Responsible investment & governance annual report 2011

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Responsible investment & governance annual report 2011

  1. 1. We create Responsible ReturnsIdentifying companies performing wellProducts & solutionsResponsible Investment & Governance Annual Report  2011
  2. 2. Dear readerAsset management is all about value creation, and Our products with specifically integrated ESGwe believe that responsible value creation is what approach have delivered performance and value inmakes all the difference. Economic growth and terms of ESG. Our focus on solutions for ourprofitability can only be sustainable when clients has resulted in a number of partnerships webusinesses behave responsibly and look beyond believe will lead us to develop more comprehensivethe immediate present by giving appropriate client solutions.consideration to environmental, social andgovernance (ESG) aspects in their operations. We are also continuously building our knowledge and competence, writing white papers andNordea’s1 commitment to being a responsible thematic reports, in the areas we consider to haveasset manager has deep roots in our corporate an impact on our ability to deliver value creationculture and business model. We believe that this for our clients from financial, environmental,innate responsible perspective constitutes a social and governance perspective.valuable distinguishing edge. It makes us steerclear of risky short-term behaviour and helps us Enjoy reading!anticipate influential trends and – most of all – itstrengthens our position as a reliable, trustworthypartner, capable of creating sustainable value forclients in a rapidly changing world.2011 has been a year of concrete achievements.We have engaged and successfully completedengagements with a number of companies verifiedfor violation of international labour and human-rights-related norms. We have also visited anumber of companies in which we invest in Asia,Europe and Africa and managed to exert influenceregarding their approach to managing key ESG Sasja Beslikrisks in their operations. Head of Responsible Investment & Governance1. Throughout the report Nordea is used as a reference to Nordea’sfund companies and Nordea Investment Management. Processes andpractices described in this report cover our role and responsibility as anasset manager.
  3. 3. In 2007 we signed the Principles for Responsible Investment and developed our own Responsible Investment framework. In 2010, a new strategy and policy was adopted and we have taken further steps on our journey in 2011.We create Responsible ReturnsSince the first Responsible Investment (RI) policy Products & solutionswas launched in 2007, all funds managed by During 2011, we have launched unique RI fundsNordea are screened for companies verified for where ESG is part of the product’s DNA. Theseviolation of international norms regarding funds are in the forefront of RI developments.environmental protection, human rights, labourstandards and business ethics. The results of the Knowledge & competencescreening, conducted twice a year, are reviewed Nordea has a dedicated Responsible Investmentand assessed by Nordea’s RI committee. The and Governance team, comprising 7 employees.committee decides on the level of engagement with The team has long experience within the area andcompanies verified for violations. Moreover, was awarded “Best team within the ESG sector inNordea does not invest in companies involved in Sweden” by Financial Hearings in 2010.the production of illegal weapons2. Sasja Beslik, who heads the team, was awarded theAnalysis & engagement title of Young Global Leader 2011 by the WorldThe core of our RI strategy is in-depth environ- Economic Forum. The title means that Sasja willmental, social and governance (ESG) analysis and for five years serve as an ambassador of a globalengagement activities. Throughout our ESG network aiming to influence internationalanalysis companies’ overall management practices companies to increase their social responsibility.regarding key ESG issues are assessed togetherwith their governance structure for these issues. The team also cooperates with several wellBased on the analysis, companies are selected for established external partners and participates inproactive engagements dialogues. The focus is on international and local initiatives to further expandtransferring knowledge and active participation in and spread its knowledge.the development process.2. Illegal weapons comprise biological weapons, chemical weapons,non-detectable fragments, blinding laser weapons, anti-personnel minesand cluster munitions. RESPONSIBLE INVESTMENT & GOVERNANCE 2
  4. 4. We consider acting responsibly a prerequisite for a company to achieve long-term good returns. Our ESG analysis enables us to identify companies that operate in line with our policy and deliver long-term value.Identifying companies performing wellIn 2010, we initiated our in-house environmental, global emerging markets that have the star poten-social and governance (ESG) analysis and tial to be a global leader in their industry both indeve-loped our own criteria and methodology. traditional industry and financial terms as well asOur analysis is based on a positive approach. from ESG point of view.Throughout the analysis companies’ overallmanagement practices regarding key ESG issues Among the brightest of these stars is the Brazilianare assessed together with their governance energy company Petrobras. By most ESG metricsstructure for these issues. The analysis aims to Petrobras is the best energy company domiciled inidentify best company practices and companies emerging markets. It is also by our analysis andthat manage their risks, opportunities and/or numerous external studies, among the mostdevelop sustainable products. Our in-house sustainable companies compared to western peers,analysis focuses mainly on Nordic companies, which is a rare feat for an emerging marketsince the Nordic region is our home market. For company. Petrobras recently made massive oilnon-Nordic companies we process and assess discoveries in the coast of Brazil. The depth of theESG analysis conducted by a number of external reserves presents an engineering challenge thatservice providers, our main provider being MSCI someone has compared to the Apollo mission thatInc. landed man on the moon. At the same time Petro- bras has been voted to be the most sustainableMajor focus on enhanced RI funds Brazilian company among Brazilian people.During 2011, the focus of the ESG analysis was onanalysing companies for our enhanced RI funds. ISO standards in TaiwanThe funds have both local, Swedish Stars, and In Taiwan the client is king, especially among theglobal focus, Emerging Stars. We have thus electronic companies. Due to specific clientanalysed a wide range of companies on the requests, most of the manufacturers supplying theSwedish market and emerging markets to find global electronics giants have certified theircompanies performing well environmentally, operations against various ISO standards. ISOsocially as well as financially. certification in many cases facilitates “engineer- ing” approach of these companies in measuringDuring the year, we have also conducted in-depth and managing their corporate responsibility. ThisESG analysis of our largest Finnish holdings. “let the numbers speak for themselves” – approach would surely be useful for some of ourEmerging market companies: Best Practice Nordic companies that produce more wordyPetrobras in Brazil corporate responsibility reporting.The Emerging Stars Fund makes us constantly lookfor the actual Emerging Stars, companies from the3 RESPONSIBLE INVESTMENT & GOVERNANCE
