How To Invest In Sustainable And Responsible Funds In Swedish Money Management

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1 Responsible investments About funds, ethics and sustainability

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3 Responsible investments About funds, ethics and sustainability Swedish Investment Fund Association ( Brasel Publishing ( Copyright 2012 Swedish Investment Fund Association and the publisher Publisher: Brasel Publishing Layout and illustration: Jonas Rahm Editor: Åsa Drakenberg Photo: bambooinasia.com (p 26), Magnus Borelius (p 56), Victor Brott (p 40), Howard Brundrett (p 52), Church of Sweden (p 54), Dan Coleman (p 42, 60 centre), elvisphoto.com (p 34), Håkan Flank (p 12, 20, 61 bottom), Magnus Fond (p 50), Handelsbanken (p 48), Handelsbanken/Bengt Evertsson (p 60 top), Jann Lipka (p 14, 32, 61 top), Henrik Malmsten (p 16), Tina Nilsson (p 28), Magnus Östh (p 10, 44), SEB (p 61 centre), Skagen Fonder (p 60 bottom), Jakob Sörensen (p 24), Hanna Teleman (p 8, 22, 36), Anna Thorbjörnsson (p 38), Vontobel AG (p 46) Brasel Publishing Print: Elanders Fälth & Hässler, Värnamo 2012 ISBN

4 Contents Foreword Pia Nilsson, Swedish Investment Fund Association Trends and facts Managing sustainably and responsibly a natural development of active management Anette P Andersson, SEB Fonder Field trips around the world a practical means of exerting influence Ylva Hannestad, Nordea Fonder Dialogue and influence a cornerstone Marianne Nilsson, Swedbank Robur Sustainable and responsible investments a background Henrik Malmsten, Swesif Different sustainability concepts From niche to mainstream Sasja Beslik, Nordea Fonder The savers Savers prioritise ethics highly when choosing fund management companies Åsa Drakenberg, Swedish Investment Fund Association Do good or expect a better return? Jonas Nilsson, The Umeå School of Business and Economics Responsibility how does it affect performance? Emma Sjöström, Nuwa Transparency helps investors make decisions Axel Edling, The Ethical Council for Investment Fund Marketing (ENF) ENF s statement We are aided by ENF s statement Anna Nilsson, Swedbank Robur Different types of funds same responsibility? A sustainable approach, whatever the fund type Josefine Ekros and Pär Löfving, DNB Sustainability an opportunity in emerging market funds Louise Hedberg, East Capital A sustainable approach should apply to index funds too Liza Jonson, SPP Fonder Can fixed income funds take sustainability criteria into account? Anette P Andersson, SEB Fonder Increased information intake positive for hedge funds Erik Eidolf, Vontobel Stockholm Different approaches a challenge for commodity funds Magnus Strömer, Handelsbanken The companies and capital owners Do companies take respon sibility for sustainability work? Nadine Viel Lamare, Första AP-fonden Corporate social responsibility a key to sustainable success in global markets Anders Nordström, ABB Capital owners with a conscience who help promote development Gunnela Hahn, Church of Sweden Responsible investments investments in perpetuity Magnus Borelius, City of Gothenburg PRI as a driving force The UN s six principles drive development Applying PRI in practice Screening how it works Ulrika Hasselgren, Ethix SRI Advisors Good ethics are a cornerstone of the entire investment fund sector Lena Falk, Swedish Investment Fund Association

5 Foreword The subject of this book is the involvement of fund management companies in sustainability issues. Every fund management company is the subject of wideranging demands for good ethics and a sound approach, and the imposition of special environmental and social issue criteria is becoming more and more the norm. Pia Nilsson CEO of the Swedish Investment Fund Association It began with special ethical funds that exclude companies with links to such sectors as weapons, alcohol and tobacco. The trend has now shifted, and greater emphasis is being placed on positive selection criteria when making investment decisions. Fund management companies are also using their contacts to exert an influence over the companies in which they invest. Fund managers are keen to take their share of the responsibility. The sector as a whole wants to be characterised by transparency and by taking a long-term responsible approach. Fund saving is very suitable for long-term savings plans, such as regular monthly saving, and funds are a particularly popular alternative when it comes to saving for a pension. Fund managers are legally obliged to work in the best interests of their unit holders, which means achieving the best possible return in line with the fund s investment orientation and any special criteria. It is vital that savers are provided with easily accessible information in order to understand what characterises individual funds and in order to facilitate their choice of fund has seen the introduction of the EU s new KIIDs for funds. It is interesting to see consumer research indicating that savers motives differ when it comes to choosing funds that have an explicit responsibility and sustainability orientation. Some savers believe that doing so increases their chances of a higher return, while others are prepared to waive return for the sake of doing good. The research also shows, however, that there is no generally applicable link between either higher or lower yields for funds with specific responsibility and sustainability criteria. Responsible investments mean commitment on the part of the fund management companies to the companies in which they invest. The focus is on environmental, energy and climate issues, and on human rights, work environment issues, anti-corruption measures and a high standard of business ethics. These are not issues of black and white and it can be difficult to draw the boundaries between what is and is not acceptable. Dialogue and transparency are the tools everyone can use in their efforts to bring about improvements and help inspire innovation. The Swedish Investment Fund Association has decided to encourage investor education. The Association is a member of SWESIF (the Swedish Sustain a ble Investment Forum) and is a Network Supporter of the UN Principles for Responsible Investments (PRI). This book, which has been produced through an industry-wide cooperative approach, contains more information about both SWESIF and PRI and we hope that it will not only make a constructive contribution towards increasing know-how, but also stimulate a fruitful discussion. Dialogue and transparency are the tools everyone can use in their efforts to bring about improvements and help inspire innovation. 8 R E S P O N S I B L E I N V E S T M E N T S 9 R E S P O N S I B L E I N V E S T M E N T S

6 Trends and facts Managing sustainably and responsibly a natural development of active management What does managing responsibly and sustainably mean in practice? And what does it mean for the information you seek from the companies? These are common questions put to me by companies and colleagues alike. Sustainability seems to be perceived by many people as being a difficult and unclear concept. Personally, I believe it s about common sense. Running a company in a responsible and sustainable way means maintaining good control over costs and conducting good risk management. Saving resources and being aware of the Anette P Andersson Investment Fund Manager, SEB Fonder risks you face is something on which every company management team should be focusing. Companies with high quality sustainability work are often also well-run from a financial viewpoint. Saving resources such as energy, water and materials can be converted directly into cold hard cash. Good risk control allows these companies to avoid costly adaptations to legal requirements and means they are better positioned to handle increased costs such as taxes, customs duties and transportation costs. Relevant and active processing of business intelligence means the company is able to react more quickly and deal more efficiently with changes in customer preferences and demand. BP is one example of a company that lacked good risk awareness, and which has paid for that lack. The disastrous oil spill in the Gulf of Mexico in 2010 was not only an ecological catastrophe of unfathomable scale; it also forced the company into expensive legal proceedings. The USD 20 billion or so that the company is planning to pay out in the form of compensation is lost profit. Siemens, which was convicted of corruption and fined EUR 2 billion is another example. These two examples may be somewhat extreme, but if these companies had had better risk control, this might have been possible to avoid. So what are we looking for in companies when we attempt to build up a picture of the way in which they conduct their operations? The most important factor by far is that the company management is motivational and committed. They must be able to present their strategies for resource utilisation, HR policy, product development and management. We want them to comply with the UN Global Compact (see page 18), which includes the most fundamental principles for corporate social responsibility. We would also like to see them report their emissions to the Carbon Disclosure Project an independent, non-profitmaking organisation that is working to reduce greenhouse gas emissions and to promote sustainable water usage by companies and cities. If you can t measure it, you can t improve it. Saving resources such as energy, water and materials can be converted directly into cold hard cash. 1 0 R E S P O N S I B L E I N V E S T M E N T S 1 1 R E S P O N S I B L E I N V E S T M E N T S

