As part of Varma’s updated Principles for Responsible Investment, climate change has been given more weight and emission-generating industries are subject to enhanced monitoring.
At the same time, Varma has updated its list of excluded investees, i.e. its investment blacklist.
“As owners, our priority is to engage with the company directly by discussing climate risks and by requiring responsible business operations. This improves our chances of permanently influencing companies’ operations. There are, however, industries that we do not want to invest in for ethical reasons,” says Varma’s Executive Vice President of Investments, Reima Rytsölä.
Varma excluded tobacco and nuclear weapons from its investments already in 2004. Varma also does not invest in companies that manufacture other controversial weapons, such as anti-personnel mines, cluster bombs, and chemical and biological weapons.
Lignite and coal companies also blacklisted
In Varma’s updated principles, climate change mitigation is given even greater weight. Varma also excludes from its direct equity investments companies that rely on coal- or lignite-based operations for more than 30% of their net sales, and companies remaining below this threshold limit are now also subject to enhanced monitoring.
“Our investment decisions are important because they guide capital. As a major investor, it is our obligation to set an example of how investing can be used to bear responsibility for reducing emissions. In addition to avoiding coal-dependent companies, we have specified industries that we monitor using special ESG analyses,” says Rytsölä.
This means that before making an investment decision, the portfolio manager will assess the company’s ESG risks. ESG stands for Environment, Social and Governance, and they refer to assessing the impacts of a business through environmental, social and governance factors.
At Varma, enhanced ESG monitoring is applied to industries that are significantly exposed to climate risks, such as the oil & gas industry, electricity & heat production, and the automotive, mining, concrete and transportation industries.
“The portfolio managers draw on various company- and industry-specific ESG reports, which evaluate companies’ responsibility. The portfolio managers also address these risks in meetings with the companies. We select companies that operate the most responsibly within their industry as our investees,” says Varma’s Director of Responsible Investment, Hanna Kaskela.
Enhanced ESG monitoring also applies to producers of alcohol and legal cannabis products, adult entertainment, gambling and conventional weapons.
Climate risks integrated in financial statements
Varma will also begin disclosing its climate-related risks in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) and encourages its investees to do the same. The TCFD is a global reporting framework for integrating the financial reporting of climate risks into financial statements. A common reporting framework provides a clearer understanding of climate risks and comparison between industries.
According to Kaskela, climate risks are already a concern for companies.
“One example of this is the industrial impacts of the drought-hit Rhine River. The better a company can predict and prepare for risks, the better its returns will be in the long run,” stresses Kaskela.
Varma’s Principles for Responsible Investment cover all asset classes and are applied differently depending on the asset class and type of investment. In external funds, for example, the investor is not always able to influence the content of the funds. Even in this situation, the requirement is that the asset manager has signed the UN’s Principles for Responsible Investment, i.e. PRI, or that it has a responsible investment policy in place.
“Our portfolio is not perfect; it is a work in progress and we are changing it bit by bit in line with the Paris Agreement. The biggest mistake an investor can make now is to think that it is not worth doing anything because changing the entire portfolio all at once is not possible,” says Rytsölä.