Responsibleinvestments

About funds, ethics and sustainability

Brasel Publishing

Responsible investments

About funds, ethics and sustainability

Swedish Investment Fund Association (www.fondbolagen.se)

Brasel Publishing (www.braselpublishing.se) Copyright 2012 Swedish Investment Fund Association and the publisher

Publisher: Brasel Publishing

Layout and illustration: Jonas Rahm

Editor: sa 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), Hkan 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 sth (p 10, 44), SEB (p 61 centre), Skagen Fonder (p 60 bottom), Jakob Srensen (p 24), Hanna Teleman (p 8, 22, 36), Anna Thorbjrnsson (p 38), Vontobel AG (p 46)

Print: Elanders Flth & Hssler, Vrnamo 2012

ISBN 978-91-86697-06-8

Contents

Foreword Pia Nilsson, Swedish Investment Fund Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8

TRends And FACTs

Managing sustainably and responsibly a natural development of active managementAnette P Andersson, SEB Fonder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

Field trips around the world a practical means of exerting influenceYlva Hannestad, Nordea Fonder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

dialogue and influence a cornerstoneMarianne Nilsson, Swedbank Robur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14

sustainable and responsible investments a backgroundHenrik Malmsten, SwESIF . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16Different sustainability concepts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

From niche to mainstreamSasja Beslik, Nordea Fonder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20

The sAveRs

savers prioritise ethics highly when choosing fund management companiessa Drakenberg, Swedish Investment Fund Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

do good or expect a better return? Jonas Nilsson, The Ume School of Business and Economics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

Responsibility how does it affect performance? Emma Sjstrm, Nuwa . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26

Transparency helps investors make decisionsAxel Edling, The Ethical Council for Investment Fund Marketing (ENF) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28

enFs statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

We are aided by enFs statementAnna Nilsson, Swedbank Robur . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32

screening how it worksUlrika Hasselgren, Ethix SRI Advisors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

Good ethics are a cornerstone of the entire investment fund sectorLena Falk, Swedish Investment Fund Association . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36

diFFeRenT TyPes oF Funds sAMe ResPonsiBiliTy?

A sustainable approach, whatever the fund typeJosefine Ekros and Pr Lfving, DNB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38

sustainability an opportunity in emerging market fundsLouise Hedberg, East Capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

A sustainable approach should apply to index funds tooLiza Jonson, SPP Fonder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42

Can fixed income funds take sustainability criteria into account?Anette P Andersson, SEB Fonder . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44

increased information intake positive for hedge fundsErik Eidolf, Vontobel Stockholm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

different approaches a challenge for commodity fundsMagnus Strmer, Handelsbanken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48

The CoMPAnies And CAPiTAl oWneRs

do companies take respon sibility for sustainability work? Nadine Viel Lamare, Frsta AP-fonden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50

Corporate social responsibility a key to sustainable success in global marketsAnders Nordstrm, ABB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

Capital owners with a conscience who help promote developmentGunnela Hahn, Church of Sweden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

Responsible investments investments in perpetuityMagnus Borelius, City of Gothenburg . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56

PRi As A dRivinG FoRCe

The uns six principles drive development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58

Applying PRi in practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

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

The subject of this book is the involvement of fund

management companies in sustainability issues. every

fund management company is the subject of wide-

ranging 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.

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 tak-

ing 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.

Pia Nilsson CEO Of thE SwEdiSh invEStmEnt

fund ASSOCiAtiOn

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

funds 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.

2012 has seen the introduction of the EUs 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 man-

agement companies to the companies in which they invest. The focus is on

environmental, energy and climate issues, and on human rights, work envi-

ronment 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.

Foreword

Dialogue and transparency are the tools everyone can use in their efforts to bring about improve-ments and help in-spire innovation.

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

Managing sustainably and responsibly a natural development of active management

Anette P Andersson invEStmEnt fund mAnAgEr,

SEB fOndEr

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 im-

portant factor by far is that the company management is motivational and

committed. They must be able to present their strategies for resource utilisa-

tion, 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 green-

house gas emissions and to promote sustainable water usage by companies

and cities.

If you cant measure it, you cant improve it.