7 Trends and facts Field trips around the world a practical means of exerting influence Ylva Hannestad An understanding of the commercial terms of the companies in which we at Nordea Fonder invest is one of the most important factors in determining whether we will be able to influence a company to move in a positive direction. Field trips are a way for us to gain a better understanding of the companies operations, which is why we visit several companies in various locations worldwide every year, in an attempt to influence them to improve the way they work with environmental and social issues. ESG analyst, Nordea Fonder In 2011, the team from Nordea that work with responsible investments visited Cambodia, for example, in order to meet with some of Hennes & Mauritz suppliers. The visit was triggered by a number of reports of substandard working conditions amongst H&M s suppliers in Cambodia. It had, for example, been reported that there had been several cases of employees fainting at work at one of the suppliers. We discovered, during our visit, that the local investigations into the incidents were incomplete. Some reports suggested exhaustion as a reason for the employees having fainted, while others suggested that the incidents were due to mass hysteria. Our investigation clearly showed that there are a number of issues that need to be rectified in order to improve the employees working conditions. We recommended a number of specific measures that the company should take, including improving the air conditioning system in the plant to ensure the temperature there remained at a reasonable level, and improving access to drinking water during working hours. The company also needed to find a better way of managing working hours and overtime during peak seasons. An understanding of the commercial terms of the companies in which we at Nordea Fonder invest is one of the most important factors in determining whether we will be able to influence a company to move in a positive direction. Both Nordea and H&M were happy with the open and positive attitude on the part of the factory s Chinese management team. The factory immediately implemented measures with regard to the availability of drinking water and began working with a longer term programme of further improvements to working conditions. 1 2 R E S P O N S I B L E I N V E S T M E N T S 1 3 R E S P O N S I B L E I N V E S T M E N T S

8 Trends and facts Dialogue and influence a cornerstone Marianne Nilsson Corporate Governance Manager, Swedbank Robur One of the trends that has become increasingly pronounced over the past decade has seen financial institutions, such as fund management companies, being expected to take an actively responsible ownership role in the companies in which they invest. Today s institutional owners are major shareholders in listed companies, and customers expect the people they have chosen to manage their savings to assume overall responsibility for their management duties. Which includes a responsible approach to ownership issues. There is also a growing realisation on the part of asset managers that this helps improve value creation within the companies. Here at Swedbank Robur, we largely conduct our work as active owners in the run up to and during company general meetings, but we also conduct ongoing dialogues with Boards of Directors and company management teams and we work in partnership with other owners. Important ownership issues include, for example, the work surrounding the nomination committee. The nomination committee is a preparatory body that works in the run up to general meetings to come up with suggestions with regard to the election of Board Members and Auditors, amongst other things. In the USA and UK, for example, the nomination committee is an offshoot of the Board, while in Sweden, the work of the committee is conducted outside the Board. The nomination process has become increasingly structured, with Board evaluations and requirement profiles for new Board Members. The balance between independent and non-independent Members is assessed, and it is also important that the Board contains a wide range of expertise that is in line with the requirements of the company in question. The composition of the Board must also ensure that the benefits that diversity provides are achieved. Capital structure and dividend policy, public takeover bids, share-based incentive programmes and sustainability issues are other areas in which we take an active ownership role. As major shareholders, we have a natural platform from which to impose demands with regard to the way in which the companies work with the environment, human rights, anti-corruption and business ethics, and we make these demands for all of our funds. During our dialogues with the companies, we stress the Board s responsibility for these issues and the need for clear documentation and steering systems detailing the companies concrete measures to make improvements in these areas. We support a trend where major owners act as responsible owners because it benefits our investment fund savers. We are also keen to promote the maximum possible transparency and public confidence in the stock market. In Sweden alone, we vote at around 150 general meetings every year and we also sit on over 60 nomination committees. Over the years, we have built up an organisation that coordinates and takes decisions on matters relating to our ownership activities and we use both internal and external resources, e.g. by having independent Board Members for the fund management company. Our ownership policy describes the way in which we exercise our corporate governance role and the demands we make of the companies in which we invest. The ownership policy is available in full on our website, where we also provide up to date information on our ongoing ownership and sustainability work. Sustainability issues are a component of the investment process for all of our funds, and our sustainability analysts are continuously updating our management teams on the sustainability work of the companies in question as well as evaluating our financial counterparties with regard to their sustaina bility services. As major shareholders, we have a natural platform for imposing demands with regard to the way in which the companies work with the environment, human rights, anti-corruption and business ethics, and we make these demands for all of our funds. 1 4 R E S P O N S I B L E I N V E S T M E N T S 1 5 R E S P O N S I B L E I N V E S T M E N T S

9 Trends and facts Sustainable and responsible investments a background Henrik Malmsten Chairman of SWESIF It has become increasingly common over the last decade for managers to incorporate sustainable and responsible criteria into their investment model. Some researchers believe, however, that sustainable and responsible investments began way back in the 17th century with the Quakers (who were known for being early opponents of slavery, for being peace campaigners, and for having a non-hierarchical organisation). Others believe that the roots of this type of investment began in the 1980s with the anti-apartheid movement. Strong religious values often played a part in investment decisions before the new millennium began, and there was a desire for the investors own ethical standpoints to be part of the investment process. The new millennium, however, has seen an increasing shift from overall ethical investments to a primary focus on sustainable and responsible investments. Sustainable and responsible investments are not, first and foremost, a question of a save the world mentality: rather the aim is to achieve the best possible return on the investment. The key factor is the way in which this return is achieved. Sustainable and responsible investments do not automatically result in either a higher or a lower return. It is, first and foremost, a question of a more complete risk analysis, in that those companies that operate in accordance with the principles for sustainable development also seem to manage their financial undertakings to a high standard. This, in turn, reduces the risks. There are several approaches to making sustainable and responsible investments, the most common of which are opting out or opting in certain investment objects. Opting out means avoiding investing in companies operating in the armaments, tobacco and alcohol sectors, for example. This was the method most commonly used before the year The positive selection process, i.e. one that involves actively selecting the companies in which one wishes to invest on a range of different criteria achieved its breakthrough in the early part of this century. The method is primarily implemented in one of two ways: using the best in class method involves choosing to invest in those companies which, within their own sectors, have achieved the greatest success in introducing a sustainable methodology. It can also involve basing one s investment strategy on a particular theme, such as renewable energy. Influencing companies through one s ownership is another way to approach sustainable and responsible investment. A number of major institutional investors have increased their involvement in this type of approach, and hence enhanced its effectiveness. The most modern fund managers nowadays have integrated a sustainable and responsible methodology into the entire organisation s investment and decision-making processes. The most modern fund managers nowadays have integrated a sustainable and responsible methodology into the entire organisation s investment and decisionmaking processes. 1 6 R E S P O N S I B L E I N V E S T M E N T S 1 7 R E S P O N S I B L E I N V E S T M E N T S

10 Trends and facts Different sustainability concepts Different management methods opt out, opt in and influence The flora of concepts in the field of sustainable and responsible investments can seem like a jungle. The path through that jungle for those investors who want to focus on a sustainable and responsible methodology have, however, become clearer with the establishment of a number of international norms and standards. See below for an explanation of the most common concepts. SRI, Sustainable and Responsible Investments. Sustainability refers to long-term sustainable development that takes into account future generations. Responsibility refers to issues such as human rights, labor and environment. CSR, Corporate Social Responsibility. The idea of CSR is that a company has obligations to stakeholders other than its owners. The company is, in other words, managed in a way that takes into consideration environmental and social responsibilities, alongside the financial targets. CSR can facilitate responsible investments, i.e. investments where the choice of investment object is determined by the investor s own criteria or values, beyond expectations of financial returns. ESG, Environmental, Social and Governance issues comprises criteria that relate to environmental responsibility, social responsibility and corporate governance. There has been an increasing focus on ESG in recent years. The management focus when it came to sustainable and responsible investments was previously on opting out, i.e. on having a negative selection process that involved deselecting companies or sectors from one s portfolio on the basis of certain specific criteria. These days, opting in is also more common, i.e. having a positive selection process in which the investor looks for companies Swesif and PRI SWESIF (the Swedish Sustainable Investment Forum) was founded in 2003 by a number of major institutions with the aim of boosting investors know-how when it came to sustain able and responsible investments. SWESIF has been working in partnership with the UN s PRI (Principles for Responsible Investments) initiative for a number of years now. PRI is a network of international that promote responsible business methods and/or produce products or services in a sustainable way. The investor can also choose to influence the company through active ownership with the aim of promoting responsible enterprise and in order to secure the return on the investment in the longer term. Find out more about the selection method known as screening on pages investors who are working to implement the six principles of sustainable and responsible investments (see page 59). Many Swedish and international capital owners and institutional investors have also signed up to PRI s principles and are working to implement the methodology into their management practic es and organisation. Global Compact. Just over 6,000 companies worldwide comply with the United Nations Global Compact (UNGC), which is a UN initiative designed to encourage companies to take on board and implement sustainable and responsible methodologies as part of their operations. There are also a number of OECD guidelines. GRI, The Global Reporting Initiative, is a non-profitmaking organisation that has compiled a relevant and usable standard for sustainability reporting. Over 3,000 companies now comply with this reporting standard. The Sustainability Profile In 2011, SWESIF launched its Sustainability straightforward information on the ways in Profile tool, which is aimed at fund savers which funds apply sustainability criteria to their and the public alike and which is designed management. Read more on pages to enable savers to obtain easy-to-grasp, 1 8 R E S P O N S I B L E I N V E S T M E N T S 1 9 R E S P O N S I B L E I N V E S T M E N T S

