2 ContentsIntroduction: Responsible investment – sound business strategy and ownership approachIdentifying companies performing wellEngagements – a cornerstone for active investorsPRI initiatives for company engagementNuclear weapons policyCorporate governance activitiesFocus BrazilFocus MexicoFocus CanadaEmerging Stars & Swedish Stars 35710121417192528
3Responsible Investment & Governance | Annual Report 2012Responsible investment– sound business strategy and ownership approachThe past couple of years have been shaped by the finan-cial crisis and growing macro changes all over the world.The imbalances disclosed have in many ways demon-strated how critical active ownership is in the financialsector. The market economies dominating world marketsare today facing significant pressure from civil societies,clients and interest groups. Questions are being raisedas to whether shareholders should and could continue tobenefit from their ownership right without also assumingthe responsibility that comes with that right.As investors we are continuously striving for higherstandards regarding transparency, disclosure and ac-countability for the companies we invest in. We believethat the industries we operate in as well as our actionsneed to move from a culture of formal ownership entitle-ment to a culture of responsible ownership.Our activities within the realm of responsible ownershiphave increased over the last couple of years, and resultsachieved have improved our ability to provide clientswith long-term responsible investment solutions.Most investment managers act on behalf of millions ofinvestors, mainly ordinary people, so it does not makesense to suggest that it is in their interest to invest in acompany that destroys the environment and mistreats itsemployees, thereby encouraging the company to con-tinue what it is doing.We clearly see some key trends shaping 2013.Slow and sluggish economic growth and downwardpricing pressure caused by regulatory and fiscal con-straints will make it increasingly difficult for a numberof industries in core developed markets. Longer term,growth will be determined by companies’ ability to tapinto new markets targeting underserved demographicsboth domestically and abroad. Despite strong focuson the commercial potential of demographic shifts andBottom-of-the-Pyramid strategies, opportunitiesremain largely unexplored even in sectors facing strongheadwinds in existing markets.We believe that companies able to tackle this key issuewill be the long-term winners.Mass protests in China have risen dramatically overthe past several years, culminating in a number of highprofile protests in 2012 that have put a stop to plansfor new industrial plants. At the heart of Chinese socialdiscontent are a growing intolerance of corruption andconcerns over the rising inequality. These shifts in policyfocus could result in sweeping structural changes orsimply a wave of high profile prosecutions, so investorsshould thoroughly consider investing in companies andsectors vulnerable to being targeted for corruption. Anyupcoming corruption sweeps could impact investorsin two ways: (i) through an immediate blow to a singlestock or (ii) through longer-term erosion of competi-tive advantage due to loss of political access. Accordingto Institutional Shareholder Services Inc. (ISS), morethan 20% of shareholders voted ‘yes’ to proxy proposalslast year involving environmental and social issues, anincrease from 7.6% in 2000 and 9.8% in 2005. As in-vestors and other stakeholders put pressure on compa-nies to increase their attention to ESG issues, companyreporting on these issues has been on the rise. However,in many cases the information provided does not helpinvestors make insightful decisions about the key mate-rial risks associated with a business.Because companies are under pressure to address a widevariety of issues of concern to various stakeholders, theyare often reporting on issues where they face little finan-cial impact while ignoring issues that pose significantrisks to their core activities.Sasja BeslikHead of Responsible Investment & GovernanceAllan PolackHead of Asset ManagementIntroduction:
Responsible Investment & Governance | Annual Report 2012 5Identifying companies performing wellThe core of our Responsible Investment (RI) strategy isin-depth environmental, social and governance (ESG)analysis and engagement activities. Throughout our ESGanalysis companies’ overall management practices re-garding key ESG issues are assessed together with theirgovernance structure for dealing with these aspects.Based on the analysis, companies are selected for proac-tive engagement dialogues. The focus is on transferringknowledge and active participation in the developmentprocess. In 2010, we initiated our in-house environ-mental, social and governance (ESG) analysis and de-veloped our own criteria and methodology. Our analysisis based on a positive approach and aims at identifyingbest practices and companies that have implementedgood management policies to address key risks and op-portunities. Our in-house research team focuses mainlyon analysis of Nordic companies as well as on analysisrelated to our enhanced RI funds: Swedish Stars andEmerging Stars (page 28).Identifying new starsThe first and one of the most important parts of the ESGanalysis process is to identify issues for each sector andfor the company we are assessing. Our aim is to identifykey issues that are of material relevance for the companyto address, today and in the future. NGOs, externalresearch providers, unions and media are importantsources of information. We search not only for policiesand management systems but also for concrete actionsand results that indicate that the company has estab-lished policies and practices to manage the identified keyissues. The company is informed about our rating butalso about what improvements we need to see in orderfor us to rate the company differently.We consider acting responsibly a prerequisite for a company to achieve long-termgood returns. Our ESG analysis enables us to identify companies that operate inline with our policy and deliver long-term value.
6 Annual Report 2012 | Responsible Investment & GovernanceEngagements –a cornerstone for active investorsNordea sees engagement as an active investor and theopportunity to contribute to positive changes as animportant part of our work with responsible invest-ments. We engage with companies violating internationalnorms and companies where we see significant room forimprovement in relation to ESG issues.Norm-based engagementsIn 2012 Nordea demonstrated active ownership in 14international companies violating international norms.The breaches include violations of human rights (in-cluding indigenous people’s rights), violations of labourrights, severe environmental degradation as well as cor-ruption.Ended engagements due to successful progressIn 2012 Nordea also successfully ended five companyengagements because the companies’ norm-basedbehaviour had improved significantly since the dialoguewas started. Among the companies were two oil and gascompanies, a car maker, a utility company and a miningcompany.The norm violations included environmental degradationthrough severe oil spills, human rights abuses in Burma,suppression of workers’ rights to unionise and violationsof the indigenous people’s rights at a dam project in Pan-ama. Other examples were supply of military equipmentto Sudan as well as environmental and human rightsviolations at mining facilities in India.All the companies have developed and implementedsufficient policies and procedures to address the previ-ous norm violations. Furthermore, they have improvedtransparency and begun reporting on how they addressESG risks in their business operations. Another impres-sive development and change is how the companies nowsee sustainability as an important part of their strategy.From being a laggard in its strategic approach to sustain-ability, the mining company now has sustainability as acore strategic pillar of its business strategy.New engagements with norm-breachingcompaniesNordea initiated three new engagements in 2012. Oneengagement targets labour rights at a company’s sub-sidiary in Mexico, where labour rights in general areweak. The other two company engagements addressindigenous people’s rights in relation to a dam projectin Brazil. Often it takes time before we see real strategicchange in the companies we engage with. But we knowfor a fact that the time and efforts we spend on engag-ing with companies discussing their norm violations andoverall approach to sustainability do lead to progress. Itis especially rewarding when the companies not only ad-dress their norm-breaching behaviour, but also start tolook at sustainability as an important part of their overallbusiness strategy.We engage to change. Nordea initiates engagement dialogues to change behaviourand to enhance business performance by addressing the business practices usedby companies we invest in.
