Episode 44 | ESG and Sustainable Investing with Tiina Landau

The Assurance Show
The Assurance Show
Episode 44 | ESG and Sustainable Investing with Tiina Landau
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Summary

Tiina Landau is an internationally recognized sustainability expert and Certified European Financial Analyst (CEFA). She currently works as Sustainability Manager at Neste Corporation, embedding sustainability considerations into new business models and supply chains.

She has extensive experience as a speaker in media and seminars and also writes a column in the Finnish financial newspaper Kauppalehti.

In this episode, we discuss Tiina’s book: Sustainable Investing – Beating the Market with ESG.

We also explore how internal auditors can help their organizations navigate ESG risks and opportunities.

 

Links: 

 

Transcript

 

Yusuf: 

Today we have Tiina Landau. Tiina is a sustainability expert based in Helsinki, Finland. Hi, Tiina.

Tiina: 

Hi, thanks for inviting me to the show.

Yusuf: 

Do you want to kick off and give us some of your background and what brought you into consulting around sustainability investing?

Tiina: 

Yes, definitely. So I have a diverse background. I’ve studied business in a business school in Finland and I focused on sustainability there. During my studies, I tried different kinds of things in sustainability. I interned for an NGO and conducted international projects and development aid, and some sustainability analytics and modeling. But after studies, I got into a large Finnish financial group working in asset management. So that’s when I first got into sustainable investing. At the time we were maybe 20 persons active in the sustainable investing society. And it was a small group. So when I told what I was working on, it usually there was kind of a blank face. Nobody really knew what it was about. It wasn’t such a big topic then at the time. After that I worked in management consulting and I was doing sustainable assurance of companies, also sustainable strategies and looking at where companies should focus and also how that information can be verified. After that I worked in sustainable investing. I was leading that for a large pension insurer. And that got me into a lot of starting from scratch, thinking of first reading this methodology document, what is sustainability analytics about. At the time there wasn’t a book or training that you could take in order to learn your job. So I had to learn by practice that I was asked to analyze something and then had all of these discussions with the portfolio managers. Also, I was preparing the voting instructions, for general meetings of companies and engaging with companies to pursue sustainability agendas. So to promote sustainable practices, both in Finland and abroad. In my current job, I am working at an industrial company, which focuses on sustainable fuels, and I’m leading the system de-risk work. So whenever we have new business initiatives and, we’re looking at supply chains. So I’m combining sustainability risk information with mitigation action plans of how we should address the topics.

Yusuf: 

Why sustainability? Why is it important to you and what made you decide to focus on it, so specifically? And then why is it important to organizations to understand what sustainable investing is?

Tiina: 

It’s important for both investors at companies. So, when you look at investors, it’s about how to address all the risks and opportunities, because there’s so many topics when we speak about ESG. So environmental, social, and governance topics, and there’s risks related to all of them. So a company that doesn’t manage all of those, they have more risk compared to companies that are actually looking into topics like climate change, water scarcity, human rights, et cetera. So legislation pressure, but also customers and investors are interested in those. And sustainable investors want to make good profit and also promote a more sustainable future at the same time. And personally, I find that, first it’s a meaningful area to be focused on, but also I think it’s endlessly interesting because you have to understand the big picture of the business and the environment that all the businesses are working on. There’s a lot to analyze and it’s complex topics that are also meaningful, so I find that inspiring.

Conor: 

You mentioned there that you find the whole topic of ESG endlessly interesting. And on that point, you’ve got a book coming out. So what’s the title of your book?