11 Trends and facts From niche to mainstream The next stage in responsible investments will be the development of more integrated products in which relevant environmental aspects, social aspects and business ethics aspects will be integrated into every fund, right from the start. Sasja Beslik CEO of Nordea Fonder It is clear, from the reviews of ethical funds that have been carried out, that today s funds do not match up to the expectations of the outside world. There seems, for example, to be a general perception that ethical funds automatically prohibit investments in fossil fuels, which is not the case. The type of funds usually referred to as ethical funds can, in our opinion, be divided into five groups: Group 1, which came first, uses de-selection of companies or sectors negative screening, in other words. Group 2, which came along a little later, does not exclude sectors; rather they choose those companies that are best in class from a financial, environmental and social viewpoint. Group 3 comprises theme funds. A climate fund, for example, chooses companies that show special attention to climate concerns or which have products that benefit the climate, such as environmental technology companies. Group 4 comprises funds that integrate environmental aspects and social aspects into ordinate funds. This is the type of product that will gain even greater ground in future because not only do they actively help generate a good return, they are actively helping to build a more sustainable world. Group 5 invests exclusively in sustainable companies and hence do not invest, for example, in companies that use fossil fuels. If fund management companies are to continue employing the Group 1 methods alone, i.e. excluding companies, they have no power to influence. Considerable potential exists for influencing the companies that make up the portfolio, even if one is a relatively small owner. It is not the size of the holding that makes the difference; it is the knowledge of the companies operations and the challenges they face. The influence must always be results-orientated. When we meet with and visit companies, we leave behind us knowledge and ideas for ways in which the business can develop, but we also leave behind clear action plans and follow up on them. Finally, I believe that the number of explicitly ethical funds will decline in future and that they will be integrated into the normal management process, becoming part of the standard range of funds offered to savers. It is not the size of the holding that makes the difference; it is the knowledge of the companies operations and the challeng es they face. 2 0 R E S P O N S I B L E I N V E S T M E N T S 2 1 R E S P O N S I B L E I N V E S T M E N T S

12 The savers Savers prioritise ethics highly when choosing fund management companies The ethical aspect is an important factor for savers when choosing fund management companies. All savers place great value on fund management companies offering high quality funds that are orientated towards ethical, environmental and responsible investments, assigning an average rating of four to this factor on a scale of one to five, where one is unimportant and five is very important. Range of ethical funds important when choosing fund management company Very important Åsa Drakenberg Head of Communications, the Swedish Investment Fund Association These are the results of a comprehensive survey of Swedes aged between 18 and 79 conducted by TNS Sifo Prospera on behalf of the Swedish Investment Fund Association in the spring of Women place greater importance on the fund management company offering ethical funds than do men, with women giving this factor a rating of 4.3 on the scale, in contrast to men s rating of 3.7. There is no substantial difference between the different age groups, but the ethical factor is slightly more important in the most senior age group (aged 63 79) than in the youngest (aged 18 42). When selecting a fund, ethical and environmental considerations in the fund is the third most important aspect that the saver takes into account following fees and risk. The survey also asked respondents to rate the importance of a fund management company being an active owner of the companies in which the funds invest. This might take the form of attending general meetings of the company or of maintaining an ongoing dialogue with the companies on a range of issues. Almost six out of every ten respondents stated that it is important. Men placed a slightly higher importance on this factor than did women. 2 1 Unimportant All Women Men Source: TNS Sifo Prospera All savers place great value on fund management companies offering high quality funds that are orientated towards ethical, environmental and responsible investments. 2 2 R E S P O N S I B L E I N V E S T M E N T S 2 3 R E S P O N S I B L E I N V E S T M E N T S

13 The savers Do good or expect a better return? Jonas Nilsson researcher at the Umeå School of Business and Economics, and SIRP (Sustainable Investment Research Platform) There s nothing particularly surprising about the fact that consumers are becoming increasingly interested in responsible investments. Investments do, admittedly, differ to some extent from normal purchase decisions, but funds are still a consumer product that changes in line with its customers preferences. Ethics and the environment have become increasingly important to many people and it is only natural that this societal trend has also had an impact on the investment fund market. What does ESG mean? ESG stands for Environment, Social, Governance, i.e. questions relating to environmental concerns, social concerns and corporate governance. As ESG factors (see info box) have become ever more important within the financial sector, there has been a growing interest on the part of the research community in ethical investments, particularly perhaps in light of the fact that ethical considerations could, to some extent, be said to run counter to certain traditional conceptions of the proper preferences for an investor. One example of a question under discussion is what makes fund savers choose to invest in ethical funds? Is it simply in order to make the world a better place, or do financial returns also play a part in influencing savers choices? Research focusing on fund consumers motivations for investing in ethical funds shows that both of these factors are relevant. The research also shows, however, that the question is, to some extent, wrongly phrased. Rather than focusing on whether ethical fund consumers invest in order to do good or because they want a better return, it is more relevant to ask who is investing for these different reasons. Several studies have shown that investment fund savers have widely differing reasons for choosing to invest ethically (e.g. Nilsson, 2009, Derwall et al, 2011). Some people choose these funds because they have a genuine commitment to ethical and environmental issues. This group is keen to influence companies behaviour or to boycott companies they regard as ethically questionable. These sav ers differ substantially from those who invest in ethical funds primarily because they think it is a good deal from a financial viewpoint. Here, ethical funds are an alternative for savers who believe that investments in sustainable companies are a good way of achieving a healthy financial return. For these savers, in other words, an investment in an ethical fund does not necessarily have anything to do with ethical commitment. Online The full text of Jonas Nilsson s thesis can be found at Search for Consumer decision making in a complex environment. The author s recommended reading Derwall, J et al (2011), A tale of values-driven and profit-seeking social investors. Journal of Banking & Finance, 35 (8), p Nilsson, J (2009), Segmenting socially responsible mutual fund investors: The influence of financial return and social responsibility. International Journal of Bank Marketing, 27 (1), p Rather than focusing on whether ethical fund consumers invest in order to do good or because they want a better return, it is more relevant to ask who is investing for these different reasons. 2 4 R E S P O N S I B L E I N V E S T M E N T S 2 5 R E S P O N S I B L E I N V E S T M E N T S

14 The savers Responsibility how does it affect performance? Emma Sjöström PhD in Economics and Founder of the knowledge agency NUWA Does it pay to invest responsibly? A great many researchers have spent a great deal of time and effort attempting to answer this question, and the short answer is that the resul ts point in different directions. It is not possible to say, therefore, that the return on ethical funds is either better or worse than that on other funds. It is possible to find support for both beliefs: that funds and indices that take environmental and social responsibilities into account perform better than their conventional equivalents and that they perform worse. Many researchers, however, seem to have found that it makes no difference to the riskadjusted return. This view is confirmed by, amongst other things, the overview study I have conducted and which involved reviewing all of the academic research in the area published between 2008 and My research shows that of twenty one studies, one third found that responsible investments did not result in either a higher or a lower return. Almost the same number of studies show a mixed result within the same field of investigation, e.g. that it varies over time, between products or between markets. There are also five studies which concluded that responsible investments yield a higher return than conventional equivalents and three showing the opposite. It is no real surprise that the research has yielded such different results. The studies use data from different markets and different periods of time, and examine different types of products. Researchers may use different calibration methods and the rigour of their studies may also vary. Whether a fund (responsible or not) has performed better than a comparison fund can also be affected by factors other than those that can be directly linked to environmental and social responsibility a fact not always considered in the studies. The fact that responsible investments can be defined in so many different ways also makes the process something like comparing apples and pears: while some funds avoid weapons and alcohol, others focus on environmental work or working conditions amongst the company s suppliers in low-pay countries. The returns from this profusion of funds can, of course, differ. One overall conclusion might be that trying to generalise about responsible investments on the basis of individual studies is tricky, and statements of the It s proven sustainable funds perform better/worse! kind are, therefore, simply not credible. A better approach would be to redirect our spotlight s beam. Rather than fixating on the returns from an historic perspective, we should be asking, Why are the returns higher or lower in different cases? Only then would the answers become truly interesting. Online Emma Sjöström (2011), The performance of socially responsible investment: A review of scholarly studies published Stockholm School of Economics; Nuwa AB. The fact that responsible investments can be defined in so many different ways also makes the process something like comparing apples and pears: while some funds avoid weapons and alcohol, others focus on environmental work or working conditions amongst the company s suppliers in low-pay countries. 2 6 R E S P O N S I B L E I N V E S T M E N T S 2 7 R E S P O N S I B L E I N V E S T M E N T S