7Responsible Investment & Governance | Annual Report 2012Examples of norm-based engagement activitiesin 2012Case: Environmental violationsAn oil company has been responsible for severe waterand soil pollution. The company has repeatedly failed tomaintain corroded pipelines, resulting in at least eightregistered oil spills since 2006. The most recent spillwas in April 2010. Management is acknowledging theproblems related to the oil spills. The company has beenprovided with a list of key issues to work on includingpipeline monitoring and oil spills reduction systems, gasflaring as well as cleaning and remediation of areas con-taminated by oil spills. Management was also providedwith a detailed road map for pipeline integrity manage-ment and other environmental issues, and it has com-mitted itself to work with us to make progress.Case: Human rights violationsViolation of indigenous people’s rights in connectionwith a dam project in Central America. Previously, thecompany has been reported to be involved in trade uniondiscrimination in Africa, constituting a breach of severalILO conventions on workers’ rights.Nordea put pressure on the company, requiring it toadopt adequate risk mitigation strategies that address theviolations of the indigenous people’s rights. Among otherthings the company was provided with samples of leadingpeers’ work in this area.We have achieved the main target of our engagementbecause the company has now implemented a riskmitigation strategy. Furthermore, effective reportingmechanisms are now in place, with increased transpar-ency as to the company’s operations. In early 2013 thecompany will publish an extensive CSR report on the keyESG risks related to its business operations. Nordea wasallowed to preview the report, and we are satisfied withthe way the company now reports on and addresses itsrisks.Nordea also put pressure on the company, requiring it todo better in terms of honouring labour rights. We havenow also seen a positive development in this respect. InCameroon, where the company previously opposed anyform of unionisation, workers are now represented bythree different unions and the company has developeda strong culture for unionisation at its facilities. This issomething that was quite unlikely a few years ago.Following sufficient progress and with the targets met,Nordea ended this engagement in the autumn of 2012.Case: Labour rights violationIn early 2012 Nordea initiated a dialogue with a Finnishcompany allegedly involved in labour rights violations inMexico. The company had recently acquired a Mexicancompany that was suppressing unionisation.Since we started the dialogue, the Finnish company hasbeen very responsive and forthcoming towards Nordea,discussing ways to approach the labour controversiesand to ensure that the rights of the workers are suffi-ciently safeguarded.This autumn the company arranged a vote organised bya third party on union representation among its employ-ees. Nordea view this as a proactive and timely responseby the company, demonstrating its willingness to ensurethe workers’ right to union representation of their ownchoosing. The next step in the dialogue will be to ensurethat the company has sufficient policies and processes inplace to mitigate labour related controversies.
8 Annual Report 2012 | Responsible Investment & GovernanceProactive dialogues and company engagementsNordea also prioritises proactive engagements. Weinitiate dialogue with the companies representing ourlargest holdings as well as companies identified for ourRI enhanced funds during the ESG analysis process. Asowners we would like the companies we invest in to ad-dress ESG risks as well as opportunities.The proactive dialogues and engagements are carried outby Nordea’s inhouse team for responsible investmentand governance. In 2012 we met with 44 Nordic andglobal companies. It is our practice to engage in a directface-to-face dialogue with the companies.Three levels of interaction with companiesThe first level of interaction is the information request.The aim of this dialogue is to receive basic informationfrom the company. The information is used in our ESGanalysis for the RI enhanced funds and, where necessary,to encourage the company to improve transparency.The second level is a dialogue initiated in order to un-derstand more about a specific key issue. The companiesoften have good reporting processes in place, but we maylack certain information in order to complete our assess-ment of the company. The dialogue is often conducted atface-to-face meetings or via conference calls.The third level of interaction involves more intensiveengagements conducted in order to improve a company’sESG rating. In addition to contributing to a positivedevelopment in the company in terms of ESG, the goal ofsuch interaction is to improve the company’s ESG profileso that we can invest in it through our RI enhancedfunds.This type of engagement has clear targets based on find-ings in our analysis and is a long-term activity lastingbetween six months and three years.All three types of interaction are drivers of change andwill result in improved transparency and better risk oropportunity management.Examples of company meetings – 2012Astra ZenecaAxis CommunicationBR MallsEstacio ParticipacoesElextroluxGetingeH&MHolmenJ.M.KappahlKungsledenLLXLojas AmericanasMedaMillicomMillsMultiplanNCCNobiaNordeaOGXOriflamePetrobrasPRG RealtyEngagements -a cornerstone for active investors
Responsible Investment & Governance | Annual Report 2012 9Mr Sasja Beslik is Heading Responsible Investment and Governance activities for Nordea Asset Manage-ment. Beslik joined Nordea in 2009. During his time at Nordea he has worked as CEO for NordeaInvestment Funds in Sweden and is leading development of Responsible Investment concept, products andsolutions within Nordea Group . Beslik has extensive international investment experience, before joiningNordea, working in Africa, Asia and former Soviet Union countries, Beslik worked also as Global Head ofEngagement activities for ABN AMRO Asset Management.Appointed as most influential business individual in Sweden under age of 40 in 2007, Beslik have sincethen been awarded best ESG analyst in Sweden 2010 and Young Global Leader by World EconomicForum in 2011, one among 100 selected individuals globally.Aside of his work within Nordea Group Beslikchairs UNEP FI Water Work group addressing global water issues within the context of financial industry aswell as participating in steering committee within UNPRI on shale gas and water issues.Before joining Financial industry 2003, Beslik worked for multinationals in extractive industries in the CSRfield all over the world.