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 intel-

ligence means the company is able to react more quickly and deal more ef-

ficiently 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

What does managing responsibly and sustainably mean

in practice? And what does it mean for the informa-

tion 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 its about common sense. Running a company

in a responsible and sustainable way means maintain-

ing good control over costs and conducting good risk

management. saving resources and being aware of the

risks you face is something on which every company

management team should be focusing.

Saving resources such as energy, water and materials can be con-verted directly into cold hard cash.

TRends And FACTs

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

TRends And FACTs

Both Nordea and H&M were happy with the open and positive attitude on

the part of the factorys 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.

of reports of substandard working conditions amongst H&Ms 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 in-

cidents 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.

Field trips around the world a practical means of exerting influence

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.

In 2011, the team from Nordea that work with responsible invest-

ments visited Cambodia, for example, in order to meet with some of

Hennes & Mauritz suppliers. The visit was triggered by a number

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.

Ylva Hannestad ESg AnAlySt, nOrdEA fOndEr

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

dialogue and influence a cornerstone

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. Todays 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 part-

nership 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 Audi-

tors, 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 com-

mittee 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-indepen-

dent 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, pub-

lic takeover bids, share-based incentive pro-

grammes 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 Boards responsibility

for these issues and the need for clear documen-

tation and steering systems detailing the compa-

Marianne Nilsson COrpOrAtE gOvErnAnCE

mAnAgEr, SwEdBAnk rOBur

nies 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 ques-

tion 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.

TRends And FACTs

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

sustainable and responsible investments a background

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 campaign-

ers, 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 be-

fore the new millennium began, and there was a desire for the inves-

tors own ethical standpoints to be part of the investment process. The

Henrik Malmsten ChAirmAn Of SwESif

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 sec-

tors, have achieved the greatest success in introducing a sustainable metho-

dology. It can also involve basing ones investment strategy on a particular

theme, such as renewable energy.

Influencing companies through ones ownership is another way to ap-

proach sustainable and responsible investment. A number of major institutio-

nal 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

organisations investment and decision-making processes.

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 auto-

matically 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 invest-

ments, the most common of which are opting out or opting in certain

investment objects. Opting out means avoiding investing in companies oper-

ating in the armaments, tobacco and alcohol sectors, for example. This was

the method most commonly used before the year 2000.

The most modern fund managers now-adays have integrated a sustainable and responsible metho-dology into the entire organisations invest-ment and decision-making processes.

TRends And FACTs

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

different sustainability concepts

SRI, Sustainable and Responsible Investments. Sustainability refers to long-term sustaina-

ble 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 investors own criteria or values, beyond expecta-

tions of financial returns.

ESG, Environmental, Social and Governance issues comprises criteria that relate to environ-

mental responsibility, social responsibility and corporate governance. There has been an

increasing focus on ESG in recent years.

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 flora of concepts in the field of sustainable and responsible invest-

ments can seem like a jungle. The path through that jungle for those in-

vestors 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.

Swesif and PRISWESIF (the Swedish Sustainable Investment

Forum) was founded in 2003 by a number

of major institutions with the aim of boost-

ing investors know-how when it came to

sustain able and responsible investments.

SWESIF has been working in partnership

with the UNs PRI (Principles for Respon-

sible Investments) initiative for a number of

years now. PRI is a network of international

investors who are working to implement the

six principles of sustainable and responsible

investments (see page 59). Many Swedish

and international capital owners and institu-

tional investors have also signed up to PRIs

principles and are working to implement

the methodology into their management

practic es and organisation.

Different management methods opt out, opt in and influenceThe management focus when it came to sus-

tainable and responsible investments was

previously on opting out, i.e. on having a

negative selection process that involved de-

selecting companies or sectors from ones

portfolio on the basis of certain specific crite-

ria. These days, opting in is also more com-

mon, i.e. having a positive selection process

in which the investor looks for companies

that promote responsible business methods

and/or produce products or services in a sus-

tainable way. The investor can also choose to

influence the company through active own-

ership 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 3435.