15 The savers Transparency helps investors make decisions Axel Edling Chairman of the Ethical Council for Investment Fund Marketing (ENF) Savers need a transparent presentation of what a specifically responsible investment policy means to enable them to decide for themselves whether it lives up to their expect ations. This presupposes not only fully detailed product descriptions, but checks and balances that ensure the fund actually follows its stated investment policy. Many savers are looking for investments that can help promote a good performance, not only with regard to their personal savings, but from a wider perspective as well: one that includes global environmental and fairness issues, for example. The range of funds now being marketed as particularly responsible are a response to this desire on the part of savers. ENF s 2009 guidelines focus on the marketing of these funds. Good practice offers a natural starting point in this respect: all marketing must be true and reliable and must provide sufficient information to give savers a reasonable basis on which to make an informed decision. This is particularly critical when the products are, by their nature, difficult to assess, which is the case for investment fund savings. It is also vital for the industry s own credibility amongst consumers that the information lives up to stringent standards. Not only is a fully detailed product description vital, there must also be a system of monitoring ensuing adherence to the fund s investment policy. Transparency on these matters is key, not only before the purchase decision is taken, but during the subsequent relationship between funds and savers. One question that we discussed in ENF during our work on the guideline was whether the concept ethical should be defined. We decided that it would be inappropriate to try and do so. The concept is, admittedly, imprecise, and there is a risk that it will be used in a sweeping way that paves the way to false expectations on the part of savers. But it is simply not possible to establish once and for all exactly how high the ethical bar should be placed. It is more appropriate, in this context, for the deciding factor to be savers preferences. One of the core points of the ENF guidelines is that when a fund management company s marketing stresses that a particular fund is orientated towards environmental or social considerations, for example, it must also make it absolutely clear on what basis it makes this claim. It must, for ex- ample, clearly specify the sectors or products that the fund has deselected. The ENF has established a minimum requirement that states that a maximum of five per cent of the turnover of a company in which the fund invests may come from a sector that the fund management company claims to avoid. It has been suggested, from time to time, that this level should be lowered and a zero tolerance approach instituted. The ENF came to the conclusion that this would be an empty gesture, rather than a realistic requirement. It is currently virtually impossible to establish without any shadow of a doubt that none of the turnover in the companies in which the fund invests comes from certain deselected sectors. We have also assumed that enabling consumers to base their choices on improved transparency with regard to the companies work in such areas as ethics and the environment will lead the trend towards zero tolerance. The use of the ethical label also seems to have declined slightly in recent years in favour of the more concrete and more comprehensible one of a focus on responsible investments, the environment, sustainable development, and so on. This trend is, in my opinion, a good one, not least when one bears in mind the question marks that can otherwise arise with regard to funds that are not launched as ethical ones. A professional operation must, of course, respect current conventions with regard to human rights, along with international norms intended to protect the climate and the environment. The range of funds offered and the way in which savers behave is characterised by a dynamic. Issues in relation to responsible investments are attracting a lot of attention, both here in Sweden and internationally. The ENF has announce d that the guidelines will probably need reviewing in a few years time, and we are keen to hear about the experiences of both consumers and the sector, and to learn about their experiences. The Ethical Council for Investment Fund Marketing (ENF) ENF is an independent council whose aim is to monitor the compliance with applicable regulations by fund management companies in their information provision and marketing. These regulations include the Swedish Investment Fund Association s Guidelines for information and marketing etc. by fund management companies. The Council can act independently and comment on matters of principle. Individuals, companies and authorities can also report cases to the Council. A professional oper ation must, of course, respect current conventions with regard to human rights, along with international norms intended to protect the climate and the environment. 2 8 R E S P O N S I B L E I N V E S T M E N T S 2 9 R E S P O N S I B L E I N V E S T M E N T S

16 The savers ENF s guideline statement on the marketing of ethical funds Way back in 2004, the ENF commented on the marketing of ethical funds at the request of the Consumer Ombudsman. By 2009, a desire had been expressed for this statement to be updated in line with developments and progress and with changes in the concept picture. The ENF guideline statement can be summarised as follows: The ENF is of the opinion that the following criteria must be met in order for a fund to be marketed as ethical or described using another similar term that states or implies that the fund focuses on investments on the basis of specific environmental, social or other similar considerations. The fund management company shall have a clearly defined process for selecting its investments. This requirement applies whether the fund applies positive or negative criteria in its selection process, or whether the company works by attempting to influence the companies in which it invests to move in the desired direction. The fund management company shall have a function that continuously monitors and ensures compliance with and adherence to the selection process. when investments are made on the basis of negative selection criteria, a maximum of five per cent of the turnover in the companies in which investments are made, or of the corporate group of which the company is part, may refer to operations that do not live up to the special requirements established by the fund management company. The fund management company shall, over and above the information on the fund s investment orientation that must be contained in its fund provisions, KIID and information brochures, also present details of the following in a clear and easily accessible manner: the company s investment policy for the fund, including information on selection criteria and turnover limits, and the company s selection process for the fund and the way in which the process is monitored and ensured. The information shall be provided on the company s website, but it must also always be available in printed form. The fund management company shall provide a detailed account in its annual report and Q2 reports of the way in which it has complied with the investment policy with regard to the orientation of investments based on special considerations. The fund management company shall also, to the extent that it has deviated from this policy, specify the measures taken as a result thereof. 3 0 R E S P O N S I B L E I N V E S T M E N T S 3 1 R E S P O N S I B L E I N V E S T M E N T S

17 The savers We are aided by ENF s statement Anna Nilsson Head of Swedbank Robur s sustainability analysis Sustainability funds have been a part of Swedbank Robur s product range for the last thirty years now. The 1990s saw the emergence of an overgrown jungle of ethical funds in the Swedish market. The wide variation in the ways in which ethical criteria were applied, however, created confusion amongst customers and also generated credibility problems for professional sustainability funds. It was not until eight years ago that a guideline statement was issued by the Ethical Council for Investment Fund Marketing (ENF) on the ways in which the sector was allowed to market funds as ethical or sustainable. Swedbank Robur believes that the fact that there are now far fewer funds on the market with imprecise sustainability criteria is a direct result of this ENF guideline statement. The core point of the guideline statement from ENF is the requirement for the fund management company to have a well-defined selection process and for its external communication regarding the criteria, selection process and results to be clear. The nature of sustainability funds can vary widely some, for example, only invest in companies that perform the best sustainability work within their industry and that do not manufacture weapons or tobacco so it is vital that customers can see what every fund stands for and hence be able to choose the funds that are the best match for their personal preferences. Here at Swedbank Robur, we provide information about our sustainability criteria, our analysis resources, and our analysis and selection The sustainability profile is aimed at fund savers and interested members of the public, but can also be a useful tool for advisors. processes on our website and in the funds KIID and information brochures. We complement this information with concrete examples of our sustainability analyses of companies and corporate dialogues in newsletters and annual reports, etc. We were also involved in the pro duction of a standardised information sheet, known as a sustainability profile, in cooperation with SWESIF (the Swedish Sustainable Investment Forum). This information sheet can be used by funds to show how their management takes environmental, social and business ethics-related issues into account. The sustainability profile is aimed at fund savers and interested members of the public, but can also be a useful tool for advisors. The sustainability profile should be seen as a complement to the normal key investor information document and is designed to facilitate comparisons of sustainability criteria between different funds from different players. One year after its introduction, the sustainability profile was being used by all of the major players in the Swedish market, and SWESIF is working on how it can be refined and how the use of and familiarity with the profile could be further increased. We are taking an active role in this work because it is important that the work on sustainability funds is transparent, and because we want to make it easier for savers to choose sustainability funds. 3 2 R E S P O N S I B L E I N V E S T M E N T S 3 3 R E S P O N S I B L E I N V E S T M E N T S