10 Annual Report 2012 | Responsible Investment & GovernancePRI initiatives for companyengagementNordea also participates in company engagements andinitiatives through the PRI Clearing House. This is a hubfor signatories to PRI (United Nations-backed Princi-ples for Responsible Investment) where they can jointlysupport, drive and participate in different initiatives.Nordea is currently involved in five PRI initiatives:sustainable fisheries and Global Compact reporting aswell as three initiatives addressing oil sands production,water risk and fracking.Sustainable fisheriesIt is increasingly recognised that overfishing and un-sustainable fishing practices could cause an irreversibledecline in fish populations. This may lead to disruptionsin company supply chains and represents a risk to boththe companies and the investors that have invested inthese companies.The sustainable fisheries initiative was initiated and isbacked by 18 investors and covers 41 companies. Thegoal is more sustainable fisheries practices in their busi-ness operations. Among the companies are Mitsubishi,Unilever, McDonalds, Wesfarmers and Nestlé.This initiative was started in July 2011.Global CompactNordea also supports the investor-backed initiativetowards companies that have signed the UN GlobalCompact* but do not fulfil its reporting requirements.The goal of the initiative is to make the companies reporton how they address and implement the ten principles towhich they have signed up.34 investors from over 12 countries and representingover USD 3 trillion are supporting this initiative throughthe PRI Clearing House. Together with the respectiveinvestors, Nordea has addressed 116 companies in total,89 leaders and 27 laggards, on their Global Compactreporting.This initiative was started in 2007.Oil sands initiativeIn August 2012 Nordea joined a new initiative throughthe PRI that targets oil sands production and the keyenvironmental and social impacts of such production.TheinitiativeisrunbyPRIsignatoriesincooperation withCOSIA**, an organization established by the 12 biggestoil sands producing companies operating in Canada. Theaim of this initiative is a constructive dialogue focusingon how the industry may reduce the environmental andsocial impact of the companies’ oil sands production.This initiative was started in 2012.Water risk and fracking initiativesIn late 2012 Nordea was elected to participate in thesteering committee of two new engagements through thePRI, focusing on water risks and fracking.Water withdrawals are forecast to continue to growsignificantly – according to the Water Resources Groupdemand for water will by 2030 exceed current availablesupply by 40%, leading to large areas with significantwater scarcity around the world. This will most likelyhave a significant effect on future economic growth andis therefore likely to impact long-term investors.
The aim of this initiative is to initiate a dialogue withwater-intensive companies and sectors in order toaddress direct risks and supply chain risks related towater-demanding production and water scarcity.The initiative on fracking aims at addressing severalaspects of fracking operations, with a targeted groupof companies. The focus of engagements varies fromgreenhouse gas emissions, water pollution and manage-ment to social and community concerns.The water risk and fracking initiatives will run for threeyears.*The UN Global Compact is a set of ten principles that busi-nesses can sign up to regarding the protection of human rights,labour rights and the environment and anti-corruption efforts.Reporting on how the company is following up on the principlesis not required, but highly recommended so as to avoid so-calledblue-washing. Blue-washing is when a company signs up to theUN Global Compact for branding reasons, but does not followup on the principles or report on how the principles are followed.**COSIA stands for Canada`s Oil Sands Innovation Alliance.Responsible Investment & Governance | Annual Report 2012 11
12 Annual Report 2012 | Responsible Investment & GovernanceNuclear weapons excluded fromNordea FundsNordea has decided to exclude companies that con-tribute to the production or development of nuclearprogrammes from our funds*. We regard nuclearweapons and their potential use as controversial,given their indiscriminate effects on human populations.During the first months of 2012 ten companies wereexcluded from our funds due to their involvement in theproduction or development of nuclear programmes. Thatis, of the ten companies two were already excluded dueto their involvement in anti-personnel mine and clustermunitions production.Companies excluded from Nordea’s fundsdue to their involvement in the produc-tion or development of nuclear pro-grammes are:• EADS• Goodrich Corp• Safran• Babcock International Group• BAE Systems• Huntington Ingalls• Northrop Grumman• Rolls-Royce• General Dynamics**• Lockheed Martin*** By production and development of nuclear programmes we mean companies’ contribu- tion to nuclear programmes in the develop- ment and production phase.- In so-called nuclear weapons states as defined by the Non-Proliferation of Nuclear Weapons Treaty (NPT), constituting the following five countries: the United States, Russia, the United Kingdom, France and China. It therefore applies to all nuclear programmes apart from the programmes established before 1970 when the NPT entered into force.- It also involves all nuclear programmes outside the NPT. The NPT is an international treaty whose objective is to prevent the spread of nuclear weapons.** Previously excluded from Nordea´s funds due to anti-personnel mine and cluster munitions production (2009).
13Responsible Investment & Governance | Annual Report 2012Aeroteh S.A. Involvement in cluster munitionsAlliant Techsystems Inc. Involvement in cluster munitionsAryt Industries Ltd Involvement in cluster munitionsDoosan Corporation Involvement in cluster munitionsGeneral Dynamics Corporation Involvement in cluster munitions & nuclear weaponsHanwha Corporation Involvement in cluster munitions & anti-personnel minesL-3 Communications Corporation Involvement in cluster munitionsLockheed Martin Corporation Involvement in cluster munitions & nuclear weaponsMotovilikhinskive Zavody OAO Involvement in cluster munitionsPoongsan Corporation Involvement in cluster munitionsSingapore Technologies Engineering Ltd Involvement in cluster munitions & anti-personnel minesTextron Inc. Involvement in cluster munitionsPotash Corporation of Saskatchewan Violation of human rights related normsBabcock International Group Involvement in nuclear weaponsBAE Systems plc Involvement in nuclear weaponsEuropean Aeronautic Defence and Space Company EADS N.V. Involvement in nuclear weaponsUnited Technologies Corporation Involvement in nuclear weaponsHuntington Ingalls Industries Inc. Involvement in nuclear weaponsNorthrop Grumman Corporation Involvement in nuclear weaponsRolls-Royce plc Involvement in nuclear weaponsSafran Group Involvement in nuclear weaponsList of companies excluded from Nordea’s funds:If a company is not demonstrating a real commitment tochanging its norm-breaching behaviour, Nordea’s Com-mittee for Responsible Investment may decide to excludethis company from all Nordea’s fund portfolios.Certain companies also produce specific products thatmake an engagement less feasible, for example compa-nies where the production of illegal weapons and com-ponents to nuclear weapons constitutes an importantpart of their business operations.Below the companies excluded from Nordea’s fundsas of December 2012 are listed. These are companieswhere dialogue is not feasible or has led to insufficientprogress.Excluded companies – where engagement is not feasible