  5. 5. Our favourite companies in Taiwan include Delta market with well performing companies. The focus Electronics, who demonstrate a thorough under- is slowly shifting from risk management to standing in their implementations of many best capturing opportunities. It all started with case practices related to corporate responsibility corporate management of environmental impact, and who are well geared to capitalise on the followed by including social aspects such as sustainable development. Among other things, human rights and labour rights. Environmental they have ISO9001 and ISO14001 certified all of and social risks still need to be addressed, but the their production facilities and are proactively focus is shifting. Companies are now increasingly working with standardisation authorities in integrating their commitment to sustainable developing other related standards. business development with group visions, mission statements and strategies. Corporate Governance in Singapore Traditionally, stock market operators are cautious Conclusions from Finnish analysis in increasing transparency requirements as they An overwhelming majority of the large Finnish assume that companies seek listing in places companies manage their ESG risks reasonably where there are theleast regulatory constraints. well. Many companies have worked with environ- More modern, ESG integration point of view says mental issues for decades and, while most efforts that since ESG issues are increasingly material, are in compliance with law, the top-tier compa- stock market operators cannot afford big incidents nies are showing signs of integrating sustainable- at their watch as it would scare away potential development-related issues in their strategies and investors. With regard to this, the Singaporean with this, are capturing market segments that have stock exchange operator, SGX, enforced new grown from sustainable-development-related corporate governance listing requirement for all trends. listed companies. However, Finnish companies tend to lack interna- These changes do not take the Singaporean listing tional peers where social issues are concerned. requirements anywhere near western standards; Relationships with labour unions tend to escalate we do however, applaud SGX for taking a decisive into strikes too frequently, the health & safety step in the right direction in increasing corporate performance leaves considerable room for transparency and accountability and making it improvement, and only recently the companies easier for responsible investors, such as ourselves, have been able to work together with government to increasingly invest in Singapore. and local communities to prevent the adverse impact of unnecessary corporate restructuring and Conclusions from Swedish analysis related lay-offs. The Swedish market is in terms of ESG a matureAnalysis dialogues 2011• Atlas Copco • Handelsbanken • Oriflame Cosmetics • SSAB• Axis Communication • HM • Outotec • Stora Enso• Boliden • Husqvarna • Outokumpu • Swedish Orphan• BP • Intesa Sanpaolo • Rautaruukki Biovitrum• Campari • KB Financial group • Samsung Fire&Marine Insu- • Tele 2• Chroma ATE • Kepco rance • Tieto• Delta Electronics • Kuala Lumpur • Samsung Electronics • Trelleborg• DS-Norden Kepong • SCA • TSMC• Enel • Kulim • Scania • Unicredit• ENI • Lassila&Tikanoja • Securitas • Wartsila• Getinge • Lundin Petroleum • Shell Production & • Wihlborgs• Golden Agri • Neste Oil Development Company • YIT Resources • Nordea • Sime Darby • ÅF• G&S Engineering • Nibe • Snam Rete Gas
  6. 6. Church of Sweden about Swedish Stars“Church of Sweden has worked with Responsible Investment (RI) for many years. We place greatdemands on our external asset managers who commit to integrating environmental, social andgovernance-related aspects into their investment decisions. Nordea has been managing partsof our buffer capital since the autumn of 2011 through Swedish Stars. The asset manager picksboth companies that are leaders in sustainability and companies that have lofty ambitions. Webelieve in that combination. Nordea’s RI team possesses impressive competence, and we plan tojointly engage with companies in the portfolio through shareholder dialogues.” Anders Thorendal, Treasurer & Chief Investment Officer, Church of SwedenThe Swedish Municipal Workers’ Union about Emerging Stars”Kommunalarbetarförbundet was looking to investment in emerging markets. When Nordeapresented Emerging Stars we felt that it fitted perfectly with our ethical policy and guidelines.After having participated to a study tour in Asia with the investment team we are very satisfied withthe investment process in terms of both the high responsible investment standards as well as thebusiness case. ” Anders Bergström, National treasurer/Third vice president, Kommunalarbetareförbundet