18 The savers Screening how it works Ulrika Hasselgren ceo of Ethix SRI Advisors Screening is a relatively common concept in many settings, e.g. in organisational management, recruiting and health care. Screening can entail taking a broad overview or focusing on certain specific issues. Screening is also a common concept when talking about responsible investments, strategies for sustainability, or ethical and environmental funds. Screen ing, in this context, refers to a method by which one systematically searches within a given population (e.g. a fund s holdings) for a certain factor which may have an effect on the holding (the company) or the fund. Screening is an attempt to identify the incident or risk factor at as early a stage as possible in order to enable a possible problem to be prevented or resolved. Screening, in other words, entails on the basis of a fund s holdings and of certain fixed criteria, such as the environment and human rights actively seeking to identify companies which fail, in one way or another, to live up to these criteria. The systematic search is carried out in a variety of ways, depending on the criteria set for the screening process. If environmental and human rights criteria are set on the basis of UN conventions and international agreements, for example, a systematic search is made of numerous open sources, such as UN organisations, authorities, expert organisations, voluntary organisations, and the media. The information obtained, when combined with information obtained from companies and industry organisations, forms the basis for evaluating a problem or a company s involvement in a particular situation. If the criteria refer, instead, to sectors or products such as alcohol, tobacco and armaments the systematic search is carried out within the company, through their annual reports, and through industry and expert organisations. Another form of screening involves making a positive selection of companies adjudged to perform well in terms of e.g. environmental and social responsibility, and who are successfully managing their risks and opportunities Another form of screening involves making a positive selection of companies adjudged to perform well in terms of e.g. environmental and social responsibility, and who are successfully managing their risks and opportunities relating to environmental and social responsibility. relating to environmental and social responsibility. The systematic search in these cases is done directly via the company concerned as well as through available data from a variety of relevant sources. Whatever the criteria chosen, the screening results in the identification of a number of companies. The fund manager can then either engage in a dialogue with the companies, with the aim of influencing them in the areas that have been identified as problematic or risky, or can elect not to invest in those companies that have been identified as problematic or risky, or actively select companies which are considered as best in their respective industries. The first fund to develop a screening method based on international norms for the environment and human rights was Sjunde AP-fonden, which was tasked by Sweden s Parliament, way back in 2000, with taking ethical and environmental considerations into account in their management without thereby foregoing the requirement for a high rate of return. Ethix SRI Advisors provides, amongst other things, systematic monitoring of over 6,000 companies worldwide on the basis of set criteria with regard to such areas as the environment, human rights, working conditions and anti-corruption work. 3 4 R E S P O N S I B L E I N V E S T M E N T S 3 5 R E S P O N S I B L E I N V E S T M E N T S

19 The savers Good ethics are a cornerstone of the entire investment fund sector Lena Falk Deputy General Counsel, the Swedish Investment Fund Association This booklet is about fund management that pays particular attention to factors such as ethics, the environment and social issues. But good ethics are definitely a matter for all fund management companies in that all fund management must by law be carried out in the collective best interests of the unit holders. Creating and maintaining confidence in the investment fund market is an important task for the industry as a whole. That is why, in addition to the various legislative and regulatory provisions, there has been a system of selfregulation for many years now that is designed to summarise the principles that should govern the way in which fund operations are conducted in Sweden. The Swedish Investment Fund Association s own Swedish Code of Conduct for Fund Management Companies details good practice in the Swedish investment fund market, and compliance with the Code is mandatory for all of the Association s member companies. One of the fundamental principles of the Code is that fund management operations shall be sound and shall be characterised by high integrity. The Code also requires all those who represent fund management companies to act in an ethically acceptable way. Ethical positions shall be part of every fund management company s operations, and there is also a legislative requirement for fund management companies to act in an honourable, fair and professional manner at all times. The Swedish Investment Fund Association has also instituted a number of guidelines in parallel with the Code of Conduct. The Association s guidelines for investment fund managers as shareholders, for example, stresses the fund management company s obligation to endeavour to achieve the best possible return and to act in the collective best interests of the unit holders. To what extent does this formulation offer the scope for taking other aspects into account in addition to the specific one of returns? The matter is, of course, simplified if the fund s specific investment orientation has stated that environmental or social aspects shall be taken into account in the management operations. At the same time, it is clear that ethical considerations that have no negative effect on returns can never be deemed to contravene the unit holders collective best interests. It will probably become increasingly clear that it is not a question of how expensive it is to analyse companies on the basis of sustainable principles, but rather one of how expensive it can be not to analyse them in this way. Transparency and good information are amongst the most important tools in ensuring sound fund management operations, and the Swedish Investment Fund Association s guidelines consequently address the ways in which information shall be provided by fund management companies who market funds which have an investment orientation that places special emphasis on environmental, social or other similar considerations. Taking a clear stance in favour of fundamental ethical considerations such as human rights or environmental concerns is important if public confidence in all forms of investment fund saving is to be maintained. The combination of legislation with the Association s Code and guidelines guarantees a high standard and an industry that acknowledges its responsibility for a high standard of ethics in the investment fund sector and thereby also generates the preconditions for an investment fund market in which fundamental principles of responsibility and sustainability permeate every investment. Online The Swedish Investment Fund Associations Code of Conduct and guidelines can be viewed at It will probably become increasingly clear that it is not a question of how expensive it is to analyse companies on the basis of sustainable principles, but rather one of how expensive it can be not to analyse them in this way. 3 6 R E S P O N S I B L E I N V E S T M E N T S 3 7 R E S P O N S I B L E I N V E S T M E N T S

20 Different types of funds same responsibility? A sustainable approach, whatever the fund type Equity funds are probably the funds that most savers associate with sustainable investments. There are good reasons why this is the case in that as shareholders, one is responsible for the way in which the company s operations are conducted. Twenty five years ago, Swedish and other Nordic companies largely operated exclusively in their domestic markets, where laws were set in accordance with clear, democratic rules of the game. This meant it was relatively easy to manage a Nordic equity fund, simply by avoiding companies with undesirable products. Globalisation has exposed Nordic companies to new risks: their manufacturing and subcontractors are nowadays increasingly located in developing countries where the parent companies encounter the sort of problems and challenges that characterise these markets, such as low economic standards and undemocratic governance. Companies worldwide are also facing an ever-accelerating ecological crisis, particularly in the form of the threat of climate change, which means that those companies who want to be part of a sustainable future must change their production methods and their energy consumption. Businesses are increasingly realising that they must review a product s entire lifecycle, and even indirect emission sources, such as transport, are important. The investment fund sector has had to change in line with these external changes. Managers of sustainable equity funds must assess a multitude of new factors as part of their investment decisions nowadays. Does the company have systems in place that prevent its involvement in breaches of human rights and labour rights? What is the company s attitude towards corruption? What are the risks involved in investing in a company that is overly reliant on fossil fuels? We work actively to analyse and evaluate sustainability risks and have Josefine Ekros and Pär Löfving Sustainability Analysts, DNB dedicated specific resources to this end. The funds managers also actively attempt to reduce risks by engaging in dialogues with the companies to discuss the sort of measures they could take. The international scope of the Nordic companies operations means that these dialogues can range all the way from working conditions in Bangladesh to forestry management and biological diversity in Uruguay. Seeing a company s growth potential has always been a central component of our share portfolio management, and nowadays this increasingly requires the managers to become experts in such fields as enhanced energy efficiency, health trends and water purification. Sustainability risks often pose very real financial risks for the companies as well, and it is just as important for the manager to have control over these risks in ordinary equity funds as in specifically ethical ones. To this end, we have instituted an ethical platform that establishes a minimum level for the sustainability risks that we will tolerate in our funds, irrespective of whether the funds are officially designated as ethical ones. Businesses are in creasingly realising that they must review a product s entire lifecycle, and indirect emission sources, such as transport, are important. 3 8 R E S P O N S I B L E I N V E S T M E N T S 3 9 R E S P O N S I B L E I N V E S T M E N T S