14 Annual Report 2012 | Responsible Investment & GovernanceCorporate governance activitiesWhen exercising our role as an owner, we focus our rela-tively limited resources on companies where our owner-ship is of such a size that our decisions have significancefor the company’s development. In a relatively largenumber of companies our shareholding is of signifi-cance. For example, at the end of 2012 we had hold-ings in 42 companies exceeding 5% of the outstandingshares, and in more than 95 companies we held morethan 3%.The absolute majority of these large holdings are con-centrated to Nordic companies, mainly Swedish compa-nies. Some examples of our largest holdings are Sigma,an information technology company in which we hold20% of the capital, and Sectra, a company operating inthe area of medical systems and secure communicationsystems in which we hold 19% of the capital.Nomination committeesDuring the first half of 2012 Nordea Fundswas represented on 26 nomination committees ofthe companies; Alpcot Agro, Arise, Boliden, Bure Equity,Connecta, Dibs, Doro, East Capital Explorer, HiQ, JM,Kungsleden, Lagercrantz, Meda, MTG, NCC, OpusProdox, Proffice, Rezidor, Saab, Sectra, Sigma, Studs-vik, Svedbergs, Swedol, Transmode and ÅF.The nomination committees normally consist of repre-sentatives from the 3-4 largest owners. It is their re-sponsibility, among other things, to evaluate the perfor-mance of the board and to propose new board membersand auditors as well as their remuneration to the AGM.At the end of 2012 Nordea Funds was a member of 29nomination committees.During the year we have had dialogues with the boardsof 16 companies regarding the design of remunerationprogrammes for executives and employees.We consider correctly designed incentive programmes asuseful instruments for the creation of added value for theshareholders. This means for instance that participantsin the incentive programme should be exposed to bothincreases and decreases in the value of the company’sstock. Incentive programmes should have a clear con-nection to performance at both individual and companylevel and should also aim at long-term ownership ofshares. Provided that clearly operations-related goalsor explicit and relevant reference measurements areachieved, the incentive programme may result in sharesor options to the management and staff.In one case during 2012 (Autoliv) we voted against theadvisory resolution to approve the compensation of thecompany´s executives, among other things due to thelack of performance criteria for granting shares and op-tions.At this season’s AGMs, proposals have in a number ofcases been presented, mandating the boards to decideon rights issues against cash without pre-emptive rightsfor the shareholders. In our opinion rights issues againstcash without pre-emptive rights could result in obvi-ous disadvantages for existing shareholders and in somecases destroy value.We therefore normally act on such proposals. In anumber of companies we have initiated a dialogue withthe boards, resulting in the mandates being limited toNordea Funds is an active owner in the companies we invest in.A good long-term development of the companies will benefit shareholders,employees as well as other stakeholders.
15Responsible Investment & Governance | Annual Report 2012issues with pre-emptive rights. At some AGMs we havealso made requests to the boards regarding the use ofsuch mandates. One example is Finnish company Rapalawhere the suggested mandate was exceptionally exten-sive. In other cases, for example Consilium, we havevoted against such a mandate.We have focused on this type of mandate for a number ofyears and are happy to note that the number of requestsfor such mandates is decreasing. More importantly, wenote that in no case where we have acted has the man-dates been used for rights issues against cash withoutpre-emptive rights for the shareholders.At the AGM of Scania, together with eight other Swedishinstitutions we abstained from voting for the election ofboard members. We considered it to be the most suitableway to express our concerns. The reason was that theonly representative on the nomination committee whowas independent of VW and MAN did not support theproposed board on the grounds that it would not takethe interests of minority shareholders sufficiently intoaccount. At the AGM Nordea Funds requested that themajority owners’ representatives on nomination com-mittees should in future consider the interests of allshareholders.
17Responsible Investment & Governance | Annual Report 2012Focus BrazilRioThe UN conference on sustainable development washeld in Rio in June 2012. The event, known as Rio+20marking the twentieth anniversary of the Rio Earth Sum-mit held in 1992, gathered 45,000 delegates from 188countries to discuss the institutional framework andeconomics of sustainable development.Company meetings in BrazilBefore the PRI conference, Nordea representatives tookthe opportunity to meet a total of 12 Brazilian com-panies which are all Emerging Stars holdings or potentialholdings. The sustainability index (ISE) of the Brazil-ian stock exchange (BOVESPA) has been in place since2005, and this has encouraged Brazilian companies tobuild strong ESG management systems and practices.Many Brazilian companies report far less than they areactually doing in terms of ESG management. This “doinginstead of reporting” attitude is indeed a welcome devel-opment, and as a whole (with few exceptions) the ratingsof the Brazilian companies are improving.The future we wantThe large international development conferences nowa-days rarely produce binding international agreements,and while the Rio+20 conference as expected did notresult in any new binding agreements, several business-related initiatives were included in the conferenceoutcome document “The Future We Want”.Corporate responsibility for sustainable developmentwas wholeheartedly supported through for example thepromotion of green economy, environmentally sound useof raw materials and corporate sustainability reporting.During the conference many organizations and stockexchanges announced their ESG reporting initiatives.The UK Department for the Environment, Food andRural Affairs (DEFRA) announced that greenhouse gasemission reporting will be a mandatory part of the annualreporting of all companies listed on the London StockExchange as from 2013. DEFRA estimates that over timethis will make it possible for the UK to reduce its annualcarbon emissions by 4 million tonnes and thus meet theEU target by 2020. Nasdaq OMX announced that it willjoin the Sustainable Stock Exchanges initiative, requiringESG reporting from all listed companies on a “comply orexplain” basis.The Nordea RIG team fully supports and endorsesinitiatives improving transparency on ESG issues. The“Stars” ESG research process relies on corporate trans-parency, and the LSE and NASDAQ OMX are welcomeadditions to the Sao Paolo, Johannesburg and Singaporeexchanges, all key exchanges for Emerging Stars thatalready include some form of ESG disclosure in theirlisting requirements.PRI conferenceShortly after the Rio+20 conference, the Principlesof Responsible Investment initiative held its annualconference for PRI signatories in which the Nordeadelegation including the Emerging Stars fund managerand analysts also participated.Main conference topics addressed systemic risks andhow the responsible investment community as a wholecan respond. Among the key initiatives, the PRIsecretariat will start consulting signatories on whichpolicy issues to research and lobby, to identify policyresponses on the key subjects identified for action.
