It’s a generally recognized fact that institutional investors in the Nordic region pioneered the approach to sustainable investing, including incorporating environmental, social and governance factors.
Sweden’s large public pension funds — AP1, AP2, AP3, AP4, AP6 and AP7 — are regulated by a law introduced in the early 2000s stipulating that sustainability needs to be taken into account in the management of the funds.
“Sustainability requirements in the law have been raised over time,” says Nadine Viel Lamare, sustainability strategist at the Swedish Fund Selection Agency, a government authority that procures and monitors investment funds for the country’s public pension system. “This has set the tone for the entire Swedish pension fund market.”
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In 2023, the agency made it compulsory for any European asset managers competing for a share of the public pension mandate to prove full ESG integration to be considered.
“The law states that procured funds must be sustainable and that fund agreements must contain conditions stating that fund managers must manage the funds in an exemplary way in terms of sustainability through responsible investment and responsible ownership,” says Viel Lamare.
“Through our assignment of procuring funds for the premium pension system, we thus have great opportunities to contribute to the necessary transition toward a more sustainable society.”
Insurance & Pensions Denmark also plays an important role in facilitating a sustainable transition, assisting in the global efforts to reach the United Nations’ sustainable development goals and the Paris Agreement, says Stine Pagh, the trade association’s chief consultant of climate, solvency and tax.
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“This approach is based on the goal of ensuring the highest possible return to its members, while at the same time fulfilling the responsibility as responsible investors. Danish pension funds believe these two aspects are mutually supportive.”
The culture and values shared between the Nordic countries is well-aligned with the ESG thematic, says Vesa Syrjäläinen, development manager at Varma Mutual Pension Insurance Co. in Finland. “For example, nature and equality are all themes that are at the core of Nordic values and thus, integrating the themes has been generally seen as a natural process.
“Also, both the national and [European Union]-level legislation has supported the widespread adoption of sustainability in pension schemes in the Nordics.”
ESG push back on this side of the pond
Meanwhile, North America is seeing a push back against ESG, but Viel Lamare isn’t seeing the same slide in Sweden.
One of the reasons is the evolution of investing sustainably over the past 20-plus years, she says. “It has developed from a compliance and check-the-box exercise with exclusions as the main tool to a more sophisticated approach with a full range of tools to integrate sustainability aspects in the investment and active ownership processes as a mean to reduce investment risks and identify investment opportunities.”
In Finland, Syrjäläinen says there has always been a vocal minority demanding that pension plans focus purely on maximizing returns. “We’ve seen the term ESG become politicized, but I wouldn’t go as far to say we’ve seen push back here in Finland from our stakeholders. What we have seen is external managers have definitely been affected by this, especially in the U.S., which is a challenge for European investors investing in the U.S.
“To some extent, I believe the push back has resulted in a healthier environment for sustainability-related investment products. An investor shouldn’t expect to be able to solve all problems by investing in an ESG-themed investment vehicle. A solution that works for us may not work for other funds. It all depends on the mandate, internal/external targets, [key performance indicators] and overall approach to investing.”
A key consideration going forward, according to Syrjäläinen, is the rising gap between the U.S. and Europe in reporting practices for both investee companies and pension funds. “We’re seeing increasing regulatory requirements in the E.U. that aim for more robust sustainability integration within our investment portfolios, while the same progression in the U.S. has stagnated. Aggregating portfolio level sustainability figures required by E.U. legislation (e.g. carbon emissions) for U.S.-based funds can become difficult without adequate reporting in the future.”
Ursula von der Leyen, president of the European Commission, is working to reduce the reporting burden on E.U. businesses to boost its competitiveness, says Pagh. “The requirements for reporting on sustainability have become so large that the costs have become a financial burden to Danish companies that take time and effort away from real sustainable efforts.”
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While Danish pension funds are dedicated to continuing to lead the way in promoting the green transition and ensuring sustainability, regulation and reporting must also make sense, she adds.
Lessons for Canada
There are several ways forward for Canadian pension plans to incorporate more ESG in their investment processes and help push companies towards more sustainable development, says Pagh, acknowledging that different Danish pensions have different approaches to sustainability.
“A common denominator is that they all work to ensure transparency in their work with sustainable investments.”
In addition, all Danish pension funds are engaged in one or more international climate initiative or alliances, such as the Institutional Investors Group on Climate Change, the Net-Zero Asset Owner Alliance and the Science-Based Targets Initiative.
“I’d say, overall, the Nordics have been relatively advanced in assessing and managing climate-related risks in their portfolios,” says Syrjäläinen. “As a testament to this, there are currently three pension funds globally that have set emissions reduction targets validated by the Science-Based Targets Initiative, all of them coming from the Nordics.”
Indeed, the $20-billion Akademiker-Pension (Denmark), the $44-billion PensionDanmark (Denmark) and Varma (Finland) are the only global pension funds to earn recognition from the SBTi. The initiative is a partnership between several climate disclosure organizations that validate and approve climate goals if they’re based on a scientific method and meet the Paris Agreement’s goal of limiting the global temperature rise to 1.5 degrees Celsius.
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In Sweden, Viel Lamare says there’s no such thing as a one-size-fits-all approach, noting the integration of sustainability into investment processes is only a way to systematically identify material aspects that might affect business as well as financial risks and business opportunities.
“The approach to integrate sustainability has to be aligned with the value creation model of the fund. And to do it properly requires time and resources, as the devil is in the details.”
Jennifer Paterson is the editor of Benefits Canada and the Canadian Investment Review. Additional reporting by Sadie Janes, associate editor at Benefits Canada and the Canadian Investment Review. She’s currently on maternity leave.