NN IP: Almost half of big Nordic investors allocate to impact strategies

February 20, 2020

• Large Nordic investors interested with 43% already allocating to impact strategies
• 22% intend to invest, 41% have no plans citing lack of suitable impact products
• There is more to impact investing than creating a better world

Larger investors in the Nordics, a region at the forefront of sustainable investing, are interested in impact investments. But a lack of diverse investment products that meet their requirements and seek an impact on society are a concern, according to a survey among Nordic institutional investors by Danish asset-management consultancy Kirstein.

‘Solutions have to be investable, easily tradable, scalable and offer sufficient diversification potential for larger investors,’ comments Edith Siermann, Head of Fixed Income and Responsible Investing at NN Investment Partners, who commissioned the study. ‘The survey results reveal a broad interest in responsible investing with environmental, social and governance (ESG) factors deemed essential by both investors and beneficiaries.’

Impact investing – still in the early stages, but maturing

The focus on impact investing is clearly growing with almost all investors in the research panel proving interested in impact investing. While ESG was deemed slightly more important in the survey, Siermann says investors are increasingly considering a shift from ESG-integrated investments to an impact-based approach targeting one or more UN Sustainable Development Goals (SDGs).

Climate-related solutions over social impact

It is clear investors are keener to invest in climate-related solutions than to focus on the social element. The impact of environmental factors is more quantifiable, says Siermann. ‘But there are many potential investments that offer exposure to a broader range of SDGs, offering diversification and risk benefits.’

Why are impact solutions attractive?

Besides the creation of a better world, which is seen as the essence of impact investing, respondents also cited “more typical” investment arguments. These include risk reduction and gaining access to sustainable growth strategies. Nordic investors also believe that impact can be achieved in a diverse range of public and private asset classes.

Larger investors more hesitant to invest in impact

Larger investors were more reticent when it came to taking steps to invest in impact strategies. Of these big investors, 43% allocate to impact strategies. When asked about the near future, 22% plan to allocate to impact strategies, but 41% are not willing to do so. The message is clear – there are not enough investment products on offer that fulfil their requirements. A number of dominant pension schemes in Denmark and Sweden feel that asset managers still need to improve in the context of impact strategies; something that can make it difficult to set up a dedicated impact strategy at present. Other investors are of the opinion that thematic strategies, such as water funds, do not really constitute impact strategies. ‘To facilitate larger investors, asset managers need to offer scalable impact strategies in a range of asset classes,’ says Siermann. ‘That way clients can make a societal impact and improve their risk-adjusted returns.’

Strategies to achieve impact

Many Nordic investors are positive about the different opportunities to make an impact across a broad range of asset classes, both public and private markets, says Siermann. In her recent discussions with Nordic investors the need for transparency was confirmed. ‘Reporting on impact investing helps for example pension funds to justify larger allocations to impact as core portfolio holdings. Applying stringent criteria and fundamentally analysing investment candidates can help ensure their investments deliver true impact and financial returns,’ Siermann explains.

Looking ahead

The survey shows that the appeal of impact investing is not just about creating a better world. Improved risk and return and sustainable growth are also important, which explains why investors require a broad range of impact products to choose from. In addition to their investment targets, they regard reporting and engagement (which includes voting) as two essential elements for assessing best practice in impact investing.

‘Most Nordic investors no longer believe they must give up returns to generate impact,’ says Siermann. ‘But they still need to be convinced that impact and improving risk-adjusted returns can go hand in hand.’