The Sustainability ProfileIn 2011, SWESIF launched its Sustainability

Profile tool, which is aimed at fund savers

and the public alike and which is designed

to enable savers to obtain easy-to-grasp,

straightforward information on the ways in

which funds apply sustainability criteria to their

management. Read more on pages 3233.

TRends And FACTs

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

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 inte-

grated into every fund, right from the start.

It is clear, from the reviews of ethical funds that have been car-

ried out, that todays 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

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 oper-

ations 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.

Sasja BeslikCEO Of nOrdEA fOndEr

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, envi-

ronmental and social viewpoint.

Group 3 comprises theme funds. A climate fund, for example, chooses com-

panies that show special attention to climate concerns or which have pro-

ducts 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.

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.

TRends And FACTs

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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

All Women Men

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, environ-

mental 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.

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 2012.

Women place greater importance on the fund management company of-

fering ethical funds than do men, with women giving this factor a rating of

4.3 on the scale, in contrast to mens 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 6379) than in the

youngest (aged 1842).

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.

sa DrakenberghEAd Of COmmuniCAtiOnS,

thE SwEdiSh invEStmEnt

fund ASSOCiAtiOn

All savers place great value on fund management companies offering high quality funds that are orientated towards ethical, environmental and responsible investments.

savers prioritise ethics highly when choosing fund management companies

Range of ethical funds important when choosing fund management company

Source: TNS Sifo Prospera 2012 .

unimportant

very important

The sAveRs

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

Jonas Nilsson rESEArChEr At thE umE SChOOl

Of BuSinESS And ECOnOmiCS,

And Sirp (SuStAinABlE invEStmEnt

rESEArCh plAtfOrm)

do good or expect a better return?

What does ESG mean?

ESG stands for Environment, Social, Governance, i .e . questions relating to environmental concerns, social concerns and corporate governance .

Theres nothing particularly surprising about the fact that

consumers are becoming increasingly interested in respon-

sible 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 custom-

ers 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 invest-

ment fund market.

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 ex-

ample 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 invest-

ing 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 be-

cause 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 finan-

cial viewpoint. Here, ethical funds are an

Online

The full text of Jonas Nilssons thesis can be found at www.ub.umu.se . Search for Consumer decision making in a complex environment .

The authors recommended reading

Derwall, J et al (2011), A tale of values-driven and profit-seeking social investors . Journal of Banking & Finance, 35 (8), p 21372147 .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 531 .

Rather than focusing on whether ethical fund con- sumers 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.

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.

The sAveRs

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

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, there-

fore, 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 research-

ers, however, seem to have found that it makes no difference to the risk-

adjusted 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 2010. 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 conventio-

nal 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 calibra-

tion 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 environ-

mental and social responsibility a fact not always considered in the studies.

Responsibility how does it affect performance?

The fact that responsible invest-

ments can be defined in so many

different ways also makes the pro-

cess something like comparing

apples and pears: while some funds

avoid weapons and alcohol, others

focus on environmental work or

working conditions amongst the

companys 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 ba-

sis of individual studies is tricky,

and statements of the Its proven

Emma Sjstrm phd in ECOnOmiCS And

fOundEr Of thE knOwlEdgE

AgEnCy nuwA

The fact that responsible invest-ments can be defined in so many different ways also makes the process something like com-paring apples and pears: while some funds avoid weapons and alcohol, others focus on environ-mental work or working condi-tions amongst the companys suppliers in low-pay countries.

sustainable funds perform better/worse! kind are, therefore, simply not

credible.

A better approach would be to redirect our spotlights 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.

The sAveRs

Online

Emma Sjstrm (2011), The performance of socially responsible invest-ment: A review of scholarly studies published 20082010 . Stockholm School of Economics; Nuwa AB . http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1948169 .

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

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 toler-

ance 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 turn-

over 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 interna-

tional norms intended to protect the climate and the environment.

The range of funds offered and the way in which savers behave is character-

ised 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.

Transparency helps investors make decisions

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 expec-

t 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 per-

formance, not only with regard to their personal savings, but from a wider

perspective as well: one that includes global environmental and fairness is-

sues, for example. The range of funds now being marketed as particularly

responsible are a response to this desire on the part of savers.

