Known for its green forests, Finland is aiming to become known for its green bonds
The idea of investing for financial gain alone is still dominant in the financial sector, but there is also a growing trend for responsible investment. This is a broad concept, but it basically relates to investors wanting to know how and where their money will be used, whether to avoid certain projects or, more commonly, to ensure the projects supported align with the investor’s sense of personal morality.
Within the wide field of responsible investment options, green bonds are among the most popular, and are currently in huge demand. Finland’s Municipality Finance (MuniFin) recently launched the very first 100 percent Finnish green bond, receiving an unprecedentedly enthusiastic response from the market. European CEO spoke to Pekka Averio, CEO of MuniFin, about the company’s experience in issuing its green bond, and what it means for investors and the broader industry.
What is a green bond and how does it differ from a conventional bond?
MuniFin’s green bonds are earmarked for environmental investments in the Finnish public sector. When investing in green bonds, investors state they want their money to be used for green initiatives that support environmental responsibility. As a green bond issuer, we have to be able to tell them exactly how their money is going to be used. Later down the line, we need to be able to outline what kind of impact the investments have had, particularly from an environmental standpoint.
Who are MuniFin’s green bonds targeted at?
Interest in green bonds has rapidly increased in the past few years. Basically, you could now say that all investors are willing to invest responsibly, or at least interested in how their investment capital is going to be used and what social impacts it will have.
Additionally, there is an increasing number of investors, especially asset managers and bank treasuries, with dedicated green portfolios. These investors are looking to invest only in green bonds, so new options are always appealing.
What was the process behind MuniFin’s green bond?
Responsibility is in the very DNA of MuniFin as an organisation. We finance Finnish municipalities and non-profit social housing projects, and the majority of our lending portfolio consists of investments that can be described as socially or environmentally responsible. Therefore, it was a natural step for us to start preparing for a green bond issuance.
You could now say that all investors are willing to invest responsibly, or at least interested in how their capital is used
However, the process of defining MuniFin’s green financing concept – setting up the green framework and building up a green evaluation team, for example – has been hard work. It took us a few years to ramp up the whole process.
For us this is a long-term commitment. I trust that, eventually, it will also benefit our business, but most importantly it will help our customers to make more environmentally friendly investments.
How has the market reacted to your introduction of green bonds?
We have received very positive feedback from our customers and investors. Our green bond was the first completely Finnish green bond to be issued, and the transaction exceeded our expectations: books were oversubscribed within a few hours. This clearly shows there is a growing demand for the product, and we are delighted to be part of moving this market forward.
Based on our discussions with investors, we knew to expect a very positive market reaction, but we didn’t foresee the outburst of great feedback that our green bond has generated. The overwhelming interest has taken us by surprise; after all, green bonds are by no means new debt instruments in the international market, even if ours is the first of its kind in Finland. It seems new green bond issuers are needed in the market.
What role can the private sector play in tackling climate change?
Due to the large scale of its operations, the public sector plays a crucial role in mitigating the effects of climate change. On the other hand, private companies are the ones who come up with new innovations and, by this token, they also have a key role in accelerating and supporting the transition. Construction companies and technology providers are the ones helping the public sector to make the necessary changes happen. They are the fast movers who are willing to test new concepts, and I believe the solutions we need are often created through trial and error.
What would an investor expect to gain from investing in green bonds? Are there any alternatives?
By investing in green bonds, an investor knows exactly how the funds will be used. Impact reporting is an essential requirement for green bonds, and we will be providing impact analysis for our green bond, starting from 2017. This will help investors to see the actual positive impact that they have contributed to.
I believe green bonds are here to stay, and it seems positive impact bonds are another upcoming trend; they represent a broader view of responsible investing. One could say most of our €20bn lending portfolio is covered by positive impact financing. There are numerous possibilities for MuniFin in this area, as the concept of responsible investment will only increase in popularity as time goes by.
How do you reflect those aims in your management style?
Over the years, there have been quite a lot of changes in MuniFin’s operating environment. Despite the uncertainties, we have managed to come out of the turmoil as winners. As a leader, I try to look for the best solution in any circumstances, while keeping in mind the strategic goals. Given the social and environmental responsibility we promote, I believe keeping an eye on the big picture is essential, both internally and externally; I want our people to share the same overall vision in terms of what we are here to achieve. Having said that, I also make sure to give them the freedom and responsibility to engage in our common goals.
To be successful one needs experience, education and courage. You need to have the right networks in place, and be wise enough to gather the right people around you.