Responsible investment is here to stay. And it does not compromise a pension company's obligation to invest profitably and securely.
These are the words of Varma's Chief Investment Officer, Reima Rytsölä.
"Investors and companies truly have a lot of power as well as a duty to make the world a better place," he says.
A responsible investor takes into account not only return expectations, but also issues related to the environment, society and corporate governance (ESG). In recent years, the focus has turned especially to environmental issues, as investors have been compelled to join the fight against climate change.
Responsible investment is here to stay, says Varma's CIO Reima Rytsölä. He predicts that the next theme to take the spotlight in responsible investment will be S, especially taking care of employees.
In 2016, Varma published its climate policy for investments, in which it set ambitious targets to reduce the carbon footprint of investments in different asset classes. The long-term target is to bring the portfolio in line with the Paris Climate Agreement. Rytsölä believes Varma is not far from reaching that target.
"For investors, climate change (E) has been a relatively simple thematic area. Strategies for minimising the risk related to fossil fuels have been considered and, at the same time, the potential benefits of future technologies have been sought," says Rytsölä.
He predicts that the next theme to take the spotlight in responsible investment will be S, i.e. corporate social responsibility, especially taking care of employees.
"In our information society, how we take care of our brain power and how companies can gain a competitive edge by attracting competent employees is becoming increasingly important," Rytsölä stresses.
Varma's journey to become a responsible investor started years ago with passive risk mitigation and has progressed to active steering. Tobacco and nuclear weapons were excluded from direct investments already in the early 2000s. Among the recent steps that have been taken is making responsibility a visible part of Varma's corporate governance.
In Rytsölä's view, the discourse on responsible investment has taken a positive direction also in the public sphere. Alongside blacklists and "bad guy" companies, there is growing interest in the profitability of more responsible companies and whether responsibility is nothing more than branding.
At the same time, he points out that responsibility in investment is susceptible to greenwashing.
"It's easy to sign pledges and be part of acronym organisations," he says. "It's much more challenging to genuinely incorporate responsibility in the investment process. The buy-in must happen throughout the organisation, and tools to help assess future cash flows must be created for portfolio managers, for instance."
Rytsölä stresses that responsibility is one of the important parameters of investment.
"But it's no holy grail that would make investing easy," he adds.
Regulation in sight
In March, the European Commission issued recommendations to promote sustainable finance and to encourage the financial sector to mitigate and adapt to climate change. The action plan covers a wide array of measures, by which, for instance, capital can be channelled to sustainable investments. Guidelines for institutional investors are also in the pipeline.
Rytsölä hopes that regulation does not assume too much power in developing responsible investment.
"The sector has been developing its operations through self-regulation for years now. It is important that investors themselves realise the importance of responsibility, and that it is not something they do just because someone tells them to. Consumers' claims also continuously drive companies' responsibility," he concludes.
Reima Rytsölä's responsible investment theses:
- Responsible investment is here to stay
- Responsibility is not in conflict with returns in the long term
- Investors and companies have the opportunity to make the world a better place
Read more about responsible investment at Varma