Tiina: 

“Sustainable Investing, beating the market with ESG.” So we want to explain how you can do sustainable investing. And of course, it’s also relevant for companies to understand how to analyze, but also how you can make profit, while being sustainable. So basically there’s both of those aspects and it doesn’t mean that all sustainable investing is profitable, but there are ways in which you can do it. And, here we combine my practical expertise, so all the analysis I’ve done and engagement of what works and what makes sense and all the analytics tools, what is available. So that the next person doesn’t have to read a hundred piece of analysis to understand how to get the relevant out of it. So trying to help the next person who’s doing that. And also looking at what are the key trends in sustainability that should be focused on. There’s also the second aspect, I’ve written it with an Associate Professor, Hanna Silvola, and we’ve gathered also the most recent academic research to the topic. So there’s a unique combination of both aspects.

Conor: 

So as part of your research for the book and your analysis, did you have to speak with varied companies and different stakeholders and individuals to get their perspectives?

Tiina: 

Yeah. So basically there’s both of course my insights of working years in the field and what I’ve learned. And then also a lot of case studies and interviews. Many of those companies that I have been in co-operation with before. And I knew that this company is really good on climate, this is really gaining sustainable development goals, this company has their fund selection process. So we wanted to give examples that could inspire anyone to take action. So good practices and something that if you have limited amount of resources and a small team, you can still get into it. And then if you have a bit more, then what you could focus on? And I wanted to hear thought leaders, what they thought and inspire different kinds of thinking.

Yusuf: 

There’s the word sustainable investing as you have as the title of the book and the topic of the book, but also there’s a lot of talk about ESG. So environmental, social, and governance factors. What’s the interplay between sustainable investing and ESG? Are they the same thing? Does one drive the other?

Tiina: 

We use them interchangeably in the book, but of course, if you speak about sustainability and ESG, there’s a bit of different emphasis. ESG, as you mentioned it, means environmental, social and governance topics and addressing them in your investment decisions. And of course you cannot treat it all so that you decided, okay, I’ll take the risk. As long as you are aware of the risks. So it doesn’t make the investing sustainable necessarily. But then if you speak of sustainability in general, it’s something that the kind of activities that are meeting the needs of today without compromising the needs of the future. So there’s this whole sustainability discussion. So that’s more about action to the right direction and what the future looks like. So there’s a bit of different emphasis, but in this kind of everyday language, they are often looked at as one. And also if you look at sustainability, there’s a whole range of topics that are not maybe covered. Especially in the governance section, like often looking at board composition and this kind of benefits to board members and related party transactions and whatnot. If you really go to the concepts. But we didn’t want to, we wanted to have practical guidance. So we are not making this distinction in the book.

Conor: 

The whole field of ESG is certainly a topical area and a growing field. What would you see, Tiina, as the role of assurance professionals or internal auditors, in trying to bring forward ESG views or assist with ESG activities within their specific organizations?

Tiina: 

I think it’s really key and it’s not used enough as a resource. I’ve done both. I’ve been doing internal audit, I’ve done assurance and I’ve also been as a subject to both of those. When you look at any company, closely enough, there’s always something where they’re lagging behind in sustainability. And it’s a lot better if you notice that internally, than if you wait for some NGO, for example, or some governmental actors to find it. And there could be blind spots. There are many companies that do their sustainability strategies, but is it implemented everywhere? Are you looking into your supply chains? Maybe that’s the most obvious place to start. What about when you’re selling products to your customers? There could be, for example, cases of some communications equipment sold somewhere, and then used somewhere to suppress freedom of expression or something like that. So there, there can be, it can be related to a lot of topics. Then what about when you do M&A. Is the sustainability team involved when you’re buying companies? When I was in as an analyst, I noticed the company had bought parts of a company that was blacklisted by many, many investors. So you really want to be sure that you have checked that you’re not buying by accident, the blacklisted operations from that company. Obviously it could be part of your basic legal due diligence, but not necessarily. So you need sustainability, where it’s material throughout the operations. And even if you have a really good team and they’re doing their all. Even they can benefit. If the internal auditor goes directly to the board and says, wait, this has to be done faster. This is where you have to focus on. Because often the sustainability team doesn’t have that, direct aspect, of getting access to the highest level of the organization. So I think the internal auditor can push the sustainability agendas and kind of support the internal work that is already being done. And even if, you know, most of them can fail on something. Like if you look long enough, like and far enough in the supply chain, for example, there’s always going to be something. But if the company is able to tell that wait, this is everything we did, this is what we had in place. This is our systems and we still have that failure. So you’re in a much better position than if you say that you did nothing. So I think internal audit does definitely have a role to play in that. And then about assurance. I think there’s a lot of discussions about the sustainability numbers. And there are investors who are, for example, buying really sustainable companies and then shorting those that are lagging behind. There was this hedge fund that told me that they wrote to one of those companies. We think you’re going to have a flash accident any day. And this is because of your numbers. And then there is. No, wait, we did a, you know, something like tenfold error in the numbers. And that’s even myself, I found that when asking about the numbers. So that’s why I think it’s really good to have assurance and internal audit. So what was striking to me is that when you look at financial statements, the numbers don’t usually change in the audit, but with sustainability when I’ve done assurance, I’ve even changed two-thirds of the numbers because you know, there’s one person who could be in the basement on her own calculating the numbers, and maybe she put one subsidiary to the wrong column. So that’s why I think that’s a lot of reasons to do some kind of checking that somebody else is actually going through all those.

