VIDEO | Is regulation the killjoy of ESG investing, and can any fund ever be 100 per cent sustainable? At the PostTrade 360° Nordic 2024 conference, a panel took to the stage to tackle tough questions about ESG investing in the session titled “ESG derivatives – a look at their use and regulation”.

“Hands up, who thinks you can be invested 100 per cent in ESG?” asked Achim Karle, E&I sales EMEA at Eurex to the audience at the beginning of the session.

Not a single hand was raised.

“No one,” he observed. “Why can you not be?”

Kristin Wallander, senior director of sustainability and engagement at Swedbank Robur offered an explanation. “I don’t think there is a perfect company,” she said. “There’s no perfect company and no perfect people. Mistakes will happen, even if a company looks perfect on paper.”

Vesa Toropainen, head of sustainability business management at SEB suggested that perhaps the better thing the industry could do for the businesses that fall short is to invest in them anyway “rather than turn our backs to them because there is uncertainty”.

Karle agreed. “Is exclusion the right way?” he asked. He pointed out that getting on the Euro Stoxx 50 index usually gives a company a lot of attention that could make it “easier to get financing for the transformation of the company”. “If you cut off these laggards from your index, what are you doing? You are cutting them off from this highlighting,” he said. “We are actually punishing companies that are getting excluded.”

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Transformation not for everyone

Wallander shared her strategy of judging companies based on four factors: their dealings in excluded segments, such as tobacco, alcohol, and weaponry; their operations; human capital development; and fossil fuel consumption.

“I think you can transition a fossil fuel company,” she said, citing the renewable energy transformation of Denmark’s former state oil company Ørsted as an example. “But can you really transition an alcohol company?” she asked. “Should we transform a tobacco company so they don’t produce cigarettes? Is that where we should put our efforts?”

“I don’t really think you can transform a company in that way and I don’t think it’s our job either. We should focus on the fossil fuel firms,” she concluded.

Watch the carbon

For Toropainen, the parameter to look out for is carbon emissions. It easily translates to data and is an “important numeric factor” that can be applied to all companies in all sectors.

“Once we have a price on carbon – and we will have a price on carbon – we will be able to have a ‘parallel universe’ on each business and sector and company,” he predicted. And once the carbon price is formulated, it should “result in distinctive repricings of industries and companies”. The industry therefore “should follow what happens with carbon and the formation of carbon-associated pricing”.

The regulatory burden

Wallander recounted meeting the CEO of a company who said that the Corporate Sustainability Reporting directive (CSRD) is the killjoy of sustainability. “The people working on it are drowning because there’s so much information”.

Toropainen believes that the regulation is a necessary pain. “It will be fundamentally important to have that (the CSRD) in place in order to bridge the sustainability-associated data with the financial data and then subsequently put that into real-life valuations of companies, which turns into the indices eventually. Without that, it’s not happening,” he said. “You’d end up with qualitative stories and lip service… So I think it’s super important. Nothing good comes easy.”

As an example, he turned back to carbon – “The carbon market is presently voluntary and not regulated,” he pointed out. His expectation that it will eventually become regulated is based on the fact that the EU already has a rather defined pathway to get there, “so there is something good about regulation after all”.

Progress made

In her conclusive remarks, Wallander shared that working in ESG can often feel like “just moving a problem to another area. You have to choose which is the least worst and go with that. Hopefully, it will be the right decision”.

Davide Masi, fixed income and currencies product manager at Eurex shared a more encouraging point of view. “Despite feeling like transferring one problem from one box to another box, over the last 10 years, all of these (ESG related matters) have made an incredible progress, from the fact of being known by common investors, and the perspective of increasing the amount of data, to the complexity of regulation around it, and making the ESG factor not something that is a niche, but something that is, little by little, integrated in the common investor’s thinking.”

Room C3: “ESG derivatives – a look at their use and regulation”

Panelists:
Vesa Toropainen, Head of Sustainability Business Management, SEB
Davide Masi, Fixed Income and Currencies Product Manager, Eurex
Kristin Wallander, Senior Director Sustainability & Engagement, Swedbank Robur

Moderator:
Achim Stefan Karle, E&I Sales EMEA, Eurex

Hosted by Eurex

• The consolidated PostTrade 360° Nordic conference, in Stockholm on 4–5 September 2024, came to host 1,200+ delegates and featured 70 sessions.
• Our coverage relating to the event is indexed here.
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