By Hamlin Lovell, NordicInvestor
“OP’s sustainable investing approach robustly integrates ESG to support investment decision and match client values and objectives for and risk and return. True active ownership should make our expectations visible to companies we invest in. It is a tool for real world impact even though we cannot measure the impact,” declares Annika Esono Manninen, Head of ESG at Finnish pension fund OP Asset Management. Before joining OP in 2018 her prior roles included being an ESG consultant at MSCI and she also held other investment consulting roles.
Double materiality and dynamic materiality in context and in flux
“The role of double materiality varies. Where the objective is to integrate ESG from a risk perspective, financial materiality will be most relevant. Where products are providing a specific solution, it is more important to understand double materiality,” explains Manninen. Materiality priorities also change: “Priorities are not always easy to define and it is essential to understand dynamic materiality with respect to double materiality: both financial and impact materiality can change over time,” she points out.
Regulations still evolving and need more clarity especially SFDR classifications
Regulations are always changing and are not yet finalized. “We need to spend more time understanding regulations, their implementation and how to integrate ESG policies, but also need to be prepared for changes. There is still a lack of clarity on SFDR definitions, which leaves asset managers to develop their own definitions. Product classification could be a helpful advance on the disclosure regime. ESMA will bring in naming guidelines from 2025 for existing and new products, adding another layer of complexity,” expects Manninen.
It is important to distinguish amongst themes, disclosure classifications and labels. OP does classify funds as SFDR Article 8 or 9 but does not label them as such since the SFDR is a disclosure regime and not a labelling regime. “We have named thematic products based on themes such as OP-Climate, OP-Clean Water, OP-Sustainable Bond Fund etc which must adhere to the percentage of sustainable investments required and stay within their defined theme. We are waiting for the new SFDR labelling regime to add other labels,” she explains.
The Corporate Sustainability Reporting Directive (CSRD) keeps getting delayed but there are high hopes for it: “ (CSRD) could also become important in improving disclosure from investee companies, but we still await guidelines for financial institutions. This can also feed into SFDR,” she adds.
SFDR Article 8, “8 Plus”, 9, taxonomy and sustainability
The majority of funds invested in are reporting under SFDR Articles 8 or 9. Certain Article 9 products have clear strategies and objectives. Most of those under SFDR Article 8 are “8 Plus” and also have some degree of taxonomy alignment though it is hard to precisely quantify. “We do not set any minimum for taxonomy alignment but do set some minimum for sustainable investments. Quality user friendly data is not yet widely available for investors and there can be mistakes in it. This means that we may already be invested in companies with high taxonomy alignment but do not yet have proper data and so have to make estimates,” says Manninen.
The taxonomy is now expanding from its first two objectives, climate change mitigation and adaptation, to four more: water, marine resources, the circular economy, pollution, and biodiversity, which increases the data demands.
Transition: investment and financing journeys
The use of best in class approaches varies between strategies and products. “Some funds seek best in class within sectors and industries, but others set absolute minimums,” she points out.
Future transition is more important than current carbon performance for OP. “We just updated our public policy document, concentrating on transition and the investment and financing that it needs. Some companies may have high emissions but have defined a clear pathway to get to net zero, and we want to be sure to support their transition journey,” says Manninen.
Evolvling exclusion lists
OP’s exclusion list is regularly reviewed in light of the changing environment. Some excluded firms might become investible again and other currently investible firms could become excluded as the criteria become more clearly defined.
In addition to tobacco, there are fossil fuel companies e.g. coal companies lacking climate targets and others in upstream sectors with no clear transition paths. The criteria are becoming more nuanced in terms of sub-sectors and whether engagement is underway. “For example, fossil fuel companies might be excluded if they are lagging in transition – or even obstructing transition,” says Manninen.
OP’s approach to defence investing has not really changed in response to geopolitical conflicts. There has always been a robust view on controversial weapons.
Active ownership voting and engagement growing
OP have been proxy voting for a long time. In the first half of 2024 they attended over 900 AGMs, using third party advisers to help define policy and voting decisions outside Finland. In Finland most meetings were in person.
Engagement around norms violation has been expanded, covering more companies. The number of engagements is reported. More direct dialogue, voting and collaboration are all increasing the number of discussions.
Direct climate engagement focuses on engaging with a group of companies on net zero by the end of 2025. The companies being prioritized have not yet aligned with net zero but OP sees potential for fruitful engagement.
Collaborative climate engagement can be via Climate Action 100 Plus and SBTI.
OP generally sees more scope for additionality in emerging markets, though this does depend on the topic and exact type of impact.
Cleaning and analysing raw data
Most of the data still needs to be gathered from external data providers, though some of it is gathered directly, for private markets, infrastructure and other direct holdings.
“This can require more manual analysis for calculations and aggregation. Portfolio managers need to have the tools to look at good governance, and sustainable indicators. We gather the data and curate it for the portfolio managers. We recently developed a human rights data tool, curating certain data points that are most relevant for human rights for portfolio managers to readily use,” says Manninen, who has noticed some data providers using AI or web scraping, even though OP’s current providers have not yet informed OP that they are using AI.
External managers have made great strides in improving their reporting. “Everyone is now on a level playing field and we can access and compare information we did not get 5 years ago. However, private companies and funds of funds remain a challenge. They have not made a massive difference. These are however fairly small allocations,” says Manninen.
Harmonising reporting standards
Multiple regulatory and voluntary reporting frameworks and standards can be hard to compare. “They should become interoperable. The reports are not always user friendly for clients to understand, especially for SFDR product level disclosure formats defined by the EU. The PAI reports are often based partly on estimated data. Things are still developing and there is no perfect solution yet,” finds Manninen. “The reporting burden is massive for investors and corporates, and it would be ideal if the data was harmonized across frameworks. We try to make the data more digestible and user friendly for our own reporting,” she admits.
Decarbonisation targets accelerating
OP has already hit its interim Paris alignment target, having halved the carbon intensity of funds.
There is actually a hierarchy of five levels related to alignment: “not aligned”, “committed”, “aligning”, “aligned” and “net zero”.
Targets for equity and bond holdings defined in terms of the third stage, aligning, are 65% by end 2028 and 75% by end 2030 to be in the process of aligning with or already aligned with net zero. Currently 56% are aligned so there is some way to go.
There are also targets for associated active ownership.
The decarbonization targets also tie in with exclusions: fossil fuel exclusions are moving upstream to exclude those without credible targets.
This article will feed into NordicInvestor’s upcoming special report on Sustainable Investing
