In the modern world, investors are interested in investing not just for financial return, but additionally for social and environmental impact.
In last year’s Debt Management Annual Review, I wrote about a significant policy trend, sustainable development. Naturally, my emphasis was on promoting the national and global commitment of the Finnish government to tackle climate change and support environmental development. Furthermore, I highlighted the fact that sustainable development trends based on the UN 2030 Agenda for Sustainable Development are rapidly feeding through to capital markets and that we, the sovereign issuers, need to take these new elements into account in our daily operational lives.
In the modern world, investors are interested in investing their money not just for financial return, but also increasingly for positive social and environmental impact. Therefore, as part of their investment decisions, institutional investors are paying growing attention to environmental, social and governance (ESG) criteria, which are very often based on the Sustainable Development Goals (SDGs) defined by the UN. Investors are demanding more granular ESG information from the issuers and from the credit rating agencies to be able to improve their own credit risk analyses and make better-informed investment valuations and allocation. As part of the trend, all major credit rating agencies have introduced new products that take the ESG aspects more thoroughly into account.
Issuers have an important role
In Spring 2019 the World Bank Treasury organized an investor workshop and invited 17 global investors and four sovereign issuers, including Finland, to have a dialogue on ESG risks and opportunities. After the workshop, the World Bank blogged*: “The focus on ESG is influencing the way sovereign issuers are engaging with investors. Ministries of Finance and public debt managers are realizing the importance of incorporating ESG issues and progress on SDGs and Paris Agreement commitments into their investor relations functions.”
I fully agree. Sovereign bond issuance reflects broad government policy initiatives which have a wide and far-reaching scope also from the sustainable development perspective. Therefore, it is important for sovereign issuers to be proactive and transparent in providing information for investors on law initiatives and tax or other fiscal measures introduced by the government to promote environmental, social and governance issues. To fulfil this investor demand and to fill the ESG information gaps, we have introduced a new section “Sustainable development in Finland” on our website. It covers themes that concern sustainable and ESG investing and guides investors to sources of information, such as the government programme, the budget review, statistics and indexes.
High-quality education in focus
As we started our ESG trilogy last year with emphasis on the environmental issues (E), it feels natural to continue with the social capital (S) theme this year. Sustainable and social responsibility has a long tradition in Finland. Free education and the public health care system have been cornerstones of welfare in the Finnish society for a long time.
Social factors can be material in sovereign credit analysis due to the importance of human capital as one of the key determinants of economic growth. Measures of demographic change, education, living standards, income inequality and social cohesion can augment sovereign bond valuations. For this year’s review, we have invited two guest columnists to shed light on Finland’s internationally recognized high-quality education system.
Issuance strategy
The key function of the State Treasury is to safeguard the liquidity and funding for the central government. In 2019, the Republic of Finland successfully fulfilled its EUR 14.8 billion issuance programme. The net borrowing amounted to EUR 1.4 billion. For 2020, the scale of our financing programme is higher due to two benchmark bond redemptions. The overall gross borrowing requirement, including short-term funding, will be EUR 23.3 billion. The net borrowing is expected to be EUR 2.2 billion.
Keeping our bonds attractive to investors remains our long-term goal. We believe that Finland’s strong credit outlook and commitment to sustainable development will support our bonds and serve all our sustainable and socially responsible investors in the coming years.
* Farah Imrana Hussain & Rodrigo Cabral (9 September 2019), World Bank Blogs: Greater transparency on environmental, social and governance (ESG) issues: New focus for sovereign debt issuers
is Director of Finance and Head of the Finance Division at the State Treasury of Finland. Mr Koivisto is in charge of the central government debt management function, which includes funding, liquidity management, investor relations and interest rate risk positioning of the government debt.