How can traditional finance mechanisms be put to work to address sustainability challenges? According to many experts, part of the solution to climate change lies in new financing forms, and accordingly the issue has been a recurring (and hotly debated!) topic at sustainability conferences as of late. Two weeks ago, our PhD student Emilia Cederberg went to a seminar showcasing some practical examples.
As a PhD student at Misum and the Department of Accounting, and writing my dissertation on sustainable investing, one of the key perks of my job is that I “have to” follow the developments in the ESG (environmental, social and governance) field of investment. Two weeks ago I got the opportunity to join a lunch seminar where Storebrand/SPP presented their new so-called fossil-free funds.
Any endeavor to expand a portfolio offering to integrate sustainability criteria in a reliable, profitable and credible way requires a lot of quantitative work. During the presentation, Storebrand/SPP offered an exciting story of the process of deciding on the criteria for the new funds: What does fossil-free really mean, and how can it be measured? Which emissions should be included? What data is available? How can we measure improvement over time?
At the same time, fiduciary duty towards asset owners (anyone who invests, really, for pension or other savings) requires careful consideration of the impact on returns. Excluding companies that are otherwise part of a comparative market portfolio implies that the new product is less diversified, and for a sustainable investor a balance has to be struck between substantial improvement of the carbon footprint while maintaining low risk and fund fees. Being interested in the both quantitative and qualitative analytical perspectives on sustainability and investment, the seminar offered many insights into the technical complexities involved in this type of effort.
The seminar also covered Storebrand’s long-standing involvement in green bonds. The logic behind a green bond is the idea of leveraging the structure of the debt market to address specific environmental challenges and solutions. Issuing a green bond, a company goes to the market to get financing for specific environmental investments. As discussed at the seminar, one benefit for the lender – beyond the potential environmental improvement – is increased transparency and disclosure, since the money is earmarked for a specific project. The lender thus now exactly what the funds will be used for. According to SPP/Storebrand, they decided several years ago that although the market was not very mature yet – and many of their peers were waiting for stronger standardization – they would take the lead. Now, a few years later the market is booming. For anyone interested in the link between global challenges and capital markets, this is a fascinating development.
Written by: Emilia Cederberg, PhD student at Misum