Yusuf: 

Historically, there’s been a lot of focus on financial statement numbers. And we’ve got very well established practices and frameworks and standards around financial statement audit numbers. So making sure the balance sheets, numbers wise, are correct and income statements, et cetera. What are you seeing in terms of the equivalent external type assurance, external type audit around sustainability, given its rising importance.

Tiina: 

There’s two levels that can be applied. There’s limited and reasonable level of assurance. And most go with the limited level, at least in the markets that I’m looking at. And that means that when, you know, an auditor says that I guarantee that everything’s correct and nothing was omitted. Then limited assurance, they always often say that the statement that, I guarantee there’s no reason to believe that everything wouldn’t be correct. And so it’s sort of the opposite way. So it’s a bit less of certainty. And also the other thing is that some auditors or assurers, they look at the numbers and some also look at the text. And some look at part of the numbers or part of the text. So that’s the other thing as well that you have to focus like which part is looked at. And obviously if you look at the text, you cannot omit controversies. But if you don’t there’s so often, like when you look at companies, you go to the financial statements somewhere in the appendix and you notice there’s been this huge legal debate and they are preparing to pay for, for example, for some corruption case, or environmental damage. And they might omit that from the substantive report. That’s something to focus on. What is the coverage? If you have no internal controls, then the assurer can do only so much. So both focus on what to do. And even if you have a shares, there’s obviously there’s still a lot of room to decide on how to calculate the figures, what to include, what is the scope? For example, in Europe, there’s a lot of legislation planning and the reporting stuff. So, so let’s hope at some point it becomes more unified, but for the time being, you also have to have a bit of flexible approach when you’re looking at the numbers and even so you cannot do sustainability analytics, just based on numbers. Like think of a company that has had a, really, a lot of accidents for the last five years. Are they going to have as much accidents for the next five years? Not necessarily. Maybe they have a huge project to get that to the right track. So you have to look at the management as well.

Yusuf: 

If you were an internal auditor within an organization that hadn’t done any internal audit work around sustainability or on ESG, where would you start? And what are the core things that you would focus on?

Tiina: 

I would start where I started as an analyst as well. I will go to the webpage of the sustainability accounting standards board. And they have looked at each industry and which topics are material for each. So for example, if you’re a construction company, then you maybe look at the worker’s rights, gray economy, business ethics. Is there kind of any corruption involved and supply chains where the materials coming from, if that’s in your, sphere of influence and if you have subcontractors. So the first thing is to look at what is material and then go forward from there to see where it lies. And you have to start with a broad approach Who is responsible for sustainability and are they part of the right tables? So when companies making decisions, is it considered and also when in the operational level, how is it implemented in practice?

