Double materiality assessment of the Finnish Climate Fund

In spring 2023, the Finnish Climate Fund carried out a double materiality assessment with the company’s own experts and members of the management team. Positive climate and environmental impacts are the key tenets of our operations. In this article, we present the results of the assessment with a particular focus on the investors’ perspective.

In line with the EU’s Corporate Sustainability Reporting Directive (CSRD), we carried out a double materiality assessment to identify and assess the direct and indirect impacts of the Climate Fund’s operations on nature and people throughout the value chain and to determine the sustainability risks and opportunities that are relevant to the Climate Fund, the financial impact they have on the company and the dependencies between these two dimensions.

The results of the double materiality assessment are presented in the graph below. All of the environmental themes and the governance theme of the CSRD are material to the Climate Fund. In terms of social responsibility, the material topics are the Climate Fund’s own employees and value chain employees. In the sections below, we discuss the key elements of the material topics both in the Climate Fund’s own and investment operations.

The impacts and financial materiality of the sustainability themes were examined in the medium term. The materiality threshold is shown on the graph as the light-blue box containing the themes material for the Climate Fund.

Climate change and circular economy are the Climate Fund’s focus areas

As expected, climate change emerged as the most material theme for the Finnish Climate Fund. The second most important theme for the company is resource use and circular economy.

In terms of climate change mitigation, investments in climate solutions need to be increased urgently, especially during this decade. This reinforces the need for the financial sector to understand the links between operational activities, the production of greenhouse gases and, naturally, the reduction of greenhouse gas emissions.

The Climate Fund’s investment operations focus on combating climate change, boosting low-carbon industry and promoting related digitalisation. Positive climate and environmental impacts guide our choice of investment targets and we assess every potential case in terms of its emissions reduction potential. Moreover, none of our investments may cause significant harm to any of the six environmental objectives of the EU’s sustainable investment framework.

The climate and environmental impacts, opportunities and risks, are realised primarily through our portfolio companies. As the Climate Fund is a small expert organisation of about 20 people, the climate and environmental impacts of its own operations can be considered minor.

There are significant climate change-related impacts, opportunities and risks that arise from the carbon handprint of our portfolio companies. New technologies are highlighted in our portfolio, which, if successful, have significant emissions reduction potential. The likelihood of the significant scalability of these technologies must be assessed in a conservative manner in the early stages of technology development. Changes in the operating environment, legislation, funding and the availability and prices of raw materials may boost or undermine the operating conditions of the portfolio companies.

Sustainable resource use and circular economy are the stepping stones to a sustainable society. In Finland, the consumption of raw materials is still high by global standards but applying the principles of circular economy has the potential to halt the rise in the use of natural resources.

Our portfolio includes several companies that are focused on circular economy. We estimate the impacts and financial materiality related to circular economy to be high. There may be a number of risks and opportunities associated with circular economy, for instance the availability of raw materials in the supply chains of our investment targets.

Read more about this topic in our theme article on circular economy.

Stakeholders expect investors to include biodiversity impacts in investment decisions

Loss of biodiversity and ecosystems is primarily caused by human activities, such as construction, and the effects of deforestation and soil degradation. Thanks to various lifecycle assessments and the identification of the drivers of biodiversity loss, it is now possible to measure our footprint on nature fairly reliably. However, further development of measuring positive effects on nature is required from a investor’s perspective as current tools mainly include various compensation mechanisms.

Climate change and biodiversity loss are strongly interlinked. Even though all of our investment targets are assessed for their impacts on biodiversity, the Climate Fund’s portfolio so far does not include any cases that would have been selected primarily due to their positive biodiversity impacts. As a result, biodiversity is placed lower in the materiality matrix than circular economy which is already represented by several investment targets in the Climate Fund’s portfolio.

In line with the ‘Do no significant harm’ (DNSH) principle, our investment targets must not cause significant harm to biodiversity. However, not all negative impacts can be avoided. Bioeconomy projects, for instance, may have biodiversity impacts resulting from obtaining biomass and constructing new facilities will have an impact on the surrounding nature. However, we have identified positive biodiversity impacts from our portfolio companies. Some companies, for instance, utilise existing industrial areas for their facilities and one of the cases aims to improve the biodiversity of farmlands.

More information is available in a Master’s Thesis commissioned by the Climate Fund.

Pollution and water and marine resources are also important topics

Pollution and water and marine resources are also material themes, but they are not as prominently represented in the Climate Fund’s portfolio as climate change, circular economy and biodiversity.

The Fund’s investment targets must not cause significant emissions into the air, water, environment or organisms, and they must not cause negative impacts on water and marine resources. Our portfolio includes several facility projects or technologies, the construction or production of which may produce emissions. However, the investment targets are typically associated with significant positive impacts through pollution control or the protection and sustainable use of water and marine resources. Moreover, many projects are also resource efficient in terms of water consumption. According to our assessment, the positive and negative impacts, risks and opportunities are low to medium in terms of scale and likelihood.

Our employees are the key to the success of our mission

The Climate Fund’s own employees are its most important resource and our team enables our company to succeed in its mission and achieve its objectives. Ensuring the skills and know-how of our employees, promoting wellbeing at work, equal treatment and diversity are identified material topics that affect the success of the Climate Fund and how it can fulfil its societal mission.

Our ethical business conduct is primarily outlined by the company’s Code of Conduct. We comply to the regulations that govern our operations and the guidelines provided by our owner, prepare instructions and policies necessary to support our mission and actively monitor the impacts of our activities. We encourage our portfolio companies to develop responsible business practices by requesting information about responsible business conduct and possible violations annually.

In the double materiality matrix, both themes are estimated to have high materiality in terms of impacts, while ethical business conduct has moderate financial materiality and own employees have high financial materiality. The realisation of risks and opportunities associated with employees could impact areas such as the Climate Fund’s funding activities, employer image and reputation. The risks and opportunities associated with ethical business conduct could impact the Climate Fund’s investment opportunities and customer relationships, for example.

Value chain employees have an indirect impact through the investment portfolio

Each year, we ask our portfolio companies to provide information about the risks posed to their employees or value chain. Potential negative impacts can arise, for instance, in the realisation of rights at work or safety on construction sites. Long supply chains and operations in developing countries may increase the likelihood of these risks being realised. We estimate the impacts associated with value chain employees to be medium and financial materiality to be low.

The Climate Fund’s potential direct impacts are minor. The Climate Fund does not manufacture anything and has no supply chains. Finnish suppliers account for 98 % of the company’s total purchases.

Affected communities, consumers and end-users

Of the social themes, neither affected communities nor consumers and end-users rose above the materiality threshold in our double materiality assessment.

The Climate Fund’s portfolio companies may impact local communities, either positively or negatively, but for the most part the risks are limited in terms of responsibility. Consumers and end-users are typically the last of many links in the value chain, and the Climate Chain’s visibility and influence are very low with regard to the theme.

The financial sector can and should drive the change

Climate change and environmental impacts are associated with different impacts, risks and opportunities for both investment targets and investors. By joining forces, investors can address these system-level impacts and risks. Climate solutions play a key role in enabling the transition to a more sustainable society and this transition also offers investors many opportunities. Investors can also promote the social responsibility of their investment targets by including these themes in the assessment of their investment targets and the terms of financing decisions.

More information about the implementation of our double materiality analysis is available in the Climate Fund’s annual report (in Finnish).

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