Kari Vatanen: ‘things are not black and white’
The head of investment strategy at Finnish pension insurer Veritas explains how company engagement, as an integral part of responsible investing, is essential to the net-zero emissions trajectory.
Three years into his role as chief investment officer (CIO) at Finland’s Veritas Pension Insurance Company, Kari Vatanen has a firm view on the way asset owners should drive the low-carbon transition while avoiding common pitfalls.
Veritas, responsible for the pension insurance cover of around 14,200 sole entrepreneurs and 8,000 companies in 2021, has made incorporating environmental, social and governance (ESG) standards a point of honour.
“Every time we are making a decision, making an analysis of any kind of investments, we take ESG into account,” Vatanen told Net Zero Investor in an interview.
“In direct investments like direct local equities, we can discuss directly with the management group of the companies,” he stated.
“The process is a little bit more difficult with asset managers because we need to engage [them] to think like us,” Vatanen added, as Veritas wants them to act as the active owners of underlying companies.
The CIO said it was important to understand limitations in efforts to influence the market, especially as legislation is often “too late”, “too old”, “wrong in some parts” and “full of political compromises”.
“Meaning that ESG responsibility – it's not that simple and we shouldn't be naive,” he noted.
Among the three letters that comprise ESG, corporate governance is the easiest one to apply thanks to the regulations in Western countries, Vatanen said. Social responsibility, however, is more complex to include as no measures have been commonly accepted amid different cultural contexts.
Environmental criteria, finally, are “something we can measure”, he said.
All about responsibility
Veritas has committed to align its investments with the Paris Agreement and minimise climate risks, which it reports in accordance with the Task Force on Climate-related Financial Disclosures’ (TCFD) guidelines. It is aiming at a carbon-neutral portfolio of investments by 2035, a step which it targets five years earlier for its real estate investments.
“We want to have a meaningful coverage of things that we can measure … that's why there are only two asset classes,” Vatanen explained. “But, over time, we are willing to widen the scope.”
The main challenge is to collect the data, he said. “It's quite easy on the listed equity side … but when going to the illiquid asset classes like private equity or hedge funds, it's quite hard to get the asset managers to report.”
Yet, the CIO said that Veritas was ahead of its objectives, despite the changes in portfolio that the combination of the pandemic, the conflict in Ukraine and inflation had led it to make.
“Now we are an active investor, meaning that we are not only allocating the active funds but also have direct positions in Europe. [We are] also active in ETFs [Exchange-Traded Funds] and derivatives and actively manage the risk and tactical asset allocation.”
Over the year ended 31 December 2021, the Finnish company recorded among listed equities and corporate bonds a 44% drop in carbon footprint – tons of CO2 equivalent per €1m invested.
“We don’t need to hurry,” Vatanen said. “It's better to do fewer things well and measure them, not try to do everything at once,” he added, pointing out that Veritas also needs to generate returns. “We have to remember that our responsibility to our customers is not only to be sustainable investors.”
Not the easy way
If negative screening has long been part of responsible investing, Vatanen sees divestment as the last resort, as ethical norms on which exclusions are based are not immutable and can change from one cultural context to another.
“Why don't I like exclusion lists? Because I think that … in many cases, things are not black and white,” he flagged. “In Europe, it's clear that tobacco is bad, and alcohol is okay, but if you go to the Islamic countries, it's totally the opposite.”
Vatanen took fossil fuel investments as an example. “The world is not ready to stop consuming oil today or even tomorrow, meaning that our job is not to exclude them. Our task is to engage companies to do things in a more environmentally friendly way,” he said, citing a “much, much more clever way to do things” than blaming the whole sector.
Yet, if Veritas were to sell out its highest carbon emitters to focus on low-carbon firms, it could reach carbon neutrality more quickly.
“But does it change the world? No, that's greenwashing,” Vatanen claimed. “Instead, let's accept that our figures are not perfect, they’re going in the right direction … that's even more important than … just make our company look good,” he added. “We want the whole universe, the whole market to change with us.”
But that’s not all. “What is sustainable changes over time,” he noted, pointing in particular to the defence industry.
Before the war in Ukraine, it seemed “unresponsible to invest in defence,” he said. But now, equipment manufacturing is “required to promote the democracy, sovereignty and social welfare of nations in the event of possible invasion,” the CIO stressed in a blog last September.
“Investing in the defence sector does not need to mean a Machiavellian ethics where the outcome justifies the means,” he further wrote, as it is still possible to exclude the weapon producers that breach fundamental humanitarian principles.