Conor: 

So one of the themes in your book, the evolution in the reporting of sustainability metrics and how that’s changing all the time. And you just mentioned there that, certain industries have material things they need to report on. I wondered if there’s any sort of enforcement for noncompliance of that reporting, or how does that look like when companies aren’t reporting on the metrics that they should be reporting on?

Tiina: 

Well at the moment, most of it is voluntary. If you look across all the topics the standard that is most common is the global reporting initiative and their companies can actually decide themselves. What is material? They’re supposed to look at the largest impacts and what are the stakeholders interested in, but there is some leeway. So that’s why also the sustainable accounting standards board comes into play because they say these are material topics, and this is where you should focus on, that part is voluntary. Then there’s regional legislation, for example, about human rights legislation in Australia, in California, some European countries, such as UK and France that are making some in this one area. Different kinds of regulations of what you should report and what you should do to address human rights. And then EU has some legislation about sustainability reporting as well. So there are certain topics that have to be covered, but even that is only for large companies at the moment. So there isn’t something that covers the whole world and all of the companies, but we are getting there. Human rights is that topic that has first started, but at least in Europe, it looks like there will be more topics that will follow.

Conor: 

Have you encountered where internal audits have been used to verify, external reporting on sustainability. Is that something you’ve come across?

Tiina: 

I’ve been the subject of that. So, so yes, I have come across that , but of course it’s usually internal audit has a wider scope. So I guess that’s actually a good place for internal auditor to start if you’re doing your first assignment. Not just look at what companies should be doing, but also about the reporting, because then you can ask what’s behind that, but often you also go as an internal auditor because you can also benchmark against best practice. So I think that’s something I would recommend to do. Because sustainability is about constant development. So it’s good to say that what you’re saying externally, that is accurate, but where should you be going? Are you doing enough?

Yusuf: 

Both external audit and internal audit are often seen as, not necessarily insurance policies, but a way to assure against. And then alongside that you want to potentially have some insurance in place to take care of certain risks that you might face. In your upcoming book, you have a discussion around data protection and information security. And there’s some talk about malware, ransomware, breach of information, et cetera. But also around insurance that you need to have in place, and what that covers for you. What do you think more generally about insurance as a replacement, if you like, for good risk management around certain sustainability topics.

Tiina: 

They should be the different lines of defense. So it shouldn’t be the only one that is applied insurance. I guess that’s a bit, well, kind of late in the process. So, and also internal audit that cannot, you know, you know, cover like instead of risk management and that kind of cover for the actions that are done. And of course you need buy-in from the whole organization. And can you insure all the sustainability risks today? Can you, in the future. There’s already cases where, for example, we are speaking about coal mining or areas where there’s climate change impacts and. for example, they could be too much water or too little water. That’s one of them, topics of climate change can close with the physical impacts. So can you insure all the sustainability risks. At the moment already, we can see that insurance companies cannot take whatever risks that are there. And maybe if you look five or 10 years from now, is that possible? So obviously companies can have insurance policies, but you also want to manage the risk and issue. What is left?

Yusuf: 

Similarly to the way in which you would evaluate other insurance that you have in place, we need to ask the questions about is insurance actually going to make sense? So if, responsible people tell you as an internal auditor that we have insurance and, we’re covered. We need to go a bit deeper and say, is the insurance going to cover us now? Is it going to cover us in future. Is there anything we need to think about that may not be covered by our policies, for example, that could land us in big trouble.

Tiina: 

Yeah. Even if it covers, then, you know, they’re still going to be some disturbance to your business. So would you really rather wait for example, at your factory that lets, the insurance will cover it. If I’ll have a huge problem or would you rather organize, your operations in a way that there will be no stoppage of your business in the case of some, for example, extreme weather event. So, so there’s only so much that can be covered with money, I guess.