  7. 7. We believe that companies with strong ESG potential and performance are interesting from an investment perspective, which is why we are developing products and solutions of the future.Products & solutionsIn our ongoing work with development of products approach. This approach combines financial andand solutions we focus on three core characteris- ESG parameters in order to find the best compa-tics we consider to add long-term value; know- nies from both perspectives. The ESG analysisledge, proactiveness and innovation. By continu- contributes to identifying companies that areously seeking knowledge about ESG issues developing their businesses and risk management.impacting companies, we are able to identifypotential material risks and hidden opportunities Identifying companies with a positive trendfor our investments. Proactiveness in our Nordea has in its research methodology decided toapp-roach means that we use various tools, for seek out companies that have adopted a systematicexample engagement activities and field visits in approach to managing key ESG risks and opportu-order to secure that our funds live up to high ESG nities. Furthermore, we want to identify companiesstandards. Knowledge and proactiveness are key that from an environmental and social perspectivefactors for innovation. will be the stars of tomorrow. We have therefore prioritised identifying companies that have a“Best practice” as a strategy positive trend and the ones that have identifiedThe core focus of our activities in 2011 concerned sustainability as a platform for growth.innovation. We have launched one unique RI fund,Emerging Stars and re-launched Swedish Starswhere we have applied our “delta” analysisOur approach to external fundsIn our process of selecting external funds andmanagers, we place emphasis on managers havinginvestment processes addressing RI in an adequatemanner. As a signatory to the PRI, we encourageour selected funds and managers to activelysupport these principles.We report on our screening and active ownership 36 % of our funds managed externally isactivities regularly and request feedback using a managed by fund manager that has signed PRI .“comply or explain” approach.7 RESPONSIBLE INVESTMENT & GOVERNANCE
  8. 8. Emerging Stars & Swedish Stars Selecting companies to invest in In Emerging Stars and Swedish Stars we only invest in companies performing well from an environmental, social, governance and financial perspective. Step 2: Analysis of financial aspects Step 1: Analysis of ESG aspects Step 3: The portfolio is constructed through an integrated approach Step 4: Ongoing evaluation of companies performance with a focus on ESG aspects Performance Emering Stars & Swedish StarsEmerging Stars 110527-120217 The diagrams shows the perfor- mance for Emerging Stars since the launch in May and the performance in Swedish Stars since the re-launch in February 2011.Swedish Stars 110228-120217 RESPONSIBLE INVESTMENT & GOVERNANCE 8
  9. 9. South Africa India • The first stock exchange in the • Reporting consists of lot of world to require mandatory policies and cases studies, not integrated sustainability much targets and goals disclosure in 2010 with the so • National Stock Exchange of called King report of corporate India proposes to initiate governance awareness programmes for • Sustainability indices encou- listed companies on ESG raged ESG disclosure since reporting 20049 RESPONSIBLE INVESTMENT & GOVERNANCE
  10. 10. ESG aspects in the emerging markets within Emerging Stars General in Emerging Markets • Governments wield comparatively stronger influence over companies’ CSR behaviour compared to western counter- parts. • ESG implementation and transparency are well below Western standards at the country level, but at the company level the implementation rates can be as high as that of Western companies. • GDP per capita is a poor predictor of CSR behavior. Some comparatively poor countries have strong ESG initiatives in place, some comparatively wealthier nations might have weak practices. • Reporting on policies and systems are more common to be in place than performance numbers and related measures and targets.China Korea • The least companies reporting • Most active among • Sustainability indices among Asian peers Asian companies in encouraged ESG • China tops list of ESG-related reporting, we estimate disclosure since 2009 corporate incidents and allega- that around 50% of the • Korea Exchange is tions, where most of the large companies have planning to provide CSR incidents are heavy manufactu- dedicated CSR person- guidelines for listed ring and mining-related nel companies • Sustainability indices encour- • Environmental issues aged ESG disclosure since generally well governed, 2008 most problems related to governance and social issues responsible investment & governance 10
  11. 11. Sector risks in Swedish StarsThe core elements of our ESG research and analysis are constructed to provide insight and understandingregarding: 1. Overall governance structure regarding management of relevant ESG aspects 2. How companies address and manage key ESG risks and opportunities in their business operations 3. How companies develop sustainable products and services in order to strengthen overall develop­ ment of their business activitiesBelow we present a selected number of sectors which we invest in within Swedish Stars, and what risks weanalyse within these sectors. Industry • Environmental: product innova- Financial tion and business development • Social: working conditions, • Environmental: investment or indirect complicity in relations credit lending to companies to clients or projects • Governance: purchasing and • Social: investment or credit sales lending to companies or project, responsible lending • Governance: risk management Consumer dicretionary • Environmental: Climate mitigation and adap- tion, Pollution, Resource Management, Waste Materials Management • Social: Child and forced • Environmental: clean labour, Workers rights, production, energy intensive Working conditions sector, water management • Social: community involve- ment, use of security forces, working conditions IT/Telecom • Governance: purchasing • Environmental: clean production, energy consumption and sales, license • Social: protecting privacy, working conditions • Governance: expanding in countries with high risk for bribes and corruption11 RESPONSIBLE INVESTMENT & GOVERNANCE
  12. 12. We engage to change. Nordea initiates engagement dialogues to change behaviour and to enhance business performance by addressing business practices used by the companies we invest in.Our engagements & dialoguesNordea prioritises engagement with companies largest holdings. This is carried out by in-houseidentified as being involved in verified breaches of expertise, our external engagement serviceinternational environmental, human rights, labour provider Hermes Equity Ownership Services orrights and business ethics-related norms. As of through cooperation with other stakeholders.December 2011, Nordea is engaged in 12 norm- During 2011 we have met about 50 Nordic andbreaching companies worldwide. We also priori- global companies. It is our practice to engage intise proactive engagement dialogues with our direct face-to-face dialogues with companies. Responsible Investment activities; the committee has an important role to - Internal governance play in ensuring that Nordea Asset Management structure follows the intention of the policy.” The RI committee was “Part of the RI committee’s responsibility is to formed in 2007, when review our engagement process and on-going Nordea adopted its first engagement dialogues. During 2011, we have