Responsible investment is not a new concept within the Nordic pension industry. Most Nordic pension funds have had ethical and environmental guidelines in place for years, predominantly used to negatively screen portfolios in order to avoid investments in firms breaching international law.

While the ethical guidelines are mainly based on international conventions and have been applied to equity investments, several investors have also begun applying them to their bond investments. More recently, responsible investment criteria have made their way into property, which is on average the third largest asset class for Nordic pension funds.

“Responsible property investment is a trend that is starting to emerge and an area that several of our clients are beginning to look into. For several years, investors have been setting up and implementing guidelines for investments in the global equity market. Now, their focus is turning to bonds, emerging markets and also property,” says Ulrika Hasselgren, president of Ethix SRI Advisors.

Ethix, which helps institutional investors and asset managers integrate environmental, social and governance (ESG) criteria into the investment process, has yet to start advising its clients on responsible property investment.

The region’s church pension funds are pioneers when it comes to ethical investments. The Finnish Church Pension Fund, which has had an ethical investment policy in place since 1999, aims to consider ESG criteria in all of its investments. The fund has about 10 per cent allocated to property and is currently looking into ways to apply its ethical policy to the asset class.

“We are trying to learn more about the field and are hoping to include responsible investment criteria within the next year. We are trying to ask ourselves how to take environmental and social aspects into account in a more concrete way,” says Magdalena Lönnroth, project manager at the Central Church Fund of Finland, which predominantly manages the assets of the Finnish Church pension fund. She is confident that a lot will happen in the area in the next 12 months.

The Swedish Church Pension Fund is not investing in property and only has exposure to equities and bonds. However, its managing director Bengt Emriksson says that the fund will definitely apply responsible investment criteria if it decides to take on the asset class.

The Swedish AP funds are also considering a more responsible approach to property investment. AP3 is currently reviewing their policy and looking into any specific requirements that should be included. The AP funds’ ethical investment policy is currently more general and based around international conventions. The funds’ Ethical Council, however, has yet to discuss any specific policy for different sectors.

The largest Nordic pension funds have signed up to the United Nation Principles for Responsible Investment (UN PRI), which are guidelines for incorporating ESG issues into mainstream investments. And, by signing up to the principles, funds take on a certain responsibility to address those issues in investment policies for all asset classes.

The PRI states: “We believe that ESG issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time).”

“For investors with a responsible investment strategy, it would make sense to include this in other asset classes,” says Ms Hasselgren at Ethix.

This is precisely what the Norwegian ministry of finance has concluded regarding the planned move into property for the Norwegian Government Pension Fund – Global.

The ministry decided that the ethical guidelines will apply to all asset classes that the fund invests in. The decision this spring to include up to 5 per cent allocated to property has made the issue of responsible property investment more pressing. While no real estate exposure has been agreed, and with the precise guidelines yet to be developed, it is said that energy consumption, waste disposal and water consumption will be among the criteria taken into account.

In fact, the UN believes that investors have a crucial part to play in making the industry move faster to address issues around climate change. The UNEP FI Property Working Group and the UN PRI made a call in June for investors to engage with property managers to include the responsible investment principles in the decision-making process.

Paul McNamara, co-chair of the UNEP FI Property Working Group, said at the time: “Ultimately, responsible investors can play a critical role in breaking down what has been termed the ‘circle of blame’ that characterises the property industry’s slowness to address its environmental impact. We operate in an industry where investors, occupiers, constructors and developers each blame the other for the lack of positive action in improving the environmental footprint of new and existing buildings.”

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