Conor: 

You’ve said in the book, Tiina and I’m paraphrasing here. So forgive me. You said ESG ratings can score, company’s governance. And internal audit and controls testing while they can reveal many issues. They’re not always able to delve into the behavior and ethical choices of individuals. Is this something that you think that internal audit needs to get better at doing? Or do you see some limitations on internal audit’s role and sort of trying to understand the behavior and ethical choices?

Tiina: 

Well, obviously internal audit, cannot discover everything that’s going on at the company. And often the us is whistle blowing hotlines, for example, which enables employees, but also the foreigners and subcontractors to complain of. So that’s also, I guess, role of learning internal audit to then research accusations. Other books that I’ve read about how anybody can be a fraud detective by Nigel Iyer. And I think that’s really a good idea that. If you can get that competence within the company, that anybody can spot red flags, like the business and sustainability, and the also even if it’s not in your personal expertise, then something that I heard from a compliance officer, for example, if it doesn’t feel right, it probably isn’t. So that more people learn to trust their guts. And also when there’s something they might not be able to get to the bottom of it, if you’re not really inside to some kind of financial numbers, for example, or maybe you don’t have access to the information, maybe it’s not in your role to find it out. But if you can kind of spot something and you get the right, person aware of that, for example, through the whistleblower hotline, then you can detect it. But it’s also about the culture sort of are you making this kind of rules based, so you can have a hundred page manual about what you should and shouldn’t do, but you can always find a loophole as well. If that’s the kind of culture that you’re looking at. As a leader, I guess, what kind of a company do you want to establish and are you teaching people that. Okay, you have to think of whether it’s ethical as well and whether this is right and not just saying that, is it legal. If you expect the sustainability policy to address everything, then you’re always going to fail because you’re not going to know what are all the questions that somebody is going to face in the future.

Conor: 

Yep for sure.

Yusuf: 

You’ve got a specific topic that’s fairly early on in the book, that talks about the difference between ethical investing and sustainable investing. And I found that quite useful cause I had in my mind that there was potential significant overlap between them. And I know that some ESG organizations or ESG focused organizations do have ethical thinking in there sustainability investing. I did think it was a little bit different to what I had expected to see. Where do you see the overlap, if any?

Tiina: 

Good question. So ethical investing, it looks at what you shouldn’t invest on. So it’s more about, you know, banning something. So I don’t want to invest in sin stock is quite traditional. Some investors, they either don’t want to invest in tobacco or gambling and whatnot. Or if you have a different religious background as an investor, then they could be. For example, maybe you don’t want to invest in pork slaughtering or, birth control and et cetera. So that depends on a set of beliefs that the investor has. And often religious organizations, they have sort of a defined members and they share these kind of values and they can make these kind of ethical investment choices. So that’s where it started. And that was the sort of the first topic of a new approach investing. But nowadays, when you look at ESG investing or sustainable investing, so there’s still kind of this kind of value based considerations that sometimes come into play, especially for institution investors. Tobacco is banned by many, but that’s sort of saying that it’s a sin, but thinking more about the health consequences and all of the kinds of causes. So then it becomes something that you can explain why it’s actually, isn’t good. So it’s not more like, like if you look at alcohol, for example, they can be. This kind of use cases where it actually, it doesn’t have such a negative consequences necessarily. So, so that’s the difference. And also there’s this kind of controversial weapons. So some investors who are traditional sustainable investors, they are still burning nuclear weapons, for example, or anti-personnel landmines. that is an overlap, but then an ethical investor might actually ban all of their weapons. So there’s a bit difference. And now the new thing is that. Environmental ideology. Some of the climate based considerations, such as planning, coal. They started more as an ethical question for some investors. Now, of course, we see that there’s, the financial outlook has also changed. And it’s also about risk management and same for tobacco companies, as well as we don’t really know what’s going to be the growth rate of tobacco users and these companies in the future, so they are kind of overlapping. The value based considerations and then the sustainability considerations. So all in all an ethical investors, willing to compromise profits, do you have this kind of a sustainability or value based agenda and a sustainable investor wants both more sustainable future and also good profit.

