Financial industry overview
At the end of 2015, the Finnish financial market comprised 281 credit institutions including deposit banks, finance houses, credit card companies, mortgage credit banks and others.
The Finnish banking sector maintained good results in 2015 and increased its capital adequacy, despite the challenging market environment and economic situation in Finland, which required the sector to adapt its business models and strategies. Influencing factors included low or even negative market rates, stricter regulation, increasing digitisation and weak national economy development. However, even under these difficult conditions, the strength of the Finnish banking sector has enabled the real economy by supporting growth of lending.
The insurance sector in Finland also achieved good results in 2015, with equity and real estate investments yielding the highest returns. However, the premium income development was negatively impacted by the unemployment rate, which did not show signs of recovery throughout the year. At the end of 2015, the Finnish insurance market included 55 licensed insurers with 38 specialising in non-life business and reinsurance, 11 in life insurance, and 6 in statutory employee pension insurance.
Characteristics of the SRI market
Finland remains a relative newcomer to the SRI space compared to the other Nordic countries, but since 2013, the Finnish SRI market has grown in size and importance. As of June 2016, Finsif had over 60 member organisations, including not only all of the largest pension funds and asset managers, but also a wide variety of other institutional players such as trade unions, endowments and municipalities.
All of the largest asset managers and asset owners have started to – or at least taken the first steps towards – initiating carbon footprinting and reporting for their investment portfolios. Moreover, the largest fund management companies have already started or will start to report the carbon footprint for mutual funds before the end of 2016. These actions followed commitments made under initiatives such as the Montreal Carbon Pledge and the Portfolio Decarbonization Coalition, which mobilises investors to measure, disclose and reduce their portfolio carbon footprints. Investors signing the Montreal Carbon Pledge, launched in September 2014, commit to measuring and disclosing annually the carbon footprint of their portfolios.
In 2016, the Finnish pension system communicated on its commitment to take environmental considerations into their investing. Varma, Finland’s largest statutory earnings-related pension insurance company, has calculated the carbon footprint of its own investments in listed shares, corporate bonds and real estate assets. Their goal is to reduce the carbon footprints by 25%, 15% and 15% percent respectively by the year 2020.
During 2015, investors strengthened their ESG capacities by recruiting more ESG professionals, or putting in place new ESG departments or teams. Key drivers for these developments are certainly an increasing client demand for SRI and related SRI market growth, carbon footprinting and reporting commitments, new engagement strategies and competitive advantage, as well as pressure from media, NGOs and other key stakeholders. Asset owners and asset managers are now using more external ESG data and services than ever before. This is partly linked to the carbon footprint trend, but also to the increasing need for broader ESG data.
Impact Investing has also reached the Finnish market. There have been product launches and other events linked to this topic (for example as part of Finsif’s anniversary event in June 2015). In addition, the Finnish Innovation Fund Sitra has been actively promoting the field of Impact Investing, focusing on developing the first Finnish social bond. Through another project, Sitra has been driving carbon footprinting among Finnish investors, for example by providing a free carbon footprint calculator for Finnish listed equities, developed in cooperation with the Southpole Group.
SRI market and strategy overview
Two of the most popular strategies highlighted in our previous Study, Norms-based screening and Exclusions, are leading again this year. Norms-based screening witnessed a very significant increase of 72% reaching AuM of €111.8 billion. Exclusions increased by 45% and it is interesting to note the sharp focus of categories that interest Finnish investors. Tobacco exclusion is at 50% followed closely by nuclear energy at 42%.
There is a small decrease in Engagement and Voting. However, this is due to the absence of a large Asset Manager whose assets this year were allocated to the Swedish market.
The Finnish market opens its doors to Impact Investing for the first time, a strategy which has been gaining traction amongst a number of consultancies and state-owned investment companies.
Equity represents a large proportion of SRI assets in Finland, closely followed this year by venture capital and corporate bonds.
Sustainability themed investments have witnessed an interesting growth in the country, largely due to the change in strategy by one local asset manager and the presence of a new player specialised in timberland investments.
A key driver for growth is derived from the appetite of institutional investors and the pension fund space clearly favours SRI.
The key pieces of national legislation influencing the Finnish investment landscape are the Companies Act, the Employment Contracts Act, the Employment Accidents Act, as well as social security and legislation and the extensive environmental protection legislation in place. For instance, the Finnish Accounting Act states that company financial accounts need to be accompanied by an annual report containing information on employment and environmental issues that can affect the company’s economic performance.
Finland still has no direct legislation in place focusing on sustainable investment. In 2016, however, the EU Non-financial and Diversity Disclosure Directive with its supporting changes is being transposed into Finnish legislation on a comply or explain basis. Other pieces of SRI-related EU legislation are also implemented in Finland, and the government supports the voluntary implementation of the OECD and UN guidelines on sustainable business conduct. As regards self-regulation of stock markets and listed companies, there are many good governance guidance documents for listed companies, which non-listed companies often use voluntarily. For instance, the Finnish Securities Market Association, whose main task is to promote and define good securities market practice, approved a new version of the Finnish Corporate Governance Code for Finnish listed companies in October 2015. The recommendations included in this code are complementary to Finnish law and include a new guideline on diversity policy whereby companies are recommended to define a diversity policy and report on their objectives regarding the representation of both genders on the board and the measures taken to achieve those objectives.
Furthermore, the Finnish government has recently developed CSR guidance for wholly and partly state-owned companies. The latest guidance document is the Government Resolution On State-Ownership Policy from May 2016 and focuses on changes necessary in the State’s ownership strategy in order to make sure that CSR is at the core of state-owned companies and that they contribute to sustainable development, among other goals. In addition, companies are encouraged to apply to internationally recognised CSR guidelines and principles such as the OECD Guidelines for Multinational Enterprises, the UN Global Compact, the ISO 26000 Social Responsibility Guidance Standard and the UN Guiding Principles on Business and Human Rights.
Another notable development which impacted the Finnish SRI market was the introduction of a tool – evaluating how well the companies in a fund’s portfolio manage the ESG investing factors relevant to their industries – by Morningstar Sustainability rating for funds.
In a separate development, the Nordic Ecolabel has gathered Finnish investors to comment on a new label they are preparing for mutual funds.
The Finnish equity market continues to be a small and concentrated market, both in terms of investors and listed companies. There are only 125 companies listed in the main market, with the largest three companies representing on average 80% of each sector. The five largest pension funds together with the five largest asset managers manage a total of around €175 billion, a dominant market share. Given the nature of the Finnish market, is fair to estimate that Engagement and Voting will remain highly valued among domestic investments.
Like other Nordic countries, Finland scores relatively highly on development indexes, such as the Corruption Perception Index, the Freedom of the Press, Equality and Diversity Indexes. Therefore, one can argue that sustainable development and corporate responsibility come naturally to Finnish investors from a moral standpoint. This explains the prevalence of Exclusions and Norms based Screening as well as the high penetration of responsible investment in general in the Finnish investment market.