policy for Responsible successfully completed two engagement dialogues; Investment, and consists of this clearly shows that we can influence company’s representatives from differ- behaviour by being an active and responsibleent units within the organisation. The responsibil- owner” Allan Polack comments.ity of the committee is to decide on the policy andstrategy framework, as well as the level of engage- “Furthermore, we clearly see that our engagementment with companies and whether a company for RI aspects is shared by our clients - in ourshould be excluded from the investment universe. dialogue with them we see a constantly increasing awareness of the responsibility of the investor in“For Nordea it has been important already from the global financial market.”the beginning to have a clear governance structurefor the management of RI aspects. Even thus the Allan Polack, Head of Nordea Asset Management andResponsible Investment & Governance team is Chairman of the RI committeeresponsible for the day-to-day management of RI RESPONSIBLE INVESTMENT & GOVERNANCE 12
  13. 13. Focus area – EnvironmentEnvironmental norms establish a commitment first Corporate Social Responsibility (CSR) reportaimed at upholding the world’s ecosystems and specifically addressing its approach to overseasbiodiversity in the face of economic development. operations. Following our discussion concerningThe business reference states that companies in the CDP survey, the company also notablysectors facing great environmental risk should be improved their answers in this year’s survey.sure to have enhanced policies and practices inplace to handle this. Another company has appointed a Chief Sustain- ability Officer and conducted an external audit ofLack of transparency a problem its current sustainability practices and reporting.Nordea is engaged with companies that are failing The company has committed to implementing thein their environmental responsibilities by lacking findings from the external audit and is now in thein their remediation work. Some companies are process of developing and implementing newunwilling to disclose information and lack trans- sustainability policies and practices. In ourparency as to how operations are managed from an dialogue with this company we have alsoenvironmental perspective. We have encouraged questioned the board’s lack of involvement inthese companies to improve their disclosure on sustainability aspects. Our aim is now to influenceenvironmental policies and practices. One the company to appoint a board member withcompany has been provided with best practice sustainability expertise.examples for its own sustainability reporting andconcerning the company’s participation in theCarbon Disclosure Project (CDP) survey. Our Ongoing engagements:engagement with one of the companies took a Chevron, CNOOC, Vedanta Resources, Royalsignificant step forward when they published their Dutch Shell and Lukoil Focus area – Human rightsInternational human rights norms aim to protect needs of the indigenous people. The businesspeople from political, legal and social abuse. The reference requires companies to adopt humanbusiness reference states that companies should rights policies and ensure that they take intosupport and respect the protection of these norms account the right to self-determination. Compa-and ensure that they are not complicit in activities nies should also require all business partners to doinvolving human rights abuses. likewise.Western Sahara Controversial sourcing of phosphate rockWestern Sahara has been on the UN’s list of In recent years several companies have beenNon-Self-Governing Territories since the 1960s. criticised and alleged to have acted in breach ofWestern Sahara was invaded by Morocco in 1975 international norms by exploiting natural resourc-and has been occupied ever since. Sourcing es in Western Sahara. Nordea has been engagednatural resources from this occupied area contra- with several companies in this area; all of themvenes the right to self-determination unless have been involved in sourcing of phosphate rock.carried out with full respect for the interests and However, we are also investigating companies13 RESPONSIBLE INVESTMENT & GOVERNANCE
  14. 14. involved in sectors such as shipping, fisheries and illegal coercive methods to recover loans. ICICIoil and gas. Bank has now improved procedures for audit and training of its recovery agents. It has also signifi-Positive results – Controversial sourcing cantly increased the board’s supervision of thisNordea’s engagement with the Mosaic Company issue. Actions taken by the company have beenwas successfully terminated in June 2010. Mosaic effective in curbing violent behaviour among thedisclosed that they have discontinued their bank’s recovery agents, and we therefore success-purchase of phosphate from Western Sahara, fully completed our dialogue with the company inwhich also was independently confirmed. The the end of 2010.company has acknowledged the human rightsissues involved with importing phosphate from Completed engagementsWestern Sahara. Our engagement with the ICICI Bank (ended 2010) and TransCanadaAustralian company Wesfarmers was successfully (ended 2011)concluded in 2009. The company decided toinvest in a new facility, enabling it to use a wide Operations in controversial regionsrange of suppliers from areas other than Western In our dialogues with companies failing to respectSahara. human rights we have urged them to improve their human rights policies as well as their practices forCompleted engagements how to implement and follow-up on these policiesThe Mosaic Company (ended 2010) and within their own organisations as well as within theWesfarmers (ended 2009) supply chain. As a result, one company has strengthened its supply chain control procedure.Positive results – human rightsNordea has been engaged in a dialogue with ICICI Ongoing engagements:Bank since the beginning of 2008. The company is Cemex SAB de CV and Nissan Motorknown to have employed recovery agents who used Focus area – Labour rightsWork is part of people’s daily life and is vital for a regarding organised labour which should alsoperson’s dignity, well-being and personal devel- apply to all subsidiaries. In one dialogue, weopment. International norms set standards which conducted a two-day on-site visit to investigateencompass freedom of association, the right to how the company in practice managed staff-relat-collective bargaining, forced labour, child labour ed issues. We have also addressed how overall ESGand discrimination. The business reference states issues are managed across global operations,that companies should ensure that their labour particularly in developing markets. particularly inpolicies are based on ILO conventions and that developing markets.they should actively inform their employees oflabour rights. Ongoing engagements The AES and Wal-Mart StoresViolation of trade union rightsMost of Nordea’s engagements in this area are Positive result – labour rightswith companies which are known violators of trade Nordea has been engaged in a dialogue withunion rights. In our dialogues we have expressed Hankook Tire since the end of 2009. The companythe importance of developing coherent policies had been violating labour laws and trade union responsible investment & governance 14
