A guide to responsible investment
A new book about responsible investment, written by a Finnish duo, brings together the scattered field of ESG. FBNW speaks to Tiina Landau and Hanna Silvola to learn more about the book that has gotten Finnish investors talking.
It is hard to come by any comprehensive work that brings together the vast field of responsible investment and the many theories and strategies used by ESG-conscious investors. A Finnish duo, Tiina Landau, a former senior responsible investment officer at the Finnish pension giant Ilmarinen, and Hanna Silvola, associate professor at Hanken School of Economics, have tried to solve this problem with a new book. It aims to assist both institutional investors and others wanting to gain a better understanding of the principles and analytics of enhancing portfolio performance through different ESG strategies.
The extensive research that went into the book was done in six months. “We wanted to write a book that serves many audiences – from ESG professionals to portfolio managers. We interviewed several investment professionals, some of whom feature in the book as well, to make it as relevant as possible,” explains Tiina Landau. She says the book can also be used by companies to better understand how investors are approaching these issues and what, for instance, is expected from companies in terms of sustainability, reporting and transparency.
Despite only having been released earlier this year, the book has already been selected as exam material for the Finnish certificates for both investment service (APV1) and investment guidance (APV2). The personnel selling investment funds at banks for retail customers are recommended, or depending on the employer and investment products sold even required, to pass at least one of these exams. Going forward, candidates are required to study the different methods of ESG investing as well as the link to returns.
The book, Vastuullisuudesta ylituottoa sijoituksiin, which has so far only been published in Finnish, includes several case studies, for example on the Swedish pension fund AP2, its Norwegian peer KLP and the Dutch pension giant PGGM. These have been compiled with the help of the investors with many of them being considered as forerunners in the field of responsible investments. “The forerunners in this field are actually actively shaping the landscape, which is why sometimes you can see them not actually wanting more regulation around these issues as this gives them more leeway to shape the framework and culture around these issues,” Hanna Silvola says.
She also points out that the new generation of investors is much more engaged with the world and issues around ESG. “They’re asking questions and not accepting answers that go against the principles of responsible investment. I gave a group of my students statistics about board compositions in some Finnish companies and they were genuinely shocked by the fact that some had no females in their boards. These kinds of things are just not considered normal by them,” Hanna Silvola explains.
One sign of the increased importance of ESG knowledge among investment specialists is the first formal qualifications on ESG investing that opened up earlier this year as Chartered Financial Analyst UK (CFA UK) launched a new qualification in ESG investing recognised and supported by the PRI. The certificate is the first formal qualification on ESG investing available sector-wide in the UK. However, comprehensive guides to the principles and strategies of ESG investing are still hard to come by.
Tiina Landau says that the changing set-up of investment teams also demonstrates how the investment community is adapting to new ways of mapping risk. Although ESG teams in many cases are still separate from the actual investment teams, it is becoming more and more common for ESG to be an integrated part of the team. “I do think in the future there will be increasing demand for individuals that can understand both the ESG side of things along with being able to execute the actual investment strategy,” she says, noting that as ESG is growing in importance, investors are also bolstering up their ESG teams.
The duo says the writing process also brought some new perspectives. “Before I started writing this book, I thought it was very difficult to comprehensively evaluate cyber security risks. However, I was proven wrong during the course of the process. For example, one can ask whether a company has a cyber security insurance, as obtaining such an insurance requires meeting certain levels of managing cyber security risks,” Tiina Landau explains. Among others, the book includes a chapter on mapping cyber security risks with insights from Mikko Hyppönen, the chief research officer at the Finnish cyber security and privacy giant F-Secure.
Overall, Tiina Landau says that much still depends on the individual investor’s resources and knowledge, which affect the capability and the extent it can integrate ESG in its investment process. "Asset managers are willing to do bespoke solutions and there are several options ranging from mandates to new investment products that the asset manager might make available to a wider range of its customers. Meanwhile, smaller investors don’t have the same capabilities as the larger ones to, for instance, engage with investee companies to promote sustainability. However, there’s always the chance to team up with other like-minded investors to achieve positive results,” Tiina Landau says.
Hanna Silvola notes that the concept of responsible investment can be fluid but that she sees responsible business as starting where the law ends. “I think it’s perfectly clear to almost all that an investment into a company using child labour is not a responsible investment. Not least because child labour is illegal according to international law. Responsible investing is often described as a voluntary activity that goes beyond the law. It’s something no law requires you to do but you choose to do because it will improve society in the long run,” Hanna Silvola comments.
Photo: Vesa Laitinen /Alma Talent