19Responsible Investment & Governance | Annual Report 2012Focus MexicoBig Business hazards in the world’s most dangerous cityMexico has in many ways become highly popular amonginvestors and companies around the globe. From one coastthe country offers access to the Pacific Ocean and Asia andfrom the other to the Atlantic Ocean and Europe. Also, sunnyMexico borders the US, the world’s largest and most attractivemarket with which it has a long-standing free trade agree-ment. Even so, the wide-spread corruption and high crimerates in Mexico often terrify even the most hardened marketplayers, and many companies soon see themselves as pawns ina game where it is difficult to see what the real agenda is.When the Finnish company PKC Group acquired activi-ties in Mexico some years ago, the strategy was fairlystraightforward. The company wanted access to cheapand efficient labour in one of the most appealing geo-graphical areas in the world. Separated only by the onceso mighty Rio Grande river, Mexico is only a stone’sthrow away from the world’s most potent market in theUS where for instance major car makers are willing ta-kers of the company’s products.PKC is not alone. Three out of four of the largest com-panies in the US have established production facilitieshere just south of the US border. Over the past 50 yearsthe Mexican government has offered extremely lucrativeconditions for production companies setting up busi-ness in the border region, the so-called “maquiladoras”.These companies have always been treated benevolentlyto ensure that the slow wheels of Mexico keep turning.Political changes in difficult timesFor almost 100 years Mexico was governed by theInstitutional Revolutionary Party, the PRI. But in theearly 2000s something happened. The Mexican peopledemanded changes, and the PRI president was oustedand replaced by a new candidate who pledged to fightcorruption and crime. This president has now also beentoppled and in 2013 the PRI returned to power.Unfortunately, the fight especially against the drugbarons became much bloodier than anyone dared ima-gine. During the second half of the 2000s and up to nowthe war between drug barons, the police and the mili-tary has claimed close to 60,000 lives. The epicentre ofthe war was the almost mythical border town of Juarez,which quite ironically is just across the border from ElPaso, one of the safest places in the US.But Juarez also acts as a magnet to big companies lookingfor access to cheap labour and the US market at the sametime. The production facilities of major global playersare located along the border like pearls on a string, withmost of them in Juarez. Even companies such as SwedishElectrolux, which is known for its soft Nordic values andan ethical rule book the size of the Bible, has more than5000 people employed at its huge white goods factoriesin Juarez.The drug war is, however, far from the only serious issuein Mexico. For decades poverty and an almost totali-tarian regime has given free rein to corruption. Manycompanies have had to realise that principles were onething, reality another. Recently, American supermarketgiant Walmart, one of the largest retailers in the world,was caught in having systematically been paying bribesfor years as a means to grow its activities. Today, Walmartis the second-largest employer in Mexico and thescandal remains front-page news in the media includingNew York Times. On the list showing the most corruptcountries in the world in 2012 Mexico is number 105.Topping the list as the world’s least corrupt countries areDenmark, Finland and New Zealand.Unions fighting to gain a footholdBut the companies in Juarez and other border towns inthe maquiladoras zones in Mexico are not only strugglingwith crime and corruption. One very hot topic these daysis the Mexican trade unions.
20 Annual Report 2012 | Responsible Investment & GovernanceThe Finnish company PKC recently found itself at thecentre of one of these battles. In line with many otherforeign companies in Mexico, it had not previouslyopened its doors to the trade unions because as so manyother organisations in the complex Mexican society theunions are known to be deeply corrupt and engagedin power struggles with one another. And the outcomeof these struggles is not always to the benefit of work-ers or employers. Some unions are even rumoured tobe a source of funding for the ruling PRI party, with notransparency as to the many millions of pesos raised inthis way.But most observers have long agreed that for companiesin Mexico to climb up from the lowest level of the pro-duction ladder, the trade unions will have to be involvedmore and in a better way. Consequently, as one of fewcompanies PKC arranged a vote among its employeeson union representation. The employees were to choosebetween two unions competing for the exclusive right torepresent the thousands of workers at PKC’s factories.The vote resulted in a tie, and the matter has now beentransferred from the PKC factory floor to the Mexicancourts. Meanwhile, PKC and many of its employees havebecome pawns in a game where so much more than col-lective agreements, overtime payment and training is atstake.A new eraBut despite the obvious hazards of the Mexican miracle,the country is no doubt moving in the right direction.The horrendous experiences of the past notwithstand-ing, the Mexican government has introduced new lawsaimed at securing transparency in government andpublic administration – and it seems that the new lawsmay have the desired effect in terms of putting an end tocorrosive corruption. Moreover, the drug war has turnedless ferocious and far fewer people have been killed overthe past year. Some think that the reason is that the mostdangerous drug cartels have lost, but others believe thatthe confrontations have merely declined following theelection of a new president.But no-one can take away Mexico’s strategic geographi-cal location, and in fierce competition with Brazil Mexicohas evolved into one of the greatest attractions forforeign direct investment in Latin America. The questionis whether companies such as PKC and Electrolux willsucceed in anchoring their own values in this complex,highly charged and dangerous society that Mexico is andwill be for many years to come.Focus Mexico
21Responsible Investment & Governance | Annual Report 2012On 1 December 2012 Mexico got a new president. Theformer president Mr. Felipe Calderon from the NationalAction Party (PAN) handed over the power to the newpresident Mr. Enrique Peña Nieto from The InstitutionalRevolutionary Party (PRI). Mr. Peña had won a clearvictory in the election in July.The PRI has more or less been running Mexico for mostof the 20th century. However, in 2000 the PAN won theelection and stayed in power through two presidentsuntil 1 December 2012.Mr. Peña is considered “new blood”, and he has clearlystated that he represents a change from the PRI that wasin power before year 2000. He is a very good communi-cator and has a strong appeal among the Mexican public.Mr. Peña has very clearly stated that his top priority aspresident is to make the economy grow faster and tofocus on reducing poverty. Some very interesting andimportant reform proposals will be up for votingsoon, and we have become more optimistic about apositive outcome. The reason for our optimism is thatthere is actually a huge “overlap” in the reform agendasof the PRI and the PAN, which should make it relativelystraightforward to get the reforms passed in Congress.Some of the reforms are quite significant and requireconstitutional changes. A two-thirds majority in Con-gress is needed to change the constitution. However, weare talking politics, and as we know things are not alwaysstraightforward.Two key reforms in the short to medium term are anenergy reform and a fiscal reform. An energy reform ob-viously contains many elements, but simply put, Mexicohas huge reserves of oil and gas but they all remain inthe