Investment

Regulatory and fiduciary duties

Are institutional investors and financial intermediaries legally required to consider ESG factors when making investment decisions? Must any additional non-financial principles and objectives be considered?

Currently, Finnish law does not require institutional investors and financial intermediaries to consider ESG factors when making investment decisions. However, most institutional investors and financial intermediaries have signed the UN Principles for Responsible Investment and are also taking into account the sustainable development goals in their investment decisions.

Voluntary standards and best practices

What voluntary standards and best practices are commonly followed in your jurisdiction with regard to integrating ESG factors and other non-financial principles into investment decisions?

Integration of ESG factors and other non-financial principles into investment decisions is a relatively new phenomenon within the Finnish investment landscape, but institutional investors, such as large pension insurance companies, and established asset managers are leading the way. Traditionally, responsible investment strategies employed in the Finnish investment landscape have been focused on exclusion. For example, institutional investors have typically refrained from investing in industries that engage in socially questionable activities (such as tobacco, weapons and alcohol), but lately the Finnish investment market has seen increasing diversification in approaches to responsible investing, and besides positive and negative screening, investors have embraced new methods, such as shareholder engagement, ESG integration and impact investing. Especially for the pension insurance companies, shareholder activism is a big part of sustainable investing, and the largest ones in Finland strive to bring changes in their investees through an active dialogue with the company’s management. Considering that Finland is small economy with few large listed companies, institutional investors are also able to achieve good visibility for shareholder activism. Traditionally, the Finnish corporate and investment landscape has been shaped by large players, and it is to be expected that these same players will also assume a leading role in the integration of ESG factors into investment decisions.

Measurement, reporting and disclosure

What voluntary and statutory measurement, reporting and disclosure frameworks are followed in your jurisdiction with regard to ESG and other non-financial factors?

Apart from the Non-Financial Reporting Directive 2014/95/EU, there are no statutory measurement, reporting or disclosure frameworks in Finland. However, certain ESG factors have been taken into account in the recommendations of the Finnish Corporate Governance Code 2020, such as the composition of the company’s board of directors with relation to gender. The Corporate Governance Code is applicable to all companies listed on Nasdaq Helsinki, and according to the Rules of the Helsinki Stock Exchange, all issuers of shares that are traded on the official list must comply with the Corporate Governance Code in accordance with the ‘comply or explain’ principle.

Instead of statutory frameworks, there are several voluntary frameworks applied by Finnish companies which address ESG or other non-financial factors. Voluntary frameworks are rapidly growing their significance in the Finnish market, as this type of disclosure provides a good tool for companies aiming at continuous dialogue with all their stakeholders. For example, various large Finnish companies are reporting on their climate exposure in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures, and many are also applying the UN’s sustainable development goals in building their disclosures.

Certain Finnish large cap companies have signed the Global Reporting Initiative. There are also a number of Finnish signatories of the UN Global Compact, mostly multinational corporations or large cap companies, which report annually on their sustainability and social responsibility policies. In the Finnish investor community, a significant number of Finnish investment companies and asset managers have signed the UN Principles for Responsible Investment.

Ratings, indices and guidelines

What ratings, indices and guidelines are used to benchmark adherence to ESG principles and other non-financial factors in your jurisdiction?

There are no uniformly approved ratings in Finnish companies to benchmark adherence to ESG principles. The calculation methods differ and, consequently, the results are not comparable. With respect to environmental factors, typical variables subject to assessment include climate change related work and efforts, energy efficiency, biodiversity and the circular economy, while personnel policy, human and labour rights, product liability and consideration for local community are typically assessed as regards social factors. In relation to good governance, the most commonly assessed variables include anti-corruption and anti-bribery activities, independence of the management and tax footprint. Many Finnish companies have also been awarded the Key Flag Symbol, which demonstrates domestic production and the company’s positive effects on employment in Finland.

There are also various certificates indicating a company’s adherence to ESG factors. With regard to infrastructure and buildings, the Building Research Establishment Environmental Assessment Method classification is the leading sustainability assessment method in Finland. It is based on common European norms and provides independent third-party certification of the assessment of the sustainability performance of individual buildings, communities and infrastructure projects. In addition, the Leadership in Energy and Environmental Design, developed by the US Green Building Council, is applied widely in the Finnish market. It encourages the construction of energy and resource-efficient buildings that are healthy to live in.

As regards guidelines, Nasdaq Helsinki has published a global environmental, social and governance reporting guide for public and private companies, which is largely entrusted by the Finnish companies when navigating with the ESG. In addition to guidelines, there are various associations and organisations that offer counselling and consulting to Finnish companies in ESG matters.

Incentives, benefits and financial support

Are any fiscal incentives or other benefits available in your jurisdiction to encourage institutional investors and financial intermediaries to integrate ESG and other non-financial factors into their investment decision-making?

In Finland, there are no fiscal incentives or other benefits available that would specifically encourage institutional investors and financial intermediaries to integrate ESG factors into their investment decision-making. However, electricity production has recently been subject to a tax reform, creating a more beneficial environment for the industry and also giving importance to sustainability and environmental factors. Furthermore, certain products, namely cigarettes and other products, considered harmful to people or the environment are subject to higher taxation in Finland.

Similar methods are yet to be implemented with regard to investors’ investment decision-making. While ESG factors are currently more of a reputational question, they will likely become more eminent in the future. For instance, some of the leading Finnish pension insurance companies already exclude direct investments into tobacco companies and gun manufacturers producing controversial weapons from their investment portfolios, and in the future, this approach will also be applied to coal and oil drilling.

Impact investing

In addition to ESG factors, what considerations and practices are commonly integrated into impact investment strategies?

Impact investing is a relatively new phenomenon in the Finnish investment landscape. The Finnish public sector is one of the world’s largest per capita, and the economic pressure of supporting an aging population is further increasing the need for alternative models of financing. Under these circumstances, impact investing is being looked at as one solution to the challenges of the Finnish welfare policy.

Social impact bonds (SIBs), are a novel form of impact investing, and Finland has already seen a few SIBs being offered to institutional investors. SIBs are a good example of ‘new public management’, in which innovative solutions to growing public-sector economic challenges are sought in private sector operating models. SIBs bring private-sector efficiency indicators and assessment policies into the public sector, and instead of paying for output, the public sector pays for outcomes and impact. The Finnish municipalities struggling with efficiency and outcome requirements have shown a great deal of interest in testing whether private-sector models could bring the desired added efficiency to the public-sector economy. The investment periods of SIBs are typically long, even up to 10–15 years, so investors need to have a long investment horizon. While impact investments typically seek moderate profits, the relevance and social benefit of the investment is a major factor for many Finnish investors, especially institutions.

At the early stages, Finnish SIBs are directed at professional investors, typically institutions. However, Finnish asset managers have their sights set on one day being able to offer these instruments to the general public in Finland. How well SIBs would work for in the retail universe is certainly a key question. Even if the landscape is truly interesting, it is a fact that a lot of pioneering work is required before SIBs will be ready to be offered for the retail investor.