21 Different types of funds same responsibility? Sustainability an opportunity in emerging market funds East Capital, which focuses on emerging markets in Eastern Europe, Russia and China, is working actively to integrate an analysis of material and relevant factors in connection with the environment, social conditions and corporate governance (ESG) into its investment process. Louise Hedberg Director Ownership Issues, East Capital We have a duty to our customers, the unit holders, to understand how different sustainability issues affect the companies from a risk and profitability perspective, and regard doing so as a component of generating the optimum return over time. Sustainability issues are not, as yet, as high on the agenda in the markets in which we operate as they are in the Nordic region, but this does not prevent us from raising them. We visit around 1,200 companies every year, and during these visits we discuss the ways in which the companies interpret challenges and opportunities in relation to sustainability issues. What would stricter local or international environmental legislation mean for them? Can the opera tions be made less resource-intensive? Rather than excluding companies that have made insufficient progress in their sustainability work, East Capital prefers to try and influence the company to initiate changes and to build up its readiness to address such issues. The challenges faced in our markets are substantial. We must be realistic in our dialogues with the portfolio companies, and focus on concrete measures that strengthen their position and value, such as improving transparency or encouraging the companies that face the biggest environmental challenges to attack them in a strategically well thought-out way. Rather than excluding companies that have made insufficient progress in their sustainability work, East Capital prefers to try and influence the company to initiate changes and to build up its readiness to address such issues. 4 0 R E S P O N S I B L E I N V E S T M E N T S 4 1 R E S P O N S I B L E I N V E S T M E N T S

22 Different types of funds same responsibility? A sustainable approach should apply to index funds too Many asset managers regard the application of sustainability screening methods to index funds as problematic because it necessitates the exclusion of companies that fail to meet the required standards. Excluding a company makes it harder for the fund to match its index and means that it may not, under current regulations, be classified as an index fund. * Liza Jonson CEO of SPP Fonder There are, however, ways around this problem and it is actually possible to match and generate a return corresponding to a particular index, even if certain shares have been excluded as a result of screening. This was the approach adopted by SPP Fonder. All SPP Fonder investments meet the Group s sustainability standards. We are firm in our belief that it is the sustainable companies that are tomorrow s winners and that generate the best returns. The inclusion of index funds in the sustainability screening process was, therefore, never in doubt for us, the challenges posed thereby notwithstanding. The adjustment process was carried out in a number of stages during which the biggest challenge involved ensuring functional optimisation methods that enable the index to be tracked even though certain companies had been screened out. The fund provisions were then revised and the funds categorisation changed from index funds to equity funds while management continued to be index tracking. Once the new fund provisions and the new fund names were approved, we informed our customers. A sustainable approach must, naturally, apply to all funds, whatever their type. As customers demand greater sustainability in the context both of active Tomorrow s winners will be the companies that actively adapt in order to meet tomorrow s challenges in a sustainable world. management and index management, it is imperative that the industry takes notice and comes up with new or adjusted products. Tomorrow s winners will be the companies that actively adapt in order to meet tomorrow s challenges in a sustainable world. And it is these companies in which our industry as a whole should invest if we are to secure long-term returns for our customers. * It is possible to track a screened index and still categorise the funds as index funds. The disadvantage lies in the fact that doing so makes it harder to achieve comparability between different funds. 4 2 R E S P O N S I B L E I N V E S T M E N T S 4 3 R E S P O N S I B L E I N V E S T M E N T S

23 Different types of funds same responsibility? Can fixed income funds take sustainability criteria into account? One difference between the management of fixed income funds and equity funds is that fixed income funds usually invest in government securities. And when investing in government securities, very little or no consideration is given to sustainability issues. Anette P Andersson INVESTMENT Fund Manager, SEB Fonder Traditional ratings institutes, such as Moody s or Standard & Poor s, take no account of sustainability criteria when assessing creditworthiness, and there are only a few players who consider sustainability when investing in government securities. When they do, the assessment often entails a political evaluation of how ethical the country is, rather than its repayment capability. Investment funds can, to the extent that they invest in corporate bonds, apply the same strategy as that used for equity funds. Those who invest in corporate bonds most commonly use negative screening, and hence avoid investments in certain industries, such as tobacco, armaments or gambling, or in companies that breach international conventions. The same arguments can, of course, be applied to corporate bonds as during equity analysis, namely that the quality of a company s sustainability work affects that company s repayment capability. Green bonds In 2008, the World Bank and SEB launched World Bank Green Bonds. These green bonds are issued to finance projects with a sustainability and developmental perspective, in order to meet the investors requirements. Online: The same arguments can, of course, be applied to corporate bonds as during equity analysis, namely that the quality of a company s sustainability work affects that company s repayment capability. 4 4 R E S P O N S I B L E I N V E S T M E N T S 4 5 R E S P O N S I B L E I N V E S T M E N T S

24 Different types of funds same responsibility? Increased information intake positive for hedge funds With the ever-growing impact of responsible invest ments, the principles that govern them are now spreading to alternative investments, of which hedge funds are a key component. Erik Eidolf CEO of Vontobel Stockholm The UN-supported PRI initiative has established a working group for responsible investments and hedge funds with the aim of increasing acceptance of responsible investments within the hedge fund sector. No two hedge funds are exactly alike and it is hence almost impossible for investors to pre-define the way in which responsible investment principles can and should be implemented with regard to hedge funds. What is required instead is that the investor analyses how each specific hedge fund is managed and how, based on the results of this analysis, ESG criteria can best be integrated. PRI proposes that invest ors, precisely as with traditional funds, break down the management into component parts, such as the type of assets to which the hedge funds are exposed and the way in which this exposure can be managed responsibly. This may include analysis of corporate governance, of the underlying instruments used, of the way in which the portfolio is constructed, and the hedge fund strategies implemented, etc. For private investors, however, it is currently difficult to find hedge funds where the principles of responsible investment are specifically implemented. Given the global interest in responsible investments in general, however, there is every likelihood that the hedge fund sector will increasingly be examining the potential for introducing these principles. Investing responsibly requires investors to take on board additional information, over and above the purely financial, and this should generate improved conditions for well-founded investment decisions. This is something that most people find easy to accept, creating a solid basis for a growing interest in responsible investments, even amongst hedge funds. Investing responsibly requires investors to take on board additional information, over and above the purely financial, and this should generate improved conditions for well-founded investment decisions. What is a hedge fund? Hedge funds are usually defined as funds whose goal is to generate a positive return, whatever direction the market may move in. Achieving this requires that the manager has more liberal investment rules which means, in practice, that hedge funds are allowed to use more instruments and investment techniques, such as short selling, derivative instruments, and borrowing. Short selling borrowing a share that one then sells in the hope of buying it back at a lower price allows the investor to hedge the portfolio against falls in the market. 4 6 R E S P O N S I B L E I N V E S T M E N T S 4 7 R E S P O N S I B L E I N V E S T M E N T S

25 Different types of funds same responsibility? Different approaches a challenge for commodity funds Interest in raw materials as an investment object has increased amongst institutional and private investors alike in recent years. Raw materials offer several advantages they spread the risk in a portfolio and they work well in conjunction with inflation. Magnus Strömer Raw Materials Director, Handelsbanken Financial investments in raw materials are made via derivatives, often in the futures market. This market exists primarily to enable producers and buyers of various raw materials to reduce the effect of price fluctuations. The futures market also gives investors an opportunity to understand how raw materials prices fluctuate. It is claimed, by some, that even if the supply of and demand for the underlying physical raw material ultimately determines its price, investments in futures create so-called pricing bubbles. Agricultural products are a particularly sensitive area and one in which opinions differ. As a result, this area has been the subject of numerous studies. The studies have not, however, been able to provide unambiguous proof either way. The principles for responsible investments in raw materials are currently not as highly developed and established as those for investments in equities, for example, but Handelsbanken is working to establish industry-wide principles on how to approach raw materials investments in order to ensure a responsible approach. Some progress has been made, and the PRI initiative recommends, amongst other things, sticking to markets where the contracts are liquid, not taking physical delivery, and that investors work in partnership with marketplaces and other market players to ensure greater transparency and better governance. One desirable development for the future would be the introduction of standardised contracts and raw materials indices that take ESG issues into consideration. Agricultural products are a particularly sensitive area and one in which opinions differ. 4 8 R E S P O N S I B L E I N V E S T M E N T S 4 9 R E S P O N S I B L E I N V E S T M E N T S