ENFs 2009 guidelines focus on the marketing of these funds. Good prac-

tice offers a natural starting point in this respect: all marketing must be true

and reliable and must provide sufficient information to give savers a reasona-

ble 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 industrys 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 funds 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 manage-

ment companys 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-

Axel Edling ChAirmAn Of thE EthiCAl

COunCil fOr invEStmEnt fund

mArkEting (Enf)

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 .

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 Associations

The sAveRs

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.

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

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 require-ments established by the fund management company .

The fund management company shall, over and above the information on the funds 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 companys investment policy for the fund, including information on selection criteria and turnover limits, and

the companys selection process for the fund and the way in which the process is monitored and ensured .

The information shall be provided on the companys 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 .

The sAveRs

enFs guideline statement on the marketing of ethical 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

We are aided by enFs statement

sustainability funds have been a part of swedbank Roburs

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 con-

fusion 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 to-

bacco 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

Anna Nilsson hEAd Of SwEdBAnk rOBurS

SuStAinABility AnAlySiS

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 broc-

hures. We complement this infor-

mation with concrete examples of

our sustainability analyses of com-

panies and corporate dialogues in

newsletters and annual reports, etc.

We were also involved in the

pro duction of a standardised infor-

mation sheet, known as a sustaina-

bility profile, in cooperation with

SWESIF (the Swedish Sustainable

Investment Forum). This informa-

tion sheet can be used by funds to show how their management takes envi-

ronmental, 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 informa-

tion 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.

The sAveRs

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

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 in-

vestments, 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 funds holdings) for a certain factor

which may have an effect on the holding (the company) or the fund. Screen-

ing 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 funds 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 companys 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 compa-

nies adjudged to perform well in terms of e.g. environmental and social re-

sponsibility, and who are successfully managing their risks and opportunities

screening how it works

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 Swedens 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.

Ulrika Hasselgren CEO Of Ethix Sri AdviSOrS

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 .

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.

The sAveRs

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

Good ethics are a cornerstone of the entire investment fund sector

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 self-

regulation for many years now that is designed to summarise the principles

that should govern the way in which fund operations are conducted in Swe-

den. The Swedish Investment Fund Associations own Swedish Code of Con-

duct for Fund Management Companies details good practice in the Swedish

investment fund market, and compliance with the Code is mandatory for all

of the Associations member companies. One of the fundamental principles of

the Code is that fund management operations shall be sound and shall be cha-

racterised 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 companys 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 Associations gui-

delines for investment fund managers as shareholders, for example, stresses

the fund management companys 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 funds

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 con-

siderations 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

Lena Falk dEputy gEnErAl COunSEl,

thE SwEdiSh invEStmEnt

fund ASSOCiAtiOn

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 Invest-

ment Fund Associations 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 Associations Code and guidelines guarantees a high

standard and an industry that acknowledges its responsibility for a high stan-

dard 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 www.fondbolagen.se .

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.

The sAveRs

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

A sustainable approach, whatever the fund type

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 locat-

ed in developing countries where the parent companies encounter

the sort of problems and challenges that characterise these markets,

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 share-

holders, one is responsible for the way in which the

companys operations are conducted.

Josefine Ekros and Pr Lfving SuStAinABility AnAlyStS, dnB

Businesses are in creas-ingly realising that they must review a products entire lifecycle, and in-direct emission sources, such as transport, are important.

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 companys 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.

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 compa-

nies who want to be part of a sustainable future must change their produc-

tion methods and their energy consumption. Businesses are increasingly

realising that they must review a products 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 companys 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

diFFeRenT TyPes oF Funds sAMe ResPonsiBiliTy?

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

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 environ-

ment, social conditions and corporate governance

(esG) into its investment process.

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 com-

ponent 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

Louise Hedberg dirECtOr OwnErShip iSSuES,

EASt CApitAl

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 com-

pany 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.

diFFeRenT TyPes oF Funds sAMe ResPonsiBiliTy?

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

Liza Jonson CEO Of Spp fOndEr

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 meth-

ods 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

management and index management, it is imperative that the industry takes

notice and comes up with new or adjusted products. Tomorrows winners will

be the companies that actively adapt in order to meet tomorrows 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.

