Sustainable investments and the adverse impacts of investment decisions on sustainability factors

Environmentally sustainable investments in accordance with the EU Taxonomy Regulation

The EU Taxonomy Regulation (2020/852) provides a definition of economic activities that are environmentally sustainable. It is possible to invest in such environmentally sustainable economic activities with financial products. For an economic activity to be deemed environmentally sustainable, it must make a significant contribution to one or more of the environmental objectives mentioned in the regulation, cause no significant harm to any other environmental objective, the activity must be carried out in accordance with certain international commitments and agreements, and the activity must meet the regulatory technical criteria.

The environmental objectives stated in the EU Taxonomy Regulation are:

a) climate change mitigation
b) climate change adaptation
c) the sustainable use and protection of water and marine resources
d) the transition to a circular economy
e) pollution prevention and control
f) the protection and restoration of biodiversity and ecosystems.

The first two environmental objectives of the EU Taxonomy Regulation (climate change mitigation and adaptation) entered into force on January 1, 2022, and the remaining objectives will enter into force on January 1, 2023. The regulation sets reporting objectives for certain major corporations regarding the environmental sustainability of their activities. The definition of an environmentally sustainable investment includes only part of the industries that have the largest share of EU emissions. Therefore, some economic actors are automatically excluded from the taxonomy.

Sustainable investments in accordance with the Sustainable Finance Disclosure Regulation

The Sustainable Finance Disclosure Regulation (SFDR, 2019/2088) defines sustainable investment as follows: Sustainable investment means an investment in an economic activity that contributes to an environmental or social objective, does not significantly harm other environmental or social objectives, and in which investee companies follow good governance practices, in particular with respect to sound management practices, employee relations, remuneration of staff, and tax compliance. Sustainable investments include investments in renewable energy, the circular economy, economically or socially disadvantaged communities, and human capital. Therefore, the definition of a sustainable investment under the Sustainable Finance Disclosure Regulation is broader than in the EU Taxonomy and is less strictly regulated.

The difference between sustainable investment and responsible investment

Investments that meet the definition of sustainable investment are usually impact investments, in which the purpose of the sustainable economic activity carried out by the company is to provide solutions to social or environmental problems. Responsible investment means taking the environment, society, and good governance into account in investment operations, by excluding certain industries, for example.

Currently, the main challenge in committing to sustainable investments is that investee companies do not have a broad obligation to report on the sustainability of their operations. As a result, providers of financial products do not have access to extensive information for evaluating and reporting the sustainability of investments, either. Evli may not currently offer the type of products that fulfil a client’s sustainability preferences, where the above-mentioned environmentally sustainable investments or other environmentally and/or socially sustainable investments in accordance with the EU’s Taxonomy Regulation are made. Evli is monitoring regulatory developments and the development of companies’ reporting obligations and will assess how to develop its product selection when the regulation is completed and when the companies’ reporting obligations enter into force. Almost all of Evli’s products comply with Evli’s Principles for Responsible Investment and take into account the potential adverse impacts of investment decisions on sustainability factors.

Investments that take account of the potential adverse impacts of investment decisions on sustainability factors

The decision-making and advice concerning investments takes account of the adverse impacts of investment decisions on sustainability factors. Adverse impacts on sustainability factors mean effects in the fields of environmental, social and employee matters, respect for human rights, and anti-corruption and anti-bribery matters that are negative and material or likely to be material.

Additional information on responsible investment at Evli and fund-specific information on taking sustainability risks and factors into account is available in Evli’s Fund Prospectus and on Evli’s website at evli.com/responsible-investing.