26 The companies and capital owners Do companies take respon sibility for sustainability work? Nadine Viel Lamare Sustainability Analyst, Första AP-fonden, and spokesperson for the Hållbart värdeskapande [Sustainable value generation] ownership initiative The formal and informal demands for companies to take sustainability issues into account in their operations are growing ever fiercer in today s globalised world. The UN s guideline principles for enterprise and human rights, presented in 2011 by the UN s Special Envoy for Human Rights, is a recent example of how these demands are becoming ever-more stringent. In the light of these growing demands, it is reasonable to expect Swedish companies to work actively with sustainability issues as part of their operations. But are they actually doing so? Are they working with sustainability issues in a systematic way, and if so, who takes responsibility for sustainability issues within the company? In an attempt to find answers to these questions, the Sustainable value generation investor initiative (see info box) have twice (once in 2009 and once in 2011) sent questionnaires to the 100 biggest companies on the Stockholm Stock Exchange. The conclusion that can be drawn from these surveys is that there are substantial differences in ambition and results from one company to another, with three groups clearly distinguishable. In the first group (approximately 14 per cent of the companies), the Board takes extensive responsibility for sustainability issues, and these issues are an integral part of their commercial operations. They see working with sustainability issues as a competitive advantage, a means not only of minimising risks but of cutting costs and boosting sales, and of attracting and retaining employees. They also communicate their work in detail. In the second group (just over half of the companies), a systematic programme of sustainability work has been launched but is less advanced. The companies have guidelines for many areas in place and have begun implement ing them, but there is still some work to be done before the sustainability work is fully integrated into the commercial operations. These companies also report their work to some extent. Sustainability issues are discussed at Board level in these companies too, even if the Board is less committed to these issues than is the case in the first group. Two thirds of the companies have, in other words, a systematic programme of sustainability work, and we have noticed a positive trend in this respect between 2009 and Approximately one third of these companies, however, have unfortunately still not implemented a systematic programme of sustainability work. These companies only have certain guidelines in place and the integration of sustaina bility issues into their commercial operations is either rare or has only just begun. The Board s responsibility for sustainability issues in these companies is limited. One of the most important conclusions to be drawn from the 2011 survey is, therefore, that there is a need for an increased dialogue within trade and industry in order to generate the preconditions for companies to learn from one another. We, as investors and owners, are keen to participate in this process in order to help generate even stronger and even more sustainable value growth. The Hållbart värdeskapande [Sustainable value generation] ownership initiative The investors behind the Sustainable value generation initiative are Andra APfonden, DNB, Fjärde AP-fonden, Folksam, Första AP-fonden, Handelsbanken Asset Management, Meta Asset Management, Nordea, SEB, Skandia Liv, SPP, Swedbank Robur, the Church of Sweden and Tredje AP-fonden. Collectively, they represent assets under management that equates to approxi mately SEK 5,000 billion, SEK 650 billion of which is invested in companies listed on the NASDAQ OMX Stockholm exchange. Online Find out more about the results of the survey and interviews with the Chairpersons of the Boards of several listed companies at In Swedish. Approximately 14 per cent of the companies see working with sustainability issues as a competitive advantage. 5 0 R E S P O N S I B L E I N V E S T M E N T S 5 1 R E S P O N S I B L E I N V E S T M E N T S

27 The companies and capital owners Bolagen Corporate social responsibility a key to sustainable success in global markets ABB is a global company operating in around 100 dif fe r ent countries. It is important to us that our customers and other stakeholders appreciate not just our products and solutions, but the way we conduct ourselves as employ ers, suppliers, customers and members of society wherever we operate. Anders Nordström Group Advisor on sustainability issues, ABB Responsibility, respect and decisiveness are three key words that we use, here at ABB, to describe our commercial principles. These three simple words are backed up by extensive guidelines, action pro grammes and management systems that help us operate in accordance with our principles in markets across the world. A Code of Conduct, strict business ethics rules, an environmental policy, a social policy, a human rights policy, and health and safety regulations are a few examples of the extensive support structures that are built into our operations. Most are well-established within the company: approximately 100,000 employees have, for example, received training on our Code of Conduct, which is available in 45 different languages. Almost 1,000 people around the world are working with our environmental management and health and safety programmes. Other components were added at a later date and are still being developed. We have, for example, a training programme that addresses corporate responsibility for human rights and where the goal is to have trained senior executives in our twelve most important manufacturing countries by the end of Our approach is one of continuous improvement. We set all of our goals and measure our environmental performance, social parameters and health and safety indicators on the basis of the findings from around 360 plants around the world. The data are aggregated in a global data base, analysed, followed up, and reported on in our Sustainability Report. ABB has zero tolerance of substandard business ethics and we have an extensive programme designed to ensure compliance. We support and encourage everyone who suspects improprieties have occurred to report them, whether they involve breaches of the Code of Conduct, suspected corruption, breaches of human rights, or environmental damage. We also have ombudsmen to whom the employees can turn in confidence to discuss conduct-related issues. The ombudsmen can give advice on how to proceed in a variety of cases. ABB s integrity programme currently has 63 ombudsmen in 47 countries. Our sustainability work and our integrity programme make us a better and a stronger company, and we are convinced that they help ensure sustaina ble success for ABB in our global markets. ABB s integrity programme currently has 63 ombudsmen in 47 countries. 5 2 R E S P O N S I B L E I N V E S T M E N T S 5 3 R E S P O N S I B L E I N V E S T M E N T S

28 The companies and capital owners Capital owners with a conscience who help promote development Gunnela Hahn Head of Responsible Investments, the Church of Sweden The Church of Sweden is keen to be involved in and to take responsibility for the world in which we live, and that includes the financial assets we manage. We have seen that long-term sustainable investments also yield good financial rewards, and when we invest in listed companies, we are also keen to contribute to the sustainable development of this world. We do this in a number of ways. Choose the right company One way is to choose companies that manufacture products and services that are of benefit to mankind, and on the environmental front, therefore, we have invested in renewable energy and in water purifying technology, for example. On the social side, we own shares in companies that provide mortgages to those on low incomes in developing countries, for example. Companies can also work actively on their environmental impact, working conditions and human rights throughout their organisation, and this includes working with their suppliers. One of the fund managers in whose funds we invest has its own stock market index for very large companies and for which companies have to qualify. This places pressure on the mega corps to work actively with the promotion of more sustainable development. Choose the right manager We have no asset managers of our own and it is consequently vital that we identify managers that can follow our stringent financial policy. The policy states what we want to invest in and what we want to avoid. We will avoid, for example, investing in companies that manufacture weapons and tobacco. We are also restrictive when it comes to investments in companies that extract fossil energy sources such as coal and oil. We are keen to help solve climate change issues and consequently prefer companies that offer renewable and intelligent energy solutions. It has become slightly easier, in recent years, to find managers who live up to our requirements. In the past, we had to customise the share portfolios that were to be managed, but now, we are increasingly coming across funds which are also open for other investors. It is consequently vital that we identify managers that can follow our stringent financial policy. Active owners Engaging in an active dialogue with our managers and others in the finance sector enables us to help generate an increased understanding of how a longer term approach can be realised in day-to-day asset management work. The sector has long been run by short-term reward structures something that is a substantial hindrance for us and others who are keen to see long-term value generation within companies. Some of our managers have introduced longer term bonus systems. We are actively involved in a number of networks for investors, both in Sweden and internationally, in order to persuade more people to integrate sustainability issues into their investment decisions. We also engage in discussions with several of the companies in which we invest and have adopted a number of issues as themes over the past year, e.g. how companies should act in countries suffering armed conflict and how people s integrity and freedom of speech online can be protected. Last winter, we visited pharmaceutical manufacturers in India. Many pharmaceutical companies have outsourced aspects of their production to suppliers in developing countries in order to cut costs. But since water purification sometimes fails it has resulted in environmental damage and in pharmaceutical products ending up in the environment. This has led to the occurrence of antibiotic-resistant bacteria. When this is the case, we are keen to see the companies in which we have holdings demand efficient water purification systems in its supply chain and help provide solutions. 5 4 R E S P O N S I B L E I N V E S T M E N T S 5 5 R E S P O N S I B L E I N V E S T M E N T S