  15. 15. rights at its plant in Hungary. In our first meeting address the contentious issues.with the company they acknowledged that they Completed engagementslagged behind peers and indicated willingness to Hankook Tire (ended 2011)change their behaviour. The company has nowtaken positive steps forward and is engaging itsworkers and their representatives in a dialogue to Focus area – Business ethicsCorruption is considered to be one of the greatest transparency regarding bribery and corruption.obstacles to economic and social development. It The company engaged has been provided with bestalso distorts competition and impedes the devel- practices examples on anti-corruption policiesopment of fair market structures. For companies to and structures. Since we started our engagementbe able to handle these issues they need to develop the company has established a set of relevanteffective anti-corruption policies and manage- guidelines on ethics and anti-bribery and createdment systems. a website to encourage employees as well as suppliers to engage in whistle-blowing. TheCorruption – institutionalised phenomenon company has now committed to increasing itsIn some countries the lack of good business ethics transparency on sustainability issues, and a furtherpractices is institutionalised. We have therefore explanation on its compliance system will beaddressed the issue on a policy and industry level included in the next CSR report.in addition to engagement with specific compa-nies. This has been conducted by participating in Ongoing engagementslocal industry forums to promote increased Hyundai MotorExclusion Active ownership • Nordea believes in positive means of engage- Nordea is exercising active ownership through ment by which we actively contribute to engagements and dialogues. During 2011, Nordea improvement of company’s management of was engaged in 15 norm-breaching companies key environmental, social and governance worldwide. practices. • We also believe that exclusion is seldom 2011 2010 2009 2008 Engagements 15 & dialogues constructive and long-term oriented. Direct 16 divesting from companies with poor manage- 14 ment practices is used as a last resort. 10 • We exclude companies when violations are severe and when companies are unwilling to change or improve their behaviour. Nordea does not invest in companies which are involved in the development, production and maintenance of illegal weapons.15 RESPONSIBLE INVESTMENT & GOVERNANCE
  16. 16. We believe that understanding of business conditions in the companies we invest in is one of the key elements influencing positive change. Field visits are one way to learn more.Global outreachNigeria oil spills. Furthermore, after our dialogue theIn February the Responsible Investment & Governance company communicated that they have initiatedteam conducted a field visit to Nigeria. The purpose of the phasing out of gas-flaring practices and plan tothe visit was to meet with Royal Dutch Shell, a company phase out all flaring by the end of 2014.accused of violating environmental norms. Singapore, Indonesia and MalaysiaShell Production and Development Company In May the Responsible Investment & Governance team(SPDC) has a long and complex history on conducted a field visit in Southeast Asia. The purpose ofenvironmental issues in the Niger Delta. Oil the visit was to meet with companies and otheroperations started in 50s and have over the last 50 organisations involved in the palm oil industry.years evolved in all parts of Niger Delta and havedue to several interrelated reasons caused severe Palm oil is the world’s most prolific vegetable oilenvironmental impact in many areas. SPDC and the demand for it has surged in recent years.conducts third party verification Our dialogue with Along with the demand, palm oil production hasSPDC started with thorough analysis of SPDC’s expanded and the industry’s managementtechnical capacity to maintain, replace as well as practices of environmental and social issues havesafeguard 7,000 km of pipelines in a very difficult become increasingly scrutinised and inevitablyand demanding environment. questioned.Our initial findings gave us a good understanding The challenges that the industry faces were wellof key issues needed to be addressed in our expressed by the companies and organisations wemeeting with the company, which mainly was met during our visit. The major sustainability riskspipeline integrity in terms of lack of access, and issues are not derived from the establishedmaintenance and investments as well as its plantation; it is rather from when companiesgas-flaring practices. After our dialogue, SPDC expand into new plantation areas. When expand-committed to conduct 3rd party verification of its ing the companies’ face several issues, such aspipeline integrity status which is a source of the logging without proper permits, expanding onmost severe environmental damage in Nigeria. prohibited peat land and virgin forests, corruptionA review will be conducted in stages and will be etc. In these situations the companies need tocompleted by the end of 2012. manage challenges related to the rights of indig- enous people to their land, the risk of destroyingThis is a big step forward in order to examine and the habitat of many species as well as climatelater mitigate pipeline integrity and prevent future change issues etc. RESPONSIBLE INVESTMENT & GOVERNANCE 16
  17. 17. During 2011 we have conducted proactive engagementdialogues with companies on the ground in Africa, Asia,Europe and the Nordic countries. Singapore, Indonesia and Malaysia • ESG challenges related to the palm oil industry triggered our field visit to Asia • Companies operating in this relatively high risk industry need to have solid management systems in order to address the diverse range of ESG challenges they facePalm oil can, however, be sustainably produced. the Roundtable on Sustainable Palm Oil (RSPO).But for this to be a reality, companies need to have The RSPO standard address main parts of keysolid management systems that address not only issues, thus companies striving to RSPO certifythe above challenges but also the risks related to their plantations are going to the right directionestablished plantations, as well as migrant work- from our point of view.ers, hazardous chemicals, heavy machinery etc. South Korea & TaiwanAnd this has sometimes been managed in very In October the Responsible Investment & Governanceremote locations. Since the middle of 2000, team together with a group of institutional investorscompanies can certify their operations against the conducted a field visit in South Korea and Taiwan. Theenvironmental and social standard developed by purpose of the visit was to meet the key holdings and17 RESPONSIBLE INVESTMENT & GOVERNANCE
