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What Is Impact and How Important Is The Role of Banks in Driving Sustainability?

Photo Credits: Nordea Open Insights

This time we sit down with Jacob Michaelsen, Head of Sustainable Finance Advisory at Nordea, to talk about ESG investing, banks’ responsibility in driving a change towards sustainable finance, and much more. Read now and understand the sustainable investing world from the inside.

Thank you for talking to us today Jacob, as an expert in the sustainability finance field. I want to ask you some questions on ESG investing. Could you tell us about your position as head of Sustainable Finance Advisor at Nordea?

I'm responsible for a unit called Sustainable Finance Advisory, within Nordea’s investment bank. As such, my colleagues and myself are responsible for the broader advisory and discussions around sustainable finance with our clients. The clients we cover tend to be the largest corporate and institutional clients. We are a bit more geared towards the large cap end of the spectrum, the big pension funds and the big asset managers and the likes. I'm not specifically focused on the investment side or the investing side in detail. We have an asset manager at Nordea who obviously are much more into detail with that and work with ESG integration on a daily basis. My team members’ coverage is on bonds and loans, and what we are looking at with regards to broader sustainability trends and developments predominantly focused on the larger companies. We cover many of those discussions and sustainable finance in particular in investing and sustainability related aspects of the investment discussions are also part of that.

Do you think Nordea is seen as a strong advocate for sustainable finance?

Yes, at least we believe so. But I'll let you judge whether you agree or if the outside world agrees with that, but obviously Nordea is a large institution with about 30 thousand people. I think it's fair to say that most global banks today will recognize the importance of sustainability. For banks in particular, sustainable finance is perhaps a more tangible area within the sustainability discussion where we are more relevant to our clients. We're not environmental consultants, but we are a specialist on sustainable finance and what that means to our clients. Clearly, it's an area we are focused on and investing into. My colleagues and I are inundated with requests from clients. I expect that our team will grow with time as well.

I think it's a huge trend nowadays. People want to live more sustainably, so they also want to make sure they invest their money in a sustainable way. But do you think that the change has to happen from the investor side, or should it be more on the investee side or is it both?

I would say it’s both. I think it would be relevant for yourself and colleagues to try to tap into the discussions in the European Community around sustainable finance. The European Commission's Sustainable Finance Action Plan. And that has really been dictating a lot of what's happened in the market. I would say that the Sustainable Finance Action Plan, which was announced in March 2018, is the most significant development within the financial markets on sustainability since the Paris Agreement in 2015. So, there's a lot of knock-on effects of what's coming up from that. That obviously dictates to a large extent what we are focused on as well.

We will definitely look into that. Do you have an overview of how important it is for a typical impact investor that you get competitive returns versus how important is it that they are seeing gains or impact results?

Impact investing is quite a hot topic. Then the term itself impact investing perhaps is still a bit interpreted in different ways. Some will claim that a bit more holistically and others will be very dedicated to it, saying that we are impact investors and put their priorities on impact above financial returns. But most investors still do that with the argument of saying, well, we believe fundamentally that's a positive impact, it's also good for financial returns in the long run. It's obviously the constant discussion of what you call short termism versus long termism. There are a number of more dedicated investors focused on impact investing, and they tend to be a bit smaller in scale to sort of integrate it fully.

So, can you give a big picture view of the current trends that will shape the future of impact investing?

If you ask specifically about impact investing, I think there is a lot of vagueness around the term and a lot of different actors approaching it from different perspectives. So, ask the question a number of different ways and you get a lot of different answers. But I think in general, as I said, the Sustainable Finance Action Plan is an important development more broadly for the financial markets that will bring about this discussion in more detail. And in general, that will help drive the broader discussions on sustainability in the financial markets and in the investment decisions, which will invariably also support what you would call more “detailed” impact investing. If you look more specifically on that, I can't give you too many details, more than I would say that impact investing requires you obviously to have an understanding of what impact is. Impact, typically referring to the non-financial impact but the sustainable impact, the environmental impact or whatever social impact. I think it's fair to say that before you can have a discussion on that, you need to understand what impact, you need to understand what the scene is. Meaning, you need to have an understanding of the context within these different areas, so called “themes”. If you want to have an impact in biodiversity you can't just buy any company that claims to have a strong focus on biodiversity. You actually need to understand what does it mean to be to have biodiversity? What does it mean that a company can impact and could be a positive driver of biodiversity? Is impact the lack of negative consequences or is it the additional positive consequence?

Nonetheless, the problem with sustainability is that it’s always so context dependent. There's probably an area where you won't find any real simple answers because there's always, have you considered this? For example, offshore windmills, for instance, windmill parks, obviously renewable energy coming from windmill power is great, but what about the impacts on biodiversity? What about the impacts on the local environment, having noise pollution? If you've ever been close to a big windmill, you know that it actually creates a lot of noise. These are all aspects that need to be clearly better defined for us. We have to start to work more fundamentally with the impact and impact investing.

Yes, I agree. It's a very difficult thing to define sustainable investing. Also, a lot of companies are basically greenwashing, claiming they're sustainable to possibly attract more customers. Talking about the future of sustainable investing do you think that current situation (Covid 19) impacted the sustainable investment market? If so, how?

I think it's fair to say that Covid as a general consequence has had a fundamental impact on the global economy. You can see it has affected impact investing and sustainable investment, just by the simple nature of having to reshape the entire global agenda and economy. I think it's also fair to say that social matters have also increased in prominence as a result of the global crisis. More investors, I think, are starting to realize how they should incorporate that as well. I think in both the short term and the long term the change will be positive for the field of sort of sustainable finance and impact investing. But again, there are so many moving parts to this discussion and it's difficult just to pinpoint the impacts on for instance Covid.

And do you think that Nordea has a responsibility in driving a change towards a sustainable future?

You can say so. It depends on how you look at it. What we believe our responsibilities will be, what's our clients and what's the market's perspectives on this?

If you will look at the banking industry, I think it's fair to say that over the last 10-20 years we've really seen a deterioration in society's appreciation of banks and the role of banks. I don't know if you recall, but it actually used to be that before the financial crisis banks were pretty well regarded as members of society and people wanted their kids to go and work for banks. Obviously, I think we've done a great job in squandering that perception, that responsibility and that place in society.

I think it's quite an opportune moment. Maybe it's the last call for the financial industry in terms of claiming its rightful place in society and being a valued member of society. Possibly we can now be part of the solution, driving forward the market for sustainable finance, with the belief that maybe it's not sustainable finance that is going to solve climate change but certainly we are part of the solution. We need to make sure that the financial markets are not seen as being obstacles to transition to a low carbon economy. That we can access to a certain extent, facilitate that, remembering essentially that the role of the financial market is as the oil in the machinery of the global economy. If we are able to help support that transition by coming up with financial solutions, financial products that help channel money towards sustainable investments and help mitigate the risk of these investments. Then obviously that's a welcome opportunity for us to be value adding and to play a role in society. I think that's absolutely the big opportunity here so that we can have an opportunity to redefine and renegotiate our contract with society.

From that perspective, clearly as a commercial entity, we should welcome that with open arms and the fact that our clients are also finding themselves in situations where they need support and where they need input on these matters. And clearly, we also have just simply a commercial opportunity to drive this. Obviously, I'm biased in terms of what I work with and what my responsibilities are, but I think it's fair to say that as Nordea we're very excited about the developments and are humble and eager to continue driving the developments of that market.

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