Reserve funds of public pension insurance institutions fall into line

Responsible investment behaviour in line with ethical, ecological and social criteria (Environmental Social Governance – in short: ESG) is becoming increasingly important, for example at EU level in the proposed directive on corporate due diligence in the area of sustainability (European Supply Chain Act – see News 3/22). A recent Study shows that this also applies to reserve funds of public pension insurance institutions in Sweden and Finland.

Sustainability – a concept in a state of flux

The issue of sustainable pensions has been high on the political agenda for several decades against the backdrop of demographic change. In this context, there are at least two definitions of sustainability in pension systems – a restrictive one and a broader one. The restrictive definition reduces the concept of sustainability to a mere question of the pension system’s financial sustainability. A pension system is sustainable if its budget is balanced. This definition is sometimes critically questioned by academics and policy makers: It ignores any effects on other essential aspects of pension policy and is not suitable for dealing with complex issues such as securing provision for old age now and in the future.

Therefore, at the European level, Member States and the European Commission have laid down three overarching pension policy goals. In addition to maintaining the financial sustainability of pension systems, these include ensuring adequate retirement incomes and increasing labour force participation and working lifetime. In recent years, the concept of sustainability has been expanded to include responsible action and investment behaviour in line with ethical, ecological and social criteria. Thus, the discussion about sustainable pensions is becoming increasingly important.

Sustainable investments

Even when buying investments that conform to ethical, ecological and social criteria, the focus remains on the expected return, taking into account possible risks. The assumption is that the inclusion of ethical, environmental and social criteria helps to minimise long-term risks.

Sweden and Finland – different paths but comparable development 

The investment options of statutory pension funds are regulated by the respective national legislator and are often subject to stringent restrictions. However, some pension funds have greater degrees of freedom and can develop their own investment strategies. In Europe, these include the reserve funds of the public pension insurance institutions in Sweden and Finland. A recent study shows that Finnish and Swedish pension investments follow ethical, environmental and social criteria. However, the path taken was different in the two countries.

In Sweden, the legislature has taken an active role. In this context, the question of a long-term sustainable and profitable investment strategy is discussed both in politics and in science. In Finland, in contrast, there has been no legislation, nor has there been any public discussion on this. That is where the driving force lies with the management of pension funds. These have been influenced primarily by the international discourse of responsible investment behaviour. In particular, the focus on investments with long-term returns at low risk has motivated decision-makers to increasingly incorporate ethical, environmental and social criteria.