  18. 18. Cambodia • There have been several reports indicating poor workingconditions at H&M’s supplier in Cambodia • We recommended the company to improve its cooling system and improve the access to drinking water Africa • Royal Dutch Shell has been alleged to violate environment-related international norms • We recommended the company to conduct 3rd party verification of its pipeline integrity status in Nigeria, which the company committed to do and complete the process by the end of 2012the most important prospects in the Emerging Stars For Korean companies, the role of government andFund. the related regulators is significant. Many of the companies we met cited direct governmentDuring the visit we met over ten companies and influence, another regulatory-related reasons asvarious other corporate responsibility experts in the main drivers of their corporate responsibilitySeoul and Taiwan. It turns out that global compa- behaviour. In Taiwan, especially among thenies domiciled in Asia are not that different after electronic companies that we mostly met, theall. All companies are ultimately driven by external client is the king. Most of the manufacturersstakeholder pressure. The major difference supplying the global electronics giants havebetween Nordic and Asian companies is their undergone the effort to certify their operationsperceived importance of different stakeholders. against various ISO standards. The greatest RESPONSIBLE INVESTMENT & GOVERNANCE 18
  19. 19. surprise for us was that for most of the companies retroactive measures revolve around well-func-we met, we were the first western investors to ask tioning, externally available whistleblowingquestions related to corporate responsibility and mechanism, which has to be backed up withsustainable development. We were not expecting stringent processes to handle the incoming cases.there to be many investors going through the Naturally, transparent reporting on both proactiveeffort, but we were surely surprised to be the and retroactive measures is always appreciated.absolute first ones to do so, especially with thelargest and most global companies. Cambodia In September the Responsible Investment & Govern-Italy ance team conducted a field visit in Cambodia togetherIn December the Responsible Investment & Governance with local Hennes & Mauritz (H&M) representatives.team conducted a field visit in Italy. Italy is among the The purpose of the visit was to investigate workingworst performing countries in the Corruption Percep- conditions at one of H&M’s suppliers.tion index. Tax evasion is a prevalent problem and,most worryingly, the big ticket incidents, at least used to There have been several reports concerning poorbe, all too frequent. With this in mind we wanted to working conditions at one of H&M’s suppliers inexplore risks related to corporate governance and Cambodia, one report for example concernedbusiness ethics among our largest Italian holdings. almost 300 workers having fainted. During the visit we discovered that local reports on theOur findings confirm that corruption is an incidents were incomplete, some pointed atendemic problem in Italy and ranges from recom- exhaustion while local officials saw the incidencemendation systems to secure employment, to of fainting as a mass hysterical phenomenon. Theprevalent use of cash in small businesses to enable visit also revealed that there still are issues thattax evasion. In the business environment, Italian need to be better managed at the Cambodianlaw can make corporations liable for the actions of supplier. We specifically recommended thethe individual employee, which gives a strong company to address the following issues: theincentive for a company to establish at minimum a cooling systems which were not sufficient to keepcode of ethics for employees to mitigate the temperatures at a decent level, working hours atliability of actions resulting from actions of a peak periods were very long and access to drinkingcorrupt employee. water during work hours was limited/non- existent.Because of the prevalence of corruption and theliability legislation, the largest companies have Both H&M and Nordea were satisfied with thegood programmes in place to proactively prevent open and positive approach from the factory’sthe corrupt practices and retroactively monitor Chinese management team. Immediate action incompliance. The best practices, which would terms of access to drinking water was taken anddefinitely benefit Nordic companies as well, the local management initiated a plan to improveinclude comprehensive communication, both overall working conditions. Nordea will re-visitvirtual and classroom learning, involving external the factories during 2012 to conduct a follow up.expertise, engaging top management in the effortand linking compensation to the trainings. Best19 RESPONSIBLE INVESTMENT & GOVERNANCE
  20. 20. Corporate governance is about safeguarding shareholders’ interests in the best way possible. Good long-term development benefits share- olders, employees as well as other stakeholders.Corporate GovernanceCorporate governance deals with the relationship Engagements in companies began in the earlybetween shareholders and the companies’ boards 1990s and have since increased successively overand executive management. From the standpoint the years with the main focus on listed companiesof Nordea, corporate governance shall be and stock markets in the Nordic region.exercised on the basis of the shareholders’common interest in good investment returns. Corporate governance guidelines Nordea’s first guidelines on corporate governanceA long tradition of active ownership were adopted in 1996. The last revision, theNordea is an active owner and has a long tradition seventh, was adopted in 2009. Long-term valueof handling corporate governance matters such as creation through engagement and voting is thevoting and engagement with companies. Nordeagenerally considers good corporate governance overall aim of our corporate governance activities.crucial to the creation of value in companies, andit plays a key role in promoting companies’ In line with our guidelines we believe that thedevelopment towards better results through active following issues are of importance: compositionownership. We have voted regularly at general and function of the board of directors, share-meetings since the 1980s and have participated in holder rights, disclosure and transparency,nomination committees of a large number of listed compensation and range of takeover defences.companies since the 1990s.Progress made in Sweden Active ownershipNomination committees are well established and Nordea is exercising active ownership throughthe Swedish nomination committee model helps to: participating in general meetings. During 2011 we have attended 115 general meetings. • Create a structured and transparent process governed by the owners. • Separate and clarify the roles between 115 2011 in the Nordics General meetings shareholders and board. 