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Responsible investing has become mainstream

What has made responsible investment so popular in recent years? As we all know, industry and business operations have an impact on climate change. Investors, on the other hand, are interested in the impact of climate change on businesses. These two viewpoints are naturally correlated. Companies with adverse climate impact are faced with ever-tightening regulation, and their appeal to investors will likely plummet. Companies with climate-friendly products and services may see the opposite scenario, because regulation will favour them, and the money will follow.

Let’s step back in time some 15 years. The UN Principles for Responsible Investment were fresh out of the oven and at the centre of attention. Finally, there were principles that weren’t based on the negative, exclusionary approach that had been frowned upon by many. The following years saw quiet but steady growth in responsible investment. A growing number of institutional investors began to ask after the responsibility of investments. It is unclear whether this was from genuine interest and recognised potential, or externally dictated demands to “do something”. Nevertheless, investment organisations began to enlist ESG specialists, who established processes for the consideration of ESG matters in the organisations’ investment operations. More and more customers were offered insight on the different strategies of responsible investment.

Today, responsible investment is fully mainstream.

It isn’t a wonder investors have perked up their ears, as climate change affects companies’ finances – either positively or negatively. The severity of climate change has raised responsibility into one of the most talked-about and significant phenomena in the investment world. Noteworthily, it is also one of the few investment-related phenomena to have grown to its full strength in Europe instead of the United States. This is something to be proud of.

Regulation typically follows practice, and this is also happening in the sphere of responsible investment. It will be interesting to see how well the EU pulls through in its objective of harnessing regulation to steer capital into climate-friendly business. It is far from obvious how this can be accomplished without breaking the elementary link between risk and return in the market. Green investment does not automatically mean smaller risk. In addition, stock exchange rarely involves capital moving much further than from one investor to another. Regulation should therefore be targeted where large-scale financing actually takes place.

Climate-related details currently take up the most airtime in the topic of responsible investment, and I believe that without climate change, responsible investment would have remained a relatively marginal phenomenon. Now that climate and environmental issues are already beginning to be fairly well handled in investment decisions, focus is more frequently turning to other issues. The social aspect of ESG has absolutely gained more attention in the wake of environmental focus than it otherwise would have.

Responsible investment developed from ethical exclusions to other strategies. However, exclusions are seeing their second coming especially in relation to fossil energy sources. Investors are increasingly excluding fossil fuel companies from their decisions. The difference compared to the past is that this exclusion is not based on ethical but financial reasons. Still, the threat of exclusion serves to push change into the right direction. 

This column is part of a series where Finance Finland member companies talk about responsibility in the financial sector.


 Author

​Mika Leskinen

Chief Investment Officer, Head of ESG at FIM/S-Bank

@mikapleskinen

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