ground because the state-run oil and gas company(Pemex) has been stripped of all its cash flows by thegovernment to fund the government budget. So despiteits huge reserves, Mexico ends up importing refinedproducts from the US and having subsidised prices ata cost for the government. An energy reform will im-prove the fiscal situation significantly over the long run,domestic energy structures will improve and the manu-facturing industry will receive a boost. As Pemex startsto restructure and increase production, we will see verypositive industry developments in the full value chainaround the energy sector, and job creation will surge.Turning to the fiscal reform, it again involves many ele-ments, but simply put, tax collection needs to improveand the tax system needs to be simplified. Over the longterm, these reforms may provide a strong boost to theeconomy and the budget and, in turn, the market.A recent labour market reform may be seen as a good in-dicator of the potentially better times ahead for Mexico.During the period from September to November, ie afterthe election but before the PRI took office, the PANand the PRI managed to agree on a new labour marketreform.Nordea’s RIG team visited Mexico in December to as-sess the effects of this new labour market reform. Theconclusions we draw from this trip are generally on thepositive side because from an ESG perspective we seeimportant improvements. One aspect for which theMexican manufacturing companies have been muchcriticised from an ESG perspective has been the fact thatthey made women do pregnancy tests before hiring them– which was totally legal. The new labour law does notallow this. We believe this is great news and an indicationthat this reform has positive ESG implications. However,much still remains to be done in Mexico in terms of ad-dressing ESG related issues.Besides the much better outlook for economic reforms inMexico, a number of other factors also contribute to ourmore positive view on Mexico from an economic growthMexico – new government and new opportunities
22 Annual Report 2012 | Responsible Investment & Governanceperspective. The key driver here is the competitivestrength that Mexico has gained over the past few yearsand the fact that this looks set to continue in the years tocome. This will help Mexico attract investments, therebylifting job creation and, in turn, consumption.The improvement in competitiveness is well illustratedby the trend in average manufacturing wages. In 2000the level in Mexico was USD 1.5 compared to USD 0.3in China so there was a quite large gap in favour of Chi-na. Now data for 2011 show that manufacturing wagesaveraged USD 2.1 in Mexico and USD 1.6 in China. Thegap has thus significantly narrowed in favour of Mexico.And if you add transportation costs, Mexico really startsto have a competitive edge over China in a number ofareasseen from aUS market perspective.Furthermore,infuture Mexico will benefit from its huge domestic energyresources (assuming the energy reform is implemented),but in the meantime until domestic energy productionpicks up, Mexican manufacturers in the northern partof Mexico can increase their use of cheap shale gas fromthe US.Another important advantage for Mexico for years tocome is its attractive demographic profile. This not onlyhas positive implications for the manufacturing sector,but also much broader structural economic implicationsfor the trend rate of growth in the economy. We believeMexico is getting closer to the point where as an econo-my and a society it can start to harvest the benefits of theso-called demographic dividend.Big structural economic issues still have to be resolvedin Mexico, and reforms are definitely needed in theyears ahead to address them. Corruption is also a hugeproblem, which will take years to solve. TransparencyInternational, a leading anti-corruption organisation,estimates that Mexican households spend a heftyUSD 2.5bn on so-called“petty corruption”(iepaymentsto ensure your rubbish is collected or your kids get theschool books they need, or a sudden parking ticket by thelocal police officer etc). This is a huge economic waste.However, relative to other emerging market countriesMexico is not doing too badly. The World Bank ranksMexico as one of the most straightforward places to dobusiness in Latin America.We are confident that Mexico is on the right track. Weare quite optimistic about the economic outlook forMexico in the years to come as we think the probability ofsuccessful reforms will generate some positive surprisesfor the economy. Consequently, we are starting to lookmore closely for new stock ideas in Mexico. However, inthe past we have struggled a bit to find companies withboth a good business model, strong ESG drivers and anattractive valuation. Hopefully we will be able to investin a few new names relatively soon – we are working onsome interesting cases, and the current political changesand potential implications for the longer-term growthoutlook are making us more confident.Mexico – new government and new opportunities
25Responsible Investment & Governance | Annual Report 2012Focus CanadaField visit March 2012, the tar sands, Alberta ProvinceThe fight over Canada’s dirty oilThese years a regular fight on words, facts, feelings and notleast over billions of dollars in potential earnings takes placein the old Indian territories in the Canadian Alberta province.Nordea went to Fort McMurray – the epicentre of what maybe regarded as the world’s most controversial oil bonanza –to examine the environmental and social impact of aburgeoning industry.At first sight, the idea of anyone wanting to start a newadventure here seems totally absurd. Fort McMur-ray, a former homely, tumbleweed-blown town in themiddle of Canada, and its surroundings are now a trulydepressing place to stay if you are not paid abundantlyfor it. Fort McMurray itself is not much bigger than asmall country town located in the middle of nowhere, butas soon as you venture out into town where the moneyflows, all your senses are assailed by the heavy industrialhaze overhanging the area. There is a constant, long lineof heavy trucks moving in and out, the climate is almostbrutal, and you get the feeling that people are here onlybecause of the money. And money – lots of it – is pre-cisely what it is all about in these parts of the country.In an area the size of England many of the world’s lead-ing oil companies are investing in excess of USD 100bnto harvest oil from reserves that are considered to beamong the most difficult to extract. And even thoughproducing one barrel of oil here requires three times asmuch energy as producing one barrel of conventionalcrude for instance in the Middle East, the high level of oilprices has so far made it a profitable business. The ruleof thumb for the multinational oil companies is that if oilprices exceed USD 65 a barrel, there are profits to bemade in the area.The fight seen from aboveTo be able to grasp what is at stake, you have to see it allfrom above. Because the area is so huge that it is impos-sible to fully understand the scope of this industry and itsenvironmental and social impact from ground level.Almost no matter in what direction you fly, it takes morethan two hours by helicopter to get away. All over, we seeArmageddon-like production sites. The oil resources inthe tar sands (oil sands) are just beneath the surface andare extracted using vast amounts of energy and water.Actually, it was a local chemist who in the 1920s dis-covered how to wash oil out of the sand – using his wife’swashing machine! And although the helicopter flightreveals that much has happened since then, the methodused to extract oil today is roughly the same. Either hotsteam is injected through the sub-surface oil layers or oilsands are mined from unbelievably large open pits thatleave the old Indian hunting grounds literally “scalped”.At an altitude of 300 metres above ground level you cansee how massive the scenery is. The trucks used in theopen mine pits operate 24/7 all year long and are thesize of big houses. Also, out in the wilderness a numberof landing strips have been constructed that the large oilcompanies use to fly in fresh supplies of multi-ethniclabour several times a day. With annual salaries in theUSD 150,000-200,000 range the companies have noproblem filling the seats of their jets.Words, facts and feelingsBut this wilderness bonanza has come under attack fromall sides, and in this fight between profits and environ-mental protection the ends justify the means.Greenpeace, the global environmental activist organi-sation and one of the more controversial players, hasthrown the spotlight on the environmental hazardsinvolved. And the hazards to highlight by the fearedgreen activists are many. One ticking bomb is the hugeartificial lakes, that is, the massive tailings ponds. Thetailings ponds contain non-recycled water from the oilproduction and are thus large pools of toxic sludge from