158 2010 • Enable shareholders to create value in the 171 2009 2008 long term when they have more influence on 147 the composition of boards. RESPONSIBLE INVESTMENT & GOVERNANCE 20
  21. 21. Food prices have reached an historic peak, exacerbating global hunger and poverty. At the same time, a number of international studies indicate that financial speculation is contributing to the volatile and record high prices.Does financial speculation impactfood prices?United Nations Food and Agriculture Organiza- supply and demand and therefore fail to providetion (FAO) reports that almost 1 billion people in producers with an effective way to hedge theirthe world do not have sufficient food to eat. During risks.2011, the global food price index produced byFAO reached a historic peak. The high food prices Although the providers of financial products havehave put pressure on the already tight food budgets legitimate objectives; it raise questions as to theirof the world’s poor, and it has as well made it more impact on commodities prices and thus theirexpensive to give them assistance in the form of impact on the lives of the world’s most exposedfood aid. populations. With global population now exceed- ing 7 billion with a continuously high growth rate,Responsibility of financial industry food supply and food prices is a fundamentalIt has been debated in the financial industry and concern and it raises questions about the appro-political spheres whether financial speculation in priateness of basic food commodities as basis foragricultural commodities is contributing to financial investment products.increasing volatility and higher food prices. Risingtransaction volumes on the derivatives markets and Our actionthe sharp rise and volatility of food prices have led On the basis of this debate, Nordea has decidedstakeholders to examine the potential responsi- to no longer produce any wrapped investmentbility of the financial sector. products where basic food commodities are included in underlying assets.Financial players’ part of the agricultural futuresand options markets has grown significantly over Information presented above are derived from UNC-the last decade. Those with direct commercial TAD report published in June 2011 and reflects viewsinterests in food production used to be the main indicating impact financial markets have on softparticipants, but today hold less than 40 % of the commodities.market compared with 88 % in 1996. Based onthis it cannot be out ruled that agricultural marketsno longer respond to underlying fundamentals of21 RESPONSIBLE INVESTMENT & GOVERNANCE
  22. 22. As the largest asset manager in the Nordic region we seek to encourage best practice through active participation in international initiatives.International initiatives & participationCarbon Disclosure Project Water Disclosure ProjectNordea is a signatory to Carbon Disclosure Project Nordea is a signatory to the Water Disclosure Project.(CDP), a project which aims to collect and spread The project is an initiative run by the Carbon Disclosureinformation concerning greenhouse gas emissions and Project and is supported by institutional investors. Theclimate change strategies. Nordea uses the information in aim of the project is to collect and spread informationthe database in its ESG analysis. CDP is a cooperation concerning water-related risks and possibilities andarrangement between 551 institutional investors who addresses 300 global companies with water-intensivetogether account for over a third of the world’s production and water-related challenges.investments.Sustainable Investment Forums Principle for Responsible InvestmentNordea actively participates in local sustainable As one of the first major banks in the Nordic countries,investment forums, so-called SIFs, which are independ- Nordea on 1 November 2007 signed the Principles forent national forums that promote responsible investment. Responsible Investment (PRI). In connection with this ourNordea became a member of SWESIF in 2008, in policy for responsible investment was launched. ThisDANSIF 2010 and was founding member of FINSIF policy shows how we adhere to the six principles. Wewhen the association was launched in June 2010. report on our activities and progress towards implement-Nordea is represented on the boards of SWESIF ing the PRI. This report is public and available on the PRIand FINSIF. website.During 2011 Nordea has, among other things, partici- During 2011 Nordea has been engaged in PRIpated in two SIF initiatives; the Broker initiative and the collaborative engagement activities focusing onSustainability profile. The Broker initiative involved encour- improving transparency and communication fromaging brokers to incorporate ESG information into their companies both on developed and emerging markets.company analysis. The other project aimed at improving We have also been engaged in an activity concerningthe financial industry’s RI communication to clients. The sustainable fisheriesresult of the project was that all project participantslaunched Sustainability profiles describing in detail howRI is implemented in their specific funds.Sustainable value creationSustainable value creation is a cooperation project involving some of Sweden and Norway´s biggest investors. The aimof the project is to influence listed Swedish and Norwegian companies in sustainable development and long-term valuecreation. Nordea considers it essential for companies to work actively with environmental and social aspects in itsbusiness; we therefore take part in the working team that runs the project in Sweden. During 2011, the survey was, for 20 RESPONSIBLE INVESTMENT & GOVERNANCE RESPONSIBLE INVESTMENT & GOVERNANCE 21the second time, sent out to the 100 largest companies on the Swedish stock exchange and the results will bepresented in the beginning of 2012.