Many asset managers regard the application of

sustainability screening methods to index funds

as problematic because it necessitates the exclu-

sion 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.*

There are, however, ways around this problem and it is actu-

ally 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 Groups sustainability

standards. We are firm in our belief that it is the sustainable

companies that are tomorrows winners and that generate the

A sustainable approach should apply to index funds too

* 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.

Tomorrows winners will be the companies that actively adapt in order to meet tomorrows challenges in a sustainable world.

diFFeRenT TyPes oF Funds sAMe ResPonsiBiliTy?

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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.

Traditional ratings institutes, such as Moodys or Standard &

Poors, take no account of sustainability criteria when assessing

creditworthiness, and there are only a few players who consid-

er 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 cor-

porate 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 indu-

stries, such as tobacco, armaments or gambling, or in companies

Anette P Andersson invEStmEnt fund mAnAgEr,

SEB fOndEr

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 companys sustainability work affects that companys repayment

capability. The same arguments can, of course, be applied to corporate bonds as during equity analysis, namely that the quality of a companys sustainability work affects that companys 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: http://sustainableperspectives.sebgroup.com/en/stories/seB-partners-with-World-Bank-to-create-Green-Bond/.

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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.

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 impos-

sible 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

increased information intake positive for hedge funds

Erik EidolfCEO Of vOntOBEl StOCkhOlm

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 .

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.

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 infor-

mation, over and above the purely financial, and this should generate im-

proved 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.

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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.

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

Magnus Strmer rAw mAtEriAlS dirECtOr,

hAndElSBAnkEn

Agricultural products are a particularly sensitive area and one in which opinions differ.

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 prin-

ciples 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.

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do companies take respon sibility for sustainability work?

The formal and informal demands for companies to take sus-

tainability issues into account in their operations are growing

ever fiercer in todays globalised world. The uns guideline

principles for enterprise and human rights, presented in 2011

by the uns special envoy for human Rights, is a recent exam-

ple of how these demands are becoming ever-more stringent.

In the light of these growing demands, it is reasonable to expect Swedish com-

panies 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 com-

panies 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 sustaina-

bility 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 pro-

gramme 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 sus-

tainability 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 com-

mitted 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 2011.

Approximately one third of these companies, however, have unfortuna-

tely 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 Boards 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.

Online

Find out more about the results of the survey and interviews with the Chairpersons of the Boards of several listed companies at www.hallbartvardeskapande.se . In Swedish .

The Hllbart vrdeskapande [Sustainable value generation] ownership initiative

The investors behind the Sustainable value generation initiative are Andra AP-fonden, DNB, Fjrde AP-fonden, Folksam, Frsta 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 .

Nadine Viel Lamare SuStAinABility AnAlySt, frStA

Ap-fOndEn, And SpOkESpErSOn

fOr thE hllBArt vrdESkApAn-

dE [SuStAinABlE vAluE gEnErA-

tiOn] OwnErShip initiAtivE

Approximately 14 per cent of the compa-nies see working with sustainability issues as a compe-titive advantage.

The CoMPAnies And CAPiTAl oWneRs

BolAGen

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Corporate social responsibility a key to sustainable success in global markets

Anders NordstrmgrOup AdviSOr On

SuStAinABility iSSuES, ABB

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.

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 prin-

ciples 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 com-

pany: approximately 100,000 employees have, for example, received train-

ing 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 2012. 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 en-

courage everyone who suspects improprieties have occurred to report them,

whether they involve breaches of the Code of Conduct, suspected corrup-

tion, breaches of human rights, or environmental damage. We also have

ombudsmen to whom the employees can turn in confidence to discuss con-

duct-related issues. The ombudsmen can give advice on how to proceed in

a variety of cases. ABBs integrity programme currently has 63 ombudsmen

in 47 countries.

Our sustainability work and our integrity programme make us a bet-

ter and a stronger company, and we are convinced that they help ensure

sustaina ble success for ABB in our global markets.

ABBs integrity programme currently has 63 ombudsmen in 47 countries.

The CoMPAnies And CAPiTAl oWneRs

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Capital owners with a conscience who help promote development

The Church of sweden is keen to be involved in and to take

responsibility for the