Yusuf: 

Sustainable investing, focuses on values that are universal almost. Whereas ethical investing is usually specific to individual or group choices around whether certain things can be invested in or not.

Tiina: 

Yeah, I think that’s actually really well put, because yes, it’s exactly like that. So when you look at internationals, for example, that’s something that companies can, can agree on that I don’t want child labor or forced labor, et cetera. So sustainability. There’s often embedded dose And also the other thing is that sustainable investor also looks at the positive, where do I want to invest? Do I want to invest in sustainable development goals and see sort of the opportunities related as well? So it has a wide range of strategies of, screening the most positive and best performance and sustainability choosing a particular theme, et cetera.

Conor: 

In the book you also mentioned that artificial intelligence is starting to be used for sustainable investment. Can you just give us a bit of an overview about how that’s playing out as you see it?

Tiina: 

There’s a couple of European companies, major pension investors in the Netherlands who have taken sort of the lead to look at the sustainable development goals and screen through a wide range of companies, the whole investible universe to identify those that are looking into. Solving some of the greatest challenges of today. And we have a case with, with them on the book with PGGM is one of those on ABGs, the other one on how to do that. And they have actually partnered with research universities and they are addressing, I guess the biggest question now that you know, something that you have to work on your own at the moment to address is like, what is the size of the impact? Because you can identify that, okay, this company, they are solving. Climate change topics. They have sustainable energy. This one is solving water shortages, but are they good at what they are doing and how important is their impact? So that’s something that artificial intelligence has also helped them looking at the research data.

Conor: 

Bringing it back for a second, just to internal audit and the role of assurance in sustainable investment going forward. Where would you see internal auditors, for example, in this space in five years time from now?

Tiina: 

Internal auditor’s, it’s not something that investors can easily find out is sustaining part of the internal audit or can their company just report whatever they want and think it’s an advertisement. And, Also maybe not implement the good practices throughout the business. So I think that’s something that’s kind can ensure that it’s not just an individual project that is sustainable, but the whole company, as something that ideally companies will report on what the internal audit covers.

Conor: 

Those companies that are willing to report their internal audit results on their sustainability efforts. Gives them a competitive advantage over other companies, if they’re willing to be that transparent, potentially.

Tiina: 

Yeah. Like we have a case with a Finnish forestry company that in the book that storyline, so that’s run into all kinds of sustainable accusations throughout the world and , how they got out of the crisis stronger. Just started disclosing all kinds of internal research results and all of that. So when you are making this kind of statements that we found this issue, it doesn’t become such a news afterwards. So if you proactively say that we have this kind of a topic, we are addressing it, this is what we are doing and find it ourselves. So it’s not such a big crisis. Investors don’t like surprises, especially that, this negative worst that can happen.

Yusuf: 

Yeah and talking about case studies. Thank you for the early copy of the book. It should already be live or be going live, when this episode is published. Lots of really interesting case studies in there. So it’s not just theory, but a lot of how it’s actually played out in practice. So, as an internal auditor I definitely would be looking at the book as information to help understand what the landscape of sustainable investing is. So, thank you for pulling this together. I’m sure it’s been huge effort cause it looks like it. So Sustainable Investing, Beating The Market with ESG. If anybody wants to get in touch with you, find out more about your work, what’s the best place to find you.

Tiina: 

I’m quite active on LinkedIn and Twitter. Just shoot me a message there and I’m happy to discuss it. There’s a lot of things going on with Australia and investors and also companies and even my company has an office in Australia. So really good to hear that you’re thinking about the same topics and we can all learn from each other. Happy to get some thoughts and discussions going on.

Yusuf: 

Great. So that’s Tiina Landau. T I I N A – so that’s double I – L A N D A U. And we’ll put a link to your LinkedIn profile in the show notes. Tiina, thanks for joining us.

Tiina: 

Thanks for inviting me. This was a great discussion.