29 The companies and capital owners Responsible investments investments in perpetuity Magnus Borelius Chief Financial Officer, City of Gothenburg The City of Gothenburg manages about one hundred found ations, the oldest of which is more than one hundred years old. The purpose of the foundations was determined by its founders and may, for example, be to award money for studies, to those in financial need, or for the beautification of the city. These foundations have a combined total capital of SEK 750 million and yield a combined annual dividend of SEK million. The foundations were established in perpetuity and are intended to generate returns for many years to come, in order to fulfil the aims of the donor founders. Managing these foundations, as the City has undertaken to do, is a huge responsibility and sustainable and responsible investments are, therefore, an important area that we address when reviewing and evaluating the ways in which the foundations assets have been invested. The work has been carried out in stages and is an area in which our focus is on continuous development. The goal of the asset management operations is to maintain the real capital income over time and, at the same time, to ensure the dividend level remains consistent. The foundations capital is invested in shares and interest-bearing securities with three asset managers. The capital is managed via a fixed income fund, an equity fund and a portfolio containing both shares and fixed income securities. The primary focus of the funds is on value growth, while the mixed mandate focuses on dividends. The investments are made in accordance with guidelines laid down by the City Council and include ethical guidelines, in addition to a purely financial dimension. Investments in companies whose operations involve armaments, alcohol, tobacco, pornography or gambling are prohibited. The companies must also comply with a number of international conventions, and in order to ensure compliance with these guide lines and requirements, we have mandated an external manager to manage the assets, approximately two thirds of which are invested in funds. The portfolios are rebalanced, i.e. the composition of the portfolios is reviewed, annually, during January. We welcome the more active role now being played by the manager when it comes to opting in, opting out and influence for the part of our assets that are invested in shares. The ability to show that we are working actively with sustainable investment issues is important to us for a number of reasons: firstly, we are keen to play our part in influ encing the creation of a better society, and secondly, we want to be able to show potential donors that we accept active responsibility for these issues. People should be able to rely, when they decide to donate money to an existing foundation, or to found a new one, on the money being managed professionally, both with regard to the foundation s objective and with regard to outside world considerations. From an investments in perpetuity viewpoint, therefore, working to promote responsible investments at all times is the natural path for us to take. People should be able to rely, when they decide to donate money to an existing foundation, or to found a new one, on the money being managed professionally, both with regard to the foundation s objective and with regard to outside world considerations. 5 6 R E S P O N S I B L E I N V E S T M E N T S 5 7 R E S P O N S I B L E I N V E S T M E N T S

30 PRI as a driving force The UN s six principles drive development Half of the Swedish Investment Fund Asso c iation s member companies have signed up to the UN s Principles for Responsible Investments initiative, known as PRI. These principles comprise six points reflecting the belief that environmental and social issues, and corporate governance (ESG) are important in terms of the investments performance. Which means they must, of necessity, also be an important component of the management approach. The principles provide a voluntary framework that enables all investors to incorporate ESG issues into their decision-making process and the practical exercise of their fiduciary duties. PRI is a network of international investors who work together with a view to putting the six principles into practice. Just over one thousand institutional investors, asset managers and industry stakeholders have signed up to the principles since they were launched in The Swedish Investment Fund Association is also a Network Supporter of the UN initiative PRI in order to help promote increased public awareness and know-how. The UN s six principles for responsible investments 1. We will incorporate ESG issues into investment analysis and decision-making processes. 2. we will be active owners and incorporate ESG issues into our ownership policies and practices. 3. we will seek appropriate disclosure on ESG issues by the entities in which we invest. 4. we will promote acceptance and implementation of the Principles within the investment industry. 5. we will work together to enhance our effectiveness in implementing the Principles. 6. we will each report on our activities and progress towards implementing the Principles. Online: R E S P O N S I B L E I N V E S T M E N T S 5 9 R E S P O N S I B L E I N V E S T M E N T S

31 PRI as a driving force Applying PRI in practice We asked some of the Swedish Investment Fund Association member companies who have signed up to the UN s PRI initiative what it has meant for them. Anna Nilsson, Swedbank Robur Signing up to PRI means taking a clear stand and saying that sustainability and corporate governance issues are important to our operations, both as managers and as owners, and that they are important in terms of the funds long-term returns. Signing up to PRI has meant, amongst other things, that we have extended the cooperation between our sustainability analysts and our managers, with the managers receiving structured reporting on the companies sustainability work. We have also conducted several corporate dialogues in other countries and introduced a system of ongoing evaluation of our broker contacts, based on their sustainability services. Elisabet Jamal Bergström, Handelsbanken Asset Management For Handelsbanken, PRI is a valuable framework within which we can work with responsible investments. Our ambition is to integrate ESG issues into every aspect of our management work. We believe that the active ownership principle can achieve a major breakthrough with so many capital owners and managers opting to work in accordance with PRI. We are also hoping that PRI will give us additional opportunities to work with other players in the responsible investments sphere. Liza Jonson, SPP Fonder/Storebrand The annual reporting to PRI has given Storebrand a greater insight into what we are good at and where we could improve. The reporting has also given us a better grasp of the concrete improvements that have resulted from the hundreds of contacts we have with companies every year. PRI has also made it easier for more investors to get together and influence companies on individual issues. Our experience indicates that this sort of cooperation yields good results. Jonas A Eriksson, Skagen Fonder Ethics have always been an important component of our analysis process when we choose companies in which to invest, so signing up to the UN s PRI initiative has had no impact on our investment philosophy. We have monitored the UN s work in this sphere since 2006 and signed up in the autumn of 2012 because we believe that doing so is in the best interests of our unit holders. We have been working with a number of external suppliers of information in this field for a long time, in order to ensure the best possible basis for our decision-making. Peter Dahlgren, SEB If customers have entrusted you with the management of their assets, the management must be conducted in a responsible and sustainable way. The UN s PRI initiative makes our view of environmental aspects, social issues and corporate governance questions clear both to our customers and to ourselves. By working actively with these issues, we reduce risks and make the most of business opportunities. We also know that these issues are important in terms of a company s profitability in the longer term, and consequently integrate them into our investment processes. PRI also gives us access to a global platform that enables cooperation with investors all over the world on a variety of different issues which is a huge plus. Ylva Hannestad, Nordea Fonder We have chosen, in line with the UN s PRI initiative, to create a policy that encompasses all of our funds, and are hence endeavouring to integrate relevant environmental, social and corporate governance issues into all of our investment decisions. We have gained access to an extensive network of other managers and capital owners, facilitating cooperation between investors. We have, for example, been part of a cooperative project that saw Nordea, along with other investors, writing to 86 companies, urging them to improve their reporting on environmental, social and corporate governance issues. PRI has also enabled us to be involved in and influence the development of responsible investments at international level. 6 0 R E S P O N S I B L E I N V E S T M E N T S 6 1 R E S P O N S I B L E I N V E S T M E N T S

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33 A book about funds, ethics and responsibility to future generations Responsible investments are about achieving long-term sustainable development that takes future generations into account. Human rights, working con ditions and the environment are all the sort of considerations that ethical funds take into account when managing their funds. But what does the term, responsible investments, actually mean? What can you, as a saver, expect when you buy units in a fund that takes these sorts of considerations into account? Does it cost more, or can it actually be profitable? Is it even possible to define the term, ethical, and shouldn t all funds be ethical, really? This book examines these concepts and allows fund managers, investors, researchers and the companies themselves to talk about them in easily accessible texts. Together, they paint a picture of a long-term approach in transition from being an exception to being the rule. Responsible invest - ments are regarded by many as a natural development of active management, and it will probably not be long before it is not so much a question of how expensive it is to analyse companies on the basis of sustainability principles, but rather one of how expensive it might prove not to analyse them in this way. The path to sustainable investments will differ from one fund manager to another. Should they choose to invest in companies that act as good role models or should they actively deselect companies that fail to meet the manager s criteria? Or should managers, in their capacity as owners, attempt to influence the company to act in a certain way? Three different approaches but all with the same objective. Understanding these arguments is important for anyone who wants to know what an ethical fund actually is, how it works, and the things to bear in mind if you are to make a sustainable and responsible investment.