There is only one question to be addressed with regards to sustainability in the finance industry: do we need to adapt? We have experienced tremendous benefits from our reliance on traditional investment theories and practices over the years in a continually changing world. Global poverty has declined and living standards have improved, yet we still depend on fossil fuels for 80 percent of the world’s energy. Given their impact on the planet, the finance industry has to ask itself if it can do more to prevent adverse effects. The answer is yes; the solution is change.
Nordics are arguably the highest quality investment competitors in the world, with their governance model and mindset meaning substantially lower risk with higher potential returns
For two consecutive years, the World Economic Forum in Davos has highlighted the fact that climate change is the number-one threat to the global economy. Overall, humans are releasing CO2 into the atmosphere much faster than at any time in the last 66 million years. The cumulative amount of global warming pollution that is resident in our atmosphere is huge: it traps as much extra heat energy every day as would be released by 400,000 Hiroshima-class atomic bombs exploding every 24 hours. This is why it is imperative we act now.
The Nordic region has proven itself to be enormously resilient and flexible, and is certainly up to the challenge of becoming more environmentally friendly. Historically, the area has had to deal with the demise, downsizing or restructuring of industries including apparel, shipbuilding, mining and steel. However painful these transitions were, the region has prospered and adapted to every transition successfully. The region’s governance model, entrepreneurship, quality awareness and culture of consensus-building have successfully created entirely new opportunities and profit pools. This has driven up both GDP growth and prosperity, while also facilitating the building of leading global franchises for many large Nordic corporations.
Moreover, the Nordic region has had high degrees of political and regulatory stability for decades now. Combined with this, its home markets are fairly small, which has enabled Nordic corporations to expand globally in very early stages. This was achieved through cooperation between companies and banks. Anyone aware of the work of the economist Joseph Schumpeter will know that creative destruction is not a new concept. We have seen it in the past, and I am sure we will see it time and again going forward, with major changes to the key components of economic output.
In fact, the Nordics are arguably the highest quality investment competitors in the world economy, with their governance model and mindset essentially meaning substantially lower risk but higher potential returns. We are seeing a big change among institutional clients like sovereign funds and foundations, as well as the younger end of our retail clients. There is no distinction in the minds of these clients between your values as a business, how you invest, and the returns you generate. The centre of gravity for this view – the sustainability focus – has existed previously in Europe, but what is fascinating to see is how it has spread globally.
I am also fascinated by how sustainability means quite different things to each individual and each institution. What they are looking for is a company’s value proposition and approach, and how it integrates these elements into its products, solutions and services.
Our teams are no different from everyone else regarding their views on the broader societal change we have witnessed and their expectations for the future. They want to feel convinced that the market economy does some good over time, having witnessed its worrying shortcomings during and after the financial crisis. We believe greatly in engaging with companies and striving to support positive change – to find solutions that benefit the societies we live in.
Just 17 years ago, the most optimistic projections about wind energy were that we might reach a capacity of 30GW by the year 2010. At Nordea, we have now surpassed that 16 times over. Offshore wind is becoming a major source of power, particularly in the North Sea, and it generated more than 100 percent of Denmark’s energy needs in 2016. In the UK, where the coal revolution began, the country now gets more electricity from wind than from coal and, in April 2017, managed to go a full day without burning any coal for electricity. The introduction of efficient, cost-effective batteries is going to further accelerate this trend, with the world’s largest battery currently found in South Africa.
Furthermore, 15 years ago, the most optimistic projection for solar energy was that by the year 2010 we might be able to install one GW per year. Last year we beat that figure 75 times over. We are seeing an even steeper curve for solar energy than for wind, because the cost is coming down so much faster for the cells that are required for it. Indeed, in August 2017, one of the biggest utilities players in the US signed a contract for solar electricity at less than three cents per kWh. The financial sector is playing a key role in this transition.
Economists used to think that economic growth and emissions had to go hand in hand, but this has not been the case; the sustainability revolution has led to new opportunities in many industries. For the financial system, sustainability has a dual imperative. The first is to ensure that environmental, social and governance (ESG) factors are at the heart of financial decision-making. The second is to mobilise capital to help solve society’s key challenges that require long-term finance. These include creating jobs, improving education and retirement finance, tackling inequality and accelerating the shift to a decarbonised and resource-efficient economy.
A sustainable world economy must be characterised not only by better protection of natural resources, but also by higher employment levels and greater financial and economic stability. The rapid evolution of the sustainable finance agenda could provide the best opportunity for the world to reorient its financial system from short-term stabilisation to long-term impact.
In a narrow sense, sustainable finance means integrating the ESG criteria into investments, financings and advice. In a broader sense, sustainable finance refers to a financial system that is promoting sustainable economic development rather than boom and bust, sustainable social development rather than inequality and exclusion, and sustainable environmental development rather than damaging the endowments of nature. Achieving this requires a clear vision, one that can be understood, implemented and measured in practice.
There is a famous African proverb: “If you want to go quickly, go alone. If you want to go far, go together.” This can be aptly applied to both financial institutions and wider society. In order to create changes, we need to take several steps. First, we need to consider the full value of financial assets, incorporating sustainability factors and production design. Second, the sector needs to be productive, serving its users – notably households, firms and governments – in their projects and needs. Third, it must be resilient and should be able to withstand and recover from a wide range of both external and internally generated shocks. Fourth, it must demonstrate an alignment between the sustainability preferences of its users and the outcomes of the decision-making process, ensuring accountability and transparency. And lastly, financiers must take a long-term perspective in order to overcome any future disasters.
For a leading Nordic bank like ourselves, good finance is about integrating sustainability into all of our business activities and products within our core areas: investment, lending and customer advice. We are constantly facing global challenges in relation to our business. This means we have to integrate and address ESG challenges when we lend, invest and advise our clients. We are constantly engaging with our clients and other stakeholders in order to understand relevant sustainability issues and their impact. By acting on behalf of our clients, we can contribute to economic growth and prosperity through capital allocation and interaction with companies.
This is not only a business opportunity, but a part of our fiduciary responsibility. Over the last few years, we have developed our policies, procedures and investment products to ensure the companies we invest in live up to the criteria of sound ESG performance. We believe that by engaging with and investing in ambitious companies, we can make a considerable difference. Indeed, we will endeavour to select quality companies with highly sustainable profiles and a high potential of generating economic value with low risk. To ensure sustainable practices, we conduct thorough research and closely monitor performance. We also visit companies to help motivate them to tackle ESG issues.
As a leading European wealth manager and bank, we are ready to be the drivers of change – and that means preparing for a sustainable future.