In terms of sustainability, the Nordic countries are often seen as leaders. Nordic countries rank first in the 2020 global sustainable development goal index, and ESG factor has long been regarded as a key component of investment by Nordic institutional investors. Therefore, we choose Nordic pension as a case study of best practice. This paper mainly analyzes the sustainable investment policies of the largest pension with asset management in Sweden, Denmark and Norway (alecta, ATP and gpfg respectively). Generally speaking, the ESG system of Nordic pension is mature, matches the investment strategy, has been generally integrated into the investment process, attaches importance to the due diligence management represented by active ownership, and the ESG concept has penetrated into external managers. Specifically:
Alecta, a Swedish Pension Fund, has been practicing ESG for 20 years. Initially, it was expressed as active ownership or non-financial issues, and then it was expressed as sustainability integration. It has a medium-sized ESG team of 4 people and has integrated ESG into the investment process. As an active investor in fundamental analysis, negative screening is unique, not its priority, and there is no public negative list. The head of alecta's Sustainable Development Department said that although the controversial targets related to weapons, tobacco, gambling and thermal coal that exceed the 10% income threshold are excluded, in view of the active investment strategy of its fundamental analysis, alecta has only 110 targets in its portfolio, which is different from the asset management institutions with passive tracking benchmark. These institutions usually take the index containing thousands of targets as the benchmark and often establish a long exclusion list.
ESG policy is based on sustainable development policy and ownership policy, and sustainability objectives and indicators are based on stakeholder and importance analysis. In terms of due diligence management, it echoed the active investment strategy, actively participated in the underlying corporate governance, and voted by shareholders themselves rather than through agents. The database is also matched with the investment strategy, and sustainalytics, which is good at individual stock rating, is selected. Alecta also reviews all listed shares and corporate loans four times a year in accordance with international conventions signed by Sweden, including the environment, workers' rights, anti-corruption and human rights.
Danish labour market supplementary pension scheme ATP: a responsibility Committee is established, chaired by the CEO, and its members include the chief investment officer and chief risk officer, as well as relevant managers of the investment department and other departments (the ESG team is subordinate to the investment department). Incorporate ESG factors into the investment process and design a questionnaire. The exclusion policy is regarded as the last choice, and the object of exclusion will be selected only after all the ways of participation are exhausted.
Four guiding principles of ESG: first, it is considered that ESG is very important for long-term return on investment. The second is to realize effective ESG integration through customized processes and formulate specific investment processes. Third, it needs internal ESG capability. In order to obtain full benefits, investment institutions must have their own ESG capability. Fourth, we believe in due diligence management and believe that exercising positive ownership to influence the company will help it develop in a better direction.
ESG policy framework: investment responsibility policy and active ownership policy. The former is the overall framework of responsible investment, establishes the basic principles and minimum standards for the behavior of the target company, and stipulates that the target company must act in accordance with the standards followed by the international conventions adopted by Denmark. In terms of due diligence management, it attaches importance to active ownership, participates in shareholder voting and has a direct dialogue with the company it holds. Due to the large number of Companies in the portfolio, it is important to determine the priority. Select the theme according to the screening, screen multiple companies in the face of the same ESG risk, and focus on participation and provide more in-depth insights.
Norwegian sovereign fund gpfg: establish an internal database on ESG. In order to obtain relevant, comparable and reliable data on ESG, collect enterprise sustainability data in the internal database, evaluate the company's reports and analyze the greenhouse gas emissions of Companies in the portfolio.
Norway's strict exclusion policy dominated by government level guidelines. The Norwegian Ministry of finance issues ethically motivated guidelines for observing and excluding the target companies of gpfg. Our previous report also mentioned that gpfg's exclusion policy is based on products / activities and behavior. The Norwegian Ministry of finance has established an independent ethics committee to conduct an ethical assessment of the company, and the executive director of Bank of Norway (the governing body of gpfg) makes the final decision on exclusion, observation or active ownership according to the recommendations of the ethics committee.
Three methods are used to identify and manage ESG risks in the portfolio: first, screening before companies are included in the fund benchmark index. The second is to continuously monitor the companies in the portfolio and benchmark index through daily analysis of events and more in-depth thematic analysis of specific markets and industries. The third is to conduct an annual review of the company according to the sustainability expectation. For companies with high risk exposure, further research should be carried out to assess whether they should have a dialogue with the company, vote against the board of directors or consider risk-based divestment.
Based on the above three cases and the research of Dutch asset management institution Robeco (involving pensions with top 10 asset management scale in Denmark, Finland, Norway and Sweden, with asset management scale ≥ 1 billion euros and time interval from March to August 2020), on the whole, the practice of Nordic pensions in ESG can be summarized into the following three points:
First, we attach great importance to climate risk. On the one hand, under the pressure of regulation and competition, most institutions have set the goal of carbon neutrality in their portfolios. There are also abundant initiatives in climate related fields: Carbon Disclosure Project, Montreal carbon commitment, climate related financial disclosure working group TCFD, climate change institutional investor group, climate action 100 +, net zero emission asset owner alliance, etc. (Figure 4). On the other hand, the number of climate and environment related objects on the exclusion list is increasing. In order to reduce carbon exposure, most Nordic pensions exclude investment in thermal coal.
Second, PRI's principle of responsible investment is the most widely accepted, followed by the United Nations Global Compact (UNGC). In contrast, UNGC focuses more on the sustainability of enterprise level participation, while PRI focuses more on asset owners and asset management institutions.
Third, the starting point of negative screening is similar, but the exclusion list is quite different. There are three main starting points: moral avoidance of certain products or activities; Signal purpose: to convey clear information to the company and other stakeholders (consumers, regulators, policy makers, etc.); In terms of reputation, holding a controversial subject matter may lead to serious problems or adverse media coverage. However, even for the same exclusion principle, the transparency of the exclusion list and the number of companies included vary greatly, which is related to the differences in exposure in emerging markets, small cap stocks and other aspects, as well as the company's investment strategy.
Risk tip: the intense geopolitical conflict has led to the reversal of the global carbon neutralization trend; Covid-19 virus mutation leads to vaccine failure and asset price collapse
