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Demands for transparency on ESG will show in future money flows, says Finnish LP Varma

The not-so-distant future in terms of climate risk means that transparency when it comes to ESG investing is increasingly on the minds of LPs.

The not-so-distant future in terms of climate risk means that transparency when it comes to ESG investing is increasingly on the minds of LPs.

Helsinki-based pension insurance company Varma is one of the largest private investors and one of the largest earnings-related pension insurance companies in Finland. It has developed its own internal ESG processes since 2011.

During the last few years, the Finnish LP has integrated ESG into the investment process of all asset classes. Having joined the company in 2001 (and rotated from listed equity to the real estate team at the end of 2018), Anniina Isomäki is a senior portfolio manager for external real estate at Varma.


Varma has an active dialogue with GPs regarding ESG, according to Isomäki. “When we select new, and monitor our existing real estate funds, we are requesting ESG specific reporting, and transparency in general,” she says.
The portfolio manager hopes the increased demand from LP’s today for transparency is having an effect at manager level, and stresses that we can “already see more money flowing into funds or strategies that have fully integrated ESG in their investment process and report regularly on it.”


“If managers are not reacting on requests or demands from the LPs less money will eventually flow into their funds,” explains Isomäki, who adds: “If there are managers that have not integrated ESG into their investment process, LPs like us will not be able to invest with them anymore.”


A trend she’s seeing is the shift to a circular economy, which isn’t yet discussed enough on a manager level, in Isomäki’s view. “It’s challenging, but it’s something that I would like to see more discussion around and practical planning of how to execute,” she says.

Isomäki views the focus on how to mitigate climate changes in every way as the main driver going into the new decade, particularly moving towards a zero carbon, circular economy.


The so-called circular economy, a system aimed at eliminating waste and the continual use of resources, focus on reusing, sharing, repairing, refurbishing, remanufacturing and recycling to create a closed-loop system, minimising the use of resource inputs.

Isomäki thinks it’s important to highlight that knowledge about what GPs are doing is important, as many are actively working on ESG aspects but don’t disclose enough of their activity. And, she says, “there are still lots of managers who are not willing to or are shy to report on it. One good way for real estate funds to report is participating in GRESB, which is a standard ESG reporting platform.”

According to the firm’s director of communication and sustainability, Elin Ljung, Nordic Capital has a firm belief that responsible business practice is essential for achieving long-term value creation. She points to the fact that 63 per cent of 2000-plus studies show how a strong ESG proposition correlates to higher equity returns. 

With sustainability at the heart of its investment process, Nordic Capital aims for its portfolio companies to have integrated a certain level of sustainability into their value creation plans within two years of ownership. The Nordic GP has minimum requirements for each company in its portfolio, which are aligned with the UN SDGs and include everything from taking action, to reducing its environmental impact, and achieving diversity goals, to name but two. It has a sustainability team that works to promote best practice in the portfolio and within its own organisation, that provides training, and measures progress.

There are two ways of looking at how to implement ESG factors into the investment process, says Ljung. “It’s important to identify a company’s sustainability risks and opportunities both in terms of how it is impacted by current trends, and also how it will be affected in the future,” explains Ljung.

“There can be extra costs in understanding ESG risks pre investment, but this filtering process can also identify new positive opportunities,” she adds. These positive opportunities include creating efficiencies, reducing costs and attracting talented people who aspire to work for environmentally friendly organisations for example, according to Ljung.

“Nordic Capital focuses on understanding how the environmental, social and governance factors impact a business’ current value and future potential, and how to incorporate clear objectives and KPIs into the value creation plan,” she adds.

The approach differs according to the sector you are investing in – material sustainability factors, for example, differ significantly in industries such as healthcare and tech, in Ljung’s view.

She acknowledges that clients, partners, employees, owners and other important stakeholders should also understand the sustainability factors that are most relevant for each company, which is why it is important to keep close stakeholder dialogues on this topic. 

“Nordic Capital creates a five-seven year value creation plan for each investee company, often including a strategic repositioning or transformative change,” she explains. “It is a significant growth journey, and part of that journey includes making sustainable choices in areas such as product development or operational change.”

Ljung notes that the private equity industry has evolved massively in recent years. “When we started in the early 90s, there was a more streamlined DD process, including financial and legal diligence. Today the Due Diligence phase often covers multiple work streams such as commercial, IT, people and ESG so as to really understand the full value creation potential,” she says. Some studies show that a premium price is often paid for companies with high standards in ESG.

What is the view on LP’s increased demands for greater transparency on the part of GPs? Ljung thinks there is positive dialogue underway between the two parties, with ESG becoming a more significant aspect of that discussion.

“A few years ago some European LPs started to request greater transparency on ESG; and today we see this a lot more globally, in the US and particularly in Asia. But even if the level of dialogue is increasing, there is still a need for more standardisation across the industry,” she says.

In terms of ESG trends for the decade ahead, Nordic Capital considers climate, diversity, and regulatory pressure as key, and emphasises the need to provide meaningful data on these factors in order to show real impact.

“From an industry point of view, diversity needs to be prioritised and improvements made,” says Ljung.

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