one of the biggest actors in Europe in the area of microfinance funds, which support entrepreneurship in developing countries. At the end of the year 2015, SEK 2.1 billion invested reached more than 15 million micro-entrepreneurs in over 30 countries such as Asia, Africa and Latin America through microfinance institutions. SEB is, so far, the only bank in the Nordic market that can offer institutional clients this kind of investment.
Energy “hunger games” driving down power prices
Classified by source, greenhouse gas emissions are the largest in energy supply (26%), industry (19%) and transportation (13%).
“This creates opportunities for wind and solar generation with backup battery storage and smart grids, industrial automation and efficiency, as well as electric or fuel-efficient vehicles”, concluded Portfolio Manager Deirdre Cooper from Ecofin Ltd., an independent investment company specializing in alternative energy, utilities and infrastructure.
According to her, the energy industry is facing “hunger games” with rapidly decreasing renewable energy cost, which has been underestimated by the capital market and not fully reflected in renewable energy companies’ stock valuation.
While the power prices have been driven down, advances in technology have made renewables competitive. Comparison of two un-subsidised new-built power projects in Asia show that unsubsidised wind is notably cheaper than coal, levelised cost of electricity being 45$/Mwh instead of 64 $/Mwh. World record prices for unsubsidised energy have been achieved in 2016, which is putting the energy transition from fossil fuel and nuclear to renewables into action.Successive re-powering of renewable projects with improved technology may result in a falling levelised cost of electricity (LCOE), and thereby, higher IRR’s make renewable infrastructure a unique investment opportunity. Reflecting in general on the current economic environment, we should take use of the low interest rates to invest in green economy.
Responsibility is good business
“We believe that customers, investors and other stakeholders value responsible operations that keep risks under control and add to our business opportunities, thereby increasing the company value”, told CFO Tapio Korpeinen from UPM.
By sharing the example of UPM’s transformation from a traditional paper manufacturer to a bio-product company, creating value through extensive know-how of forest biomass utilization, he concluded that responsibility can be good business. UPM’s core competence and value creation through products and innovation are linked to the challenges and continuous transition of the society. Responsible value chain and production mean risk mitigation, such as - 70 % in environmental deviations at pulp and paper mills in three years.
Competitive advantage and long-term value are created with employee engagement and overall efficiency, one example of which is the UPM Changshu mill in China, which has reduced significant amounts of water, energy and waste to landfill in the last ten years. When it comes to offering new product innovations, UPM ProFi is a great example of high quality decking raw material which is made from former waste. For UPM, biofuels, biochemicals and biocomposites mean new business opportunities, and the long-term work has received external recognition in many sustainability indices. On top of all, UPM’s transformation and responsible operations have increased shareholder value.
Second largest shareholder in the world acting as a role model
“The mission of the Fund is to safeguard and build financial wealth for future generations by producing high long-term return with acceptable risk”, told Johan H. Andresen, Chairman of the Council on Ethics of the Norwegian Government Pension Fund Global.
By completing extensive studies on industries and companies, the Council on Ethics of the second largest fund in the world screens companies with systematic ESG violation and makes decisions on exclusion from the fund. Over 9000 companies in more than 80 countries have been evaluated based on a process from identification of companies to assessments and recommendations. Guidelines for observation and exclusion of companies are issued by the Ministry of Finance and endorsed by Parliament, holding a high threshold for exclusion. This is a part of the Fund’s responsible investment strategy and a unique approach at putting value on investments with analytical approach.
Exclusions have involved companies operating in fields like thermic coal, tobacco or nuclear weapons, or having done severe environmental damage or human rights violations. Identification can be done via a study in a certain industry (such as textiles) and mapping out a number of companies considered risky, by scanning on the web or based on a hint of concerned citizens and NGOs. Paper is not enough for the Council, companies that have signed to global sustainability initiatives must act on violations, not only provide written sustainability reports. Public assessment reports on the excluded companies are likely to cause ripple effect to other sovereign wealth funds and private investments.
In many cases, exclusion is not the end result of evaluation when companies succeed in improving their work to meet the criteria – thus, the Council’s role is more to ensure that companies avoid breaking the norms in the future. Commitment from the top management is what will dictate the excellence of any company from the Ethics Council’s point-of-view.
Further information: Mikko Routti, Executive Director, FIBS, email@example.com, tel.+358 40 527 4575