We interview Mathias Leijon, Head of Corporate and Investment Banking at Nordea on why ESG matters for both investors and corporates.
In Nordea Asset Management, ESG has been applied successfully for years. Corporates are now starting to realise that sustainability is crucial not only for image and perception, but for actual, long-term operating and financial performance. Nordea wants to take a leadership position within ESG also outside Asset Management, to support our corporate customers, to pursue new business opportunities, but also to reduce risk in our own balance sheet.
Mathias, how would you describe the development of ESG and its key benefits?
Concepts such as ESG (environmental, social and governance), CSR (corporate social responsibility) and SRI (socially responsible investments) emerged from ethical investments. The problem with the concept of ethical investments was that although the investor could sleep well at night with a clean conscience, the investment was most often a very poor one. It was expensive and it underperformed.
What investors desire is an alternative where the soft parameters, such as ESG, match the hard ones, the financial parameters. In other words: an investment product that can be sustainable without sacrificing a good yield. Within the area of asset management we are already there, and Nordea is leading the way with its STAR concept. But for a corporate issuer of bonds or equity to be able to offer sustainable investment alternatives, it needs to accept some initial investments to achieve the key requirements. There will be costs for qualifying to be considered sustainable. These costs are long-term investments to create a more robust business model.
Securing a strong ESG performance will, for a company, over time mean avoiding problems and incidents related to sustainability. This should ultimately create a competitive advantage, both by reducing – or even avoiding – ESG-related costs, and by reducing volatility in the cash flow generated from the absence of such major incidents. Over time, this should reduce the risk premium investors will apply to the company’s cost of capital.
What do you think are the driving forces behind the initiative?
I would say the main driving forces are:
1. We will take responsibility in assisting our customers in their quest to become even better.
2. From Nordea's perspective we will reduce the risk in our balance sheet over time.
3. This is an area that creates a lot of pride both with our customers and our own staff.
4. And finally, we contribute to something of greater good.
The reason we choose to make this investment now at Nordea is because we believe the timing is right. It is happening right now, and we have a chance to position ourselves as part of it and become no. 1 in this field. We also have a responsibility as the largest bank in the Nordics to help our customers. With the strongest Nordic DCM platform, highlighted recently by 12 different no. 1 positions in rankings by Dealogic, as well as the indepth knowledge of ESG in Nordea’s asset management business, we could really accomplish lasting change.
Just a few years ago there were still large companies who did not grasp the importance of ESG and there was a lot of confusion about what it really was. This included myself. Today, most corporates and investors want to be part of it. There is now widespread understanding among companies that this creates value, not least by avoiding value destruction. ESG is not an issue until it has become an issue. And when it has, it can be very costly indeed.
Has the general perception of sustainable investments changed over time?
The big change did not happen that long ago; I would say it came three to five years ago. Before that, the general perception of sustainable finance, or ESG, was mostly a “do good” or charity mentality. But ESG is not about that.
ESG is about investing in companies that meet our ESG criteria, covering environmental protection, human rights, employee rights and anti-corruption. The relative importance of the various criteria will vary by company. For a company where labour costs weigh heavily in the P&L, it might, for example, be particularly important to invest in education, corporate culture and healthy general working conditions. If the company does not, employee turnover will most likely be high which could have significant negative consequences.
Do you see sustainable finance mostly as a question of perception and image for the companies today? Or are there other, commercial, reasons, which drive the companies to work with these issues?
Earlier, the incentive for driving ESG issues in companies related to image and perception. Today, I would say the focus has shifted to more commercial aspects. Companies have realised that it is a competitive advantage to engage in ESG. Another aspect is that demand for sustainable products and services, such as ecological products, has grown immensely. It would not have been possible 20 years ago to earn the same amount of money on ecological goods.
Would you say Nordea has a particular responsibility to adopt and drive ESG, as the biggest bank in the Nordics?
Yes, of course we have a responsibility to drive this. In a way, we have already taken some responsibility, as I would argue Nordea Asset Management is the most competent and most experienced unit of its kind in the Nordics in this area of expertise. And we are making a major investment in this area right now. But I would also highlight that this is a shared responsibility between the bank and corporates; we cannot do this alone.
What is the most important thing we can accomplish by offering sustainable products? Better returns on our customers’ investments? Being part of creating a better society? Strengthening the image of Nordea?
All of these are important. To invest in sustainable assets gives a better risk-adjusted yield, which is beneficial both for the bank and customers. As a lender, we decrease the risk on our balance sheet, and the customer, the corporate issuer, gets a lower funding cost. Another important thing is that this kind of investment and commitment creates pride among our employees, which is of course positive.
What kind of sustainable banking products will be offered in the future do you think? Today we have “green bonds” and investment funds that exclusively invest in securities that are compliant with ESG criteria. Can sustainability be a feature in more traditional banking products as well, such as loans and transaction services?
We are currently looking at many different products across the business areas in the bank. A lot can be achieved by creating different hybrid instruments, but you have to test your way forward, see which ones will gain acceptance. Sustainability bonds are an example of such a product with at least one Nordic issuer in the market so far. The future will tell if sustainability bonds will develop further or if the interest among investors is too low.
But the concept of sustainability is here to stay, and in general we have seen a major change of attitudes amongst customers. If there is real demand, I am sure we will aim to offer green loans in the future.
You are already in a position where you can influence the work being done in this area at Nordea. But if you were given totally free reign to shape how Nordea should work with sustainable finances, would you do something differently?
I would do exactly what we are doing today. We have a great team of immensely talented and committed individuals and I feel we have great support for what we are doing. We are all excited about the opportunity to make a lasting difference.
Read more in Nordea on Your Mind (pdf, 4 MB)
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