26 Annual Report 2012 | Responsible Investment & Governancethe extraction process. The companies use differentmethods to clean the water, but even after 40 years theystill have not come up with an effective way to do so. Inaddition to the challenges associated with managing oilsands tailings, there are fears of leakage from some of theold ponds into the drinking water of the local population.Some of the indigenous Cree Indians, who have alsothemselves become part of the oil industry, are beginningto oppose the fast industrialisation of the area, amongother reasons for fears of pollution of drinking water.Many have stopped using tap water following reports ofpeople starting to suffer from eczema, amnesia and insome cases cancer. Instead, they have water containersbrought in from elsewhere.However, with so much going on in the area it is dif-ficult to document and validate the many facts presentedby the various parties involved: the powerful lobby ofthe oil industry, the different factions of the indigenouspopulation, the environmental organisations, the humanrights organisations, those who have become rich andthose who have become ill. And the mere fact alone thatthe provincial government of Alberta does not appear tohave a good grasp of what is going on is not a good sign.The contrasts between profits and environmental con-sequences are so manifold and diffuse that it will requirethorough in-depth analyses to merely understand thebasics of this real-life war game.Big brother is covering the rear, for betteror worseThe US is by far the biggest importer of Canadian oil.Canada overtook Saudi Arabia in 2004 as the numberone supplier of oil to the US market. And in one wayit is easy to understand why the Americans favour theexpensive oil from Alberta. The massive oil spill in theMexican Gulf, the worldwide debate on nuclear powerand not least the many wars in the Middle East make oildeliveries from the neighbour to the North appear easyand secure. However, several US states have started toapply the thumbscrews to fuel suppliers that leave a jet-black trail of CO2 emissions, and to meet their demandsproducers have to mix the oil with biofuels. Meanwhile,there are strong protests against the highly controver-sial Keystone XL oil pipeline that is planned to run fromAlberta several thousand kilometres across the US toTexas. Recently, President Obama has postponed thedecision until 2013 – after the US presidential elec-tion. Canada has responded by threatening to redirectthe oil pipeline to the Pacific coast from where the oilcan easily be transported to the Asian markets instead.But also here the industry faces almost insurmountablechallenges as the indigenous peoples – First Nations, inCanadian terminology – in for instance the neighbour-ing province of British Colombia strenuously oppose thepipeline, and there are now indications that the partieshave reached a deadlock.Massive growth, CO2 war and a reindeerBack in the helicopter the global oil giants do not ap-pear particularly affected by the protests raised by theiractions. After one hour’s flight we see yet another newinvestment. The big oil company ExxonMobil is in theprocess of constructing a huge plant at a cost of morethan USD 20bn. Like many of its peers in the oil indus-try, the company is convinced that demand for energywill exceed supply by a wide margin in future. And manyof the big oil companies, including Norwegian Statoil,have been granted a licence to take their share of thespoils. Local economists believe that 600,000 new jobswill have been created in the area before 2020 and thatthe oil bonanza will be a key growth driver for the Cana-dian economy going forward.But nobody denies that the commercial risk involved ishuge. If oil prices plummet, as they did for instance in2008, it could jeopardise the profitability of the pro-jects. Moreover, oil extraction presents other problems.Focus Canada
27Responsible Investment & Governance | Annual Report 2012Canada is under massive pressure to meet internationalconventions and reduce its rising CO2 emissions. As thefirst country in the world Canada has responded by with-drawing from the Kyoto Protocol the objective of whichis to reduce global CO2 emissions. Officially because theUS and China have not signed the agreement.The biggest threats may be the challenges that are closerto home, including the lawsuits instigated by groupsof First Nation people against the Canadian federalgovernment. The First Nations in Canada have a consti-tutional right of exclusive use and occupation of the land.If the indigenous people cannot fish in the big rivers orcannot hunt the caribou, the local reindeer, the oil com-panies’ licences could, in theory, be withdrawn.Nordea’s analysis of the risks involved in oil sands extractionNordea is in the process of analysing the environmental and human costs of oil sands extraction. In 2012 Nordea identifiedthe oil companies involved in oil sands extraction and analyse how these companies manage the environmental and socialrisks. Nordea Funds has not invested in the two biggest Canadian oil sands companies, Suncor and Syncrude, whose corebusiness area is oil sands extraction.Nordea acknowledges the substantial social and environmental risks involved in oil sands extraction, as reflected in theongoing lawsuits raised to uphold the constitutional rights of Canada’s First Nations. Also, several environmental organisa-tions accuse the oil companies of damaging the environment, but no ruling against the companies has so far been handeddown. And the provincial government’s management and supervision of the companies, their activities and the social andenvironmental impact far from meets international standards including those of the World Bank.During our visit we took water samples of the public water supply. These samples, which were sent to Stockholm’s KarolinskaInstitutet for testing, turned out to be of the same quality as drinking water in Sweden. Facts on the oil in AlbertaOil or tar sands consist of crude bitumen-saturated sandstone. Crude bitumen is a type of oil that is too heavy for extractionusing conventional drilling techniques. Oil sands deposits are a very large proven energy resource. The biggest deposits arefound in Venezuela, Canada and the Middle East.The Canadian oil sands deposits are estimated to hold about 175bn barrels of oil. By 2020 the production of synthetic oil isforecast to have risen to 4m barrels a day, which is twice as much as today.It requires huge amounts of energy to extract and wash the oil out of the oil sands. There are two main methods of extraction:surface mining (open mine pits) or in-situ mining where heated steam is delivered to the crude bitumen-bearing strata throughinjection wells. The processes require four times as much energy as conventional oil extraction methods and are three timesas energy-intensive as for instance production of wind energy.
