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Speech by Minister for Financial Markets Per Bolund at UNPRI conference in Berlin
Berlin, 25 September 2017.
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First of all let me congratulate the PRI and its signatories for a great job over the last two decades. With almost 1800 signatories representing 70 trillion dollars PRI is truly a success. It is a great achievement. But this focus on sustainability hasn't always been the case. I remember the climate talks in Copenhagen back in 2009 and I remember especially what a Danish delegate said:
It might be the case that stopping climate change isn't profitable but it might be worth pursuing anyway.
After leaving Copenhagen, the way we talk about sustainability challenges in general and especially climate change has fundamentally changed. Today, this sceptical viewpoint is truly something of the past. UN secretary general Guterres put it quite eloquently when he, earlier this year, said:
The sustainability train has left the station. Get on board or get left behind
If I might add a Swedish perspective to this, it would be that Sweden isn't on the sustainability train. We are on the sustainability Hyperloop and we are leaving the sustainability train far behind us. But as you might have guessed, I am biased when it comes to Sweden.
With this Elon Musk- esque metaphor I would like to share with you all the Swedish experiences on how to make the financial system more sustainable and my thoughts on what role the industry could play by applying self-regulation and where supervisory authorities and legislative bodies must regulate.
In Sweden we have sustainability engrained in the constitution where it says that the public sector shall promote a sustainable development which leads to a healthy environment for present and coming generations.
When applying this to financial market policy we have focused on a risk based approach. This is important because we do not want to mix politics with regulation, but at the same time we want to make sure, in every way possible, that we are doing everything we can to implement the Sustainable Development Goals and the Paris Agreement.
The focus on risk has also been instrumental to how the Swedish Financial Supervisory Authority has approached the matter of sustainability. Because, as we see it, more sustainable financial companies pay more attention to long term challenges which is positive from a financial stability standpoint.
On our initiative, the Swedish FSA has initiated an ambitious agenda to integrate sustainability into its everyday work stream. This includes focusing on:
- how major banks consider sustainability factors in their lending operations
- and how climate change, both its effects and the transition risks affects financial stability.
These activities mirror two other initiatives which are currently taking place, namely the High Level Group on Sustainable Finance and the Task Force on Climate related Financial disclosures. The Swedish FSA's work is therefore tightly interlinked with the recommendations from the two groups.
But the Swedish agenda for more sustainable financial markets doesn't stop with the work being done by the FSA. The Swedish national pension funds which jointly manage over 130 billion dollars will get a legislative overhaul which steers them in a sustainable direction. This means that the funds must pay attention to international agreements which Sweden has ratified, such as the Sustainable Development Goals and the Paris agreement. And in the so called premium pension system, which is open to all UCITS V funds, we will propose a sustainability requirement which stipulates that a fund will not be allowed on the platform without properly declaring how sustainability is integrated in the investment process. This is a big deal as the premium pension system is part of the Swedish national pension system and covers generally speaking all individuals in Sweden. The premium pension system manages about 100 billion dollars today but the system is growing and is projected to surpass 300 billion during the coming decades.
These initiatives are examples from the Swedish toolbox for a more sustainable financial system. However, in order to make a global mark we must work together within the European Union.
I welcome the Commission's initiative to set up the HLEG group and I have with great interest taken part of the interim report.
Some of the report's recommendations can be implemented by the industry itself, and for some, the initiative must come from member states.
One example which can be initiated by the private sector itself is to change the way you rewards your employees. I urge you to stop aligning compensation with short term performance as this will have an adverse effect on the actions which your employees are taking. It will not be in line with the long term goals which actually build lasting value to a company.
In short, big cash bonuses which are based on short term performance means that employees have no motivation to change. Instead, as the report suggests, the bar for cash reward could be to achieve certain sustainability metrics. This opens up for a more smooth alignment of sustainability and the day to day business.
When looking at what recommendations that the member state can work with, this still need some additional work. However I would like to highlight the importance of scenario analysis which is brought up by both the HLEG group and the Task Force on Climate related Financial Disclosures. In these scenarios banks and insurance firms must pit their businesses plans against a scenario where global temperature rise stops at two degrees. This calls for emissions to peak in three years' time and then drop by more than 60 % by 2050 according to the UN. Needless to say, this will have a profound effect on the fossil industry, especially coal, and of course on those financial actors that support them. Creating scenario based risk assessments, is vital for investors to understand where stranded assets may appear in the future.
For this to happen, the EU must step up their game. They must strengthen the sustainability competence at the European Supervisory Authorities in order to develop and evaluate the financial sector's scenarios over the impact of climate change.
So my message to you today is this: We are in this together, the private and the public sector. The political system has woken up and is, as we speak, embracing sustainability in the financial system. This will lead to regulatory changes where Sweden's aim is simple: introduce minimum requirements in order to lift the overall quality. Focus on measures to increase transparency in order to reward those who are smart enough to realize that sustainability is the future for investors.
This strategy will be Sweden's sustainable Hyperloop and you are all welcome to join the ride.