  23. 23. Summing up• Launch of unique RI fund, Emerging Stars • We have successfully completed two and re-launch of Swedish Stars. engagement dialogues with companies violating international norms.• Launch of external blog “Responsible Returns”. A blog about our work and global • We have conducted several field visits and trends within the responsible investment field, engage with companies where their business http://newsroom.nordea.com/en/responsi- operations take place. ble-returns/. • Sasja Beslik was awarded the title of• Recruitment has been made. The Responsible YoungGlobal Leader 2011 by the World Investment and Governance team has been Economic Forum. The title means that for five expanded with three new employees with long years Sasja will serve as an ambassador of a experience from portfolio management, ESG global network aiming to influence interna- analysis and communication. tional companies to increase their social responsibility.
  24. 24. The year aheadWe believe that companies’ ability to manage ESG Aside from communication efforts we willopportunities and risks are powerful proxies and continue the development of our “stars” family ofleading indicators for their overall management products where we deliver state-of-the art ESGquality – or the lack thereof. We believe that products. Solution-related development for 2012companies’ ability to link management of ESG will concern cooperation with our Private Bankingaspects of their business to their products and division and creation of a new responsibilityservices is one of the key proxies for their future concept for their business activities.development. 2012 is all about value creation, in a responsibleDuring 2012 we will revisit one of the key founda- way.tions of our Responsible Investment and Govern-ance strategy; communication. We will increaseour efforts related to communication about howwe create responsible returns in Denmark andNorway, markets where we see increasing clientinterest in our products and solutions.
  25. 25. Responsible Investment & Governance Sasja Beslik is Head of Responsible Investment & Governance at Nordea. Mr Beslik previously served as Head of Responsible Investments at Banco/ ABN AMRO and as a consultant for the World Bank for several projects in Africa and Asia. Mr Beslik is also chairman of UNEP Finance Initiative’s Water Work Group. Helena Hagberg is Director of Responsible Investment & Governance at Nordea. Ms Hagberg has previously worked with ESG research and corpo- rate engagements at SwedbankRobur and Banco/ABN AMRO. Ms Hagberg is former Chairman of the Swedish Sustainable Investment Forum, SWESIF, and is now deputy board member. Antti Savilaakso is Director of Responsible Investment & Governance at Nordea. Mr Savilaakso has previously worked with ESG analysis and corporate engagement at Responsible Research in Singapore, Dexia Asset Management in Brussels and ABN AMRO Asset Management in Amsterdam. Ylva Hannestad is Responsible Investment & Governance analyst at Nordea. Ms Hannestad holds a Master of Business Economics in Finance from Linköping University. Ms Hannestad is a former deputy board member of the Swedish Sustainable Investment Forum, SWESIF. Thomas Ehlin is Director of Responsible Investment & Governance at Nordea. Mr Ehlin is a board member of the Swedish Securities Council (Aktiemarknadsnämnden) and has also served as a member and chairman of several nomination committees of listed companies. Jan Särlvik is Director of Responsible Investment & Governance at Nordea. Mr Särlvik has 15 years experience as portfolio manager and financial analyst at Nordea. Before joining Nordea Mr Särlvik worked as Treasurer at Fabege AB and Esselte AB. Klaus Fridorf is Director of Responsible Investment & Governance at Nordea. Mr Fridorf joined Nordea Invest in 2008, as Head of Communication. Mr Fridorf has among other things worked in the Industrialization Fund for Developing Countries in the Danish Foreign Ministry working with Communication and International CSR policy.25 RESPONSIBLE INVESTMENT & GOVERNANCE
  26. 26. An ongoing process2002 2007 2008 2009 2010 2011 Nordea launches first Signs UNPRI and launch Initiates engagements in Signs Carbon Exclude New Strategy Initiates Establish Launch of Initiates policy on Responsible Disclosure and Policy engagement in-house unique RI engagement ethical funds Investment new companies Project com- in new ESG method funds in new panies companies companies involved Nordea has been in cluster working with gover- munitions nance issues since the 1980´s
  27. 27. Nordea Responsible Investment & GovernanceAnnual Report  2011 Published by: Nordea Investment Funds Photo: Håkan Flank, Pak Noto, Ewa Baumgartner, Klaus Fridorf, iStockphoto, Getty Images Graphic design: Lina Johansson Sense Design Sources: Ethix SRI Advisors, Hermes Equity Ownership Services, UNCTAD report March 2012

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