28 Emerging Stars & Swedish StarsThe firstinvestment productsbasedonpositivescreeningwere introduced in the spring of 2011. Swedish Stars isa focused Swedish equity fund with 25-30 holdings.Emerging Stars invests solely in emerging marketscountries such as Brazil, India and China. Its portfolio isconsiderably more concentrated compared to the majo-rity of other emerging markets funds. The portfolio of theEmerging Stars fund typically comprises 40-60 compa-nies. With the relatively low number of companies in theStar fund portfolios Nordea is able to constantly monitorand assess the performance of the individual companies.The portfolio managerspickthecompaniestoinvestinonthe basis of Nordea’s own ESG analysis, which scorespotential investment candidates based on an evaluationof how they handle ESG risks and opportunities. Onlythe companies that demonstrate an ability to handle bothrisks and opportunities and that have a positive approachto ESG issues will be selected.Emerging StarsFor the Emerging Stars fund we constantly look forthe actual Emerging Stars, companies from the globalemerging markets that have the star potential to be aglobal leader in their industry, both in traditional indu-stry and financial terms as well as from an ESG point ofview.Qihoo, ChinaQihoo 360 Technology Co. Ltd. (NYSE: QIHU) is aChinese software company known for its antivirus soft-ware (360 Safeguard) and web browser (360 Browsers).It was founded by Hongyi Zhou and Xiangdong Qi inAugust 2006.As of March 2012, Qihoo’s monthly active users were411 million for its security products and 273 million forthe 360 Browsers at the end of the first quarter of 2012.The company is only active in China.Qihoo has a strong code of conduct that addresses thecompany key risks adequately on acknowledgement andpolicy level. Qihoo was criticized in 2011 for itsfinancial disclosure. The company responded byopening up its corporate governance structure anddisclosure. The company does not provide any additionalgeneral corporate responsibility information, which istypical both in China and among internet companies.Privacy and freedom of association related risks aretypical for Chinese internet companies that rely on socialmedia. Qihoo does not have strong links to social media,therefore the risk is mitigated by low exposure.Urbi, MexicoDuring its 30 years of operations the company has builtand sold more than 400,000 homes. It uses advancedbusiness processes and has outstanding financial per-formance, which makes it the most profitable companyin the sector. Urbi can serve all market segments, butfocuses primarily on affordable entry-level and lowmiddle-income housing.Urbi Desarrollos Urbanos SAB de CV is a Mexico-basedcompany primarily engaged in the real estate sector.The company’s main activities include the acquisitionof land, as well as the design, construction and deve-lopment of residential properties under the UrbiVilla,UrbiQuinta, UrbiHacienda and UrbiClub brand names.In addition, the company’s projects are supported bytwo information technology (IT) platforms that maintainthe scalability of operations: UrbiNet and UrbiNova.The company shows a strong commitment to CSR. Urbihas a Sustainability Development Committee whichfrom 2012 will be a part of the board of directors. Thecompany has started a lot of initiatives but unfortunatelylacks a bit in terms of a structured approach to CSR.Anhanguera, BrazilAnhanguera is among the highest ranking Brazilian com-panies in the Emerging Stars fund. It is Brazil’s largestAnnual Report 2012 | Responsible Investment & Governance
29(second largest in the world) publicly held company inthe education sector. Anhanguera focuses on post highschool vocational education and has 400.000 studentsin 73 campuses and over 500 learning centres locatedacross the 27 Brazilian states. Brazil’s growth rates,demographic changes and low unemployment rates haveboosted demand for vocational training to a level thatthe government cannot fulfil on its own. Consequently,the government supports private involvement, enablingAnhanguera among other education companies to fulfila social mission by providing vocational education forlarge parts of society that have not been able to benefitfrom the relatively high education standards of the fewelite schools in Brazil. The social mission is also veryvisible locally. Graduation from private schools such asAnhanguera requires practical training, and Anhangueraoften organises this training within its campuses, whichwould otherwise stay unused during daytime by themostly working students. The practical training in forexample nursing and healthcare enables these services tobe available at zero or close to zero costs at Anhangueracampuses for people who otherwise might not be able toafford them. On top of their social mission, Anhanguerahas thorough ESG management and reporting mecha-nisms in place addressing key stakeholder risks. Thecompany has published GRI (Global Reporting Initia-tive) sustainability reports since 2009 and is included inthe BOVESPA corporate sustainability index (ISE).Swedish StarsSwedish companies are often described as maturecompanies well aware of any environmental and socialrisks and at the forefront of developing new sustainabletechnologies. Our analysis shows that this is true forsome of them, but not for all. Through our ESG analysisboth the leaders and the laggards have been identified.The leaders have a good structure in place to manageenvironmental and social risks, and are increasinglyintegrating their commitment to sustainable businessdevelopment, eg in group visions, mission statementsand strategies. Our analysis has also identified compa-nies that are not top performers in this area today butdemonstrate positive momentum and have a strategy forhow to further improve, ie our future stars. SSAB andTele2 are companies that show concrete improvementsand also a willingness to go further.SSAB & Tele2SSAB made progress addressing health and safety is-sues, supply chain management and business ethics inlate 2011 and in the beginning of 2012. The companyis now addressing all key issues at a strategic level in astructured way and with clearly defined responsibilities.To receive an even better rating the company now needsto show the results of its newly established strategies.Tele2 has been on a very positive journey over the pastfive years. Analysis conducted five years ago revealed thecompany’s limited interest in taking group-wide re-sponsibility for social and environmental issues. Today,key issues have been identified through stakeholderengagements, and the relevant policies are now in place.Disclosure has improved with the group publishing anannual corporate responsibility (CR) report (GRI), butdetailed information, concrete actions and results arelacking. We have asked the company to further improveits communication regarding privacy protection andintegrity and establish a stronger statement througha position paper that describes the situation and dis-close actions taken. Both of these companies have beensubject to closer proactive engagement activities and it isgood to see that recommendations from earlier analyseshave been fulfilled.Responsible Investment & Governance | Annual Report 2012
31Responsible Investment & Governance | Annual Report 2012Emerging Stars – product factsPhilosophyThe Emerging Stars investment process includes an implicit environmental, social and governance (ESG) evaluation.The investment process is based on the belief that: • structural changes in the fields of technology, demographics and globalisation combined with global challenges such as climate change and resource scarcity are the main challenges and opportunities for companies. • companies with a competitive edge in terms of ESG that benefit from structural changes will achieve superior cashflow growth over a prolonged period. • thematic research that focuses on structural changes and identifies companies that benefit from them can produce superior information, thus leading to excess returns.Investment objectives • Excess return target 4% per annum • Ex-ante tracking error Minimum 5% per annum • Benchmark MSCI Emerging Markets as reference indexInvestment policy • Number of holdings 40-60 • Active stock positions Maximum 5% • Cash / equivalents Maximum 5% of the portfolio’s market value • Individual securities Maximum 10% of the portfolio’s market value • Country deviations No restrictions • Sector deviations No restrictions • Currency No currency hedgingThe Emerging Stars Investment ProcessSustainableshareholdervaluegenerationValuationSocial responsibilityGovernanceEnvironmentIndustry keysuccess factorsTheme & Strategy
Published by: Nordea Investment FundsPhoto: Håkan Flank, iStockphoto, Klaus FridorfGraphic design: IMMERFRISCHSources: Ethix SRI Advisors, Hermes Equity Ownership Services, UNCTADMarch 2013Responsible Investment & GovernanceAnnual Report • 2012