Sustainability in our investments

Transcription

1 Sustainability in our investments MARKETING MATERIAL

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3 Investing for a sustainable future In 2015, the world s leaders agreed to eradicate extreme poverty, reduce inequalities in the world, solve the climate crisis and promote peace and justice by It is a unique accomplishment that the world s countries and citizens strongly backed a common agenda to solve these challenges. Over the three years that have passed since the agreement, a strong force for change in society has grown and Handelsbanken wants to take an active role in this change. For our customers this typically involves savings for retirement or children savings for the long term. We are convinced that we can make a significant difference. Handelsbanken has a key role in its task of managing the savings capital of its customers. We manage assets of approximately SEK 500 billion. As a result, our goal is obvious: we want to create good returns on our customers savings capital, while at the same time work for a sustainable future. In the autumn of 2017, the Bank performed an initial analysis of climate-related transitional risks in Handelsbanken s asset management operations and credit portfolio. The analysis is conducted by the independent research company 2 Investing Initiative, which specialises in analysing financial risks associated with climate change. The results indicate that we are in line with the 2-degree target. The sustainability work continued in several ways during 2017: We integrated the Sustainable Development Goals into our asset management operations in Handelsbanken Fonder, the fund management company that offers actively-managed mutual funds. We are focusing on investing in companies that offer solutions in terms of products and services that can contribute to reaching the Sustainable Development Goals. This leads to a growing number of company holdings that, in their own way, play a key role in a sustainable transition. In the autumn 2017, our Hållbar Energi fund* was certified as Svanenmärkt. The fund only invests in companies that develop or use methods and technologies that limit global warming as well as in companies that can contribute to a more effective use of energy. In Xact Kapitalförvaltning, which offers index funds, we launched a sustainability-oriented index that excludes companies that do not comply with our sustainability policy. Choosing the right index is essential when working with sustainability in index funds. During the year we made extensive efforts to spur the development of international indexes which exclude companies that violate international norms and conventions relating to the environment, social issues and corporate governance. In Handelsbanken Liv, the transition to more sustainable fund offerings continued at a rapid pace in Funds that did not fulfil the stricter sustainability requirements adopted during the year were excluded and new mutual funds have been added that have a clearer sustainability profile. Not all of our customers have the time or interest to familiarise themselves with all the information on savings with a sustainability focus. The evaluation of mutual funds was developed further during the year and we are now placing an even greater focus on engagement and influence. Asset management with a sustainability focus is a continuous process. New asset management methods are constantly being developed, new issues are being raised related to corporate sustainability and the follow-up on how well we are reaching our goals. We are focusing on taking an active role on this journey to offer both good returns and participate in sustainable development and thereby contribute to the Sustainable Development Goals. *A fund s historical return is no guarantee of future returns. Investments made in the fund can rise or fall in value, and it is not certain that you will get back all the capital you have invested. Information and fact sheets are available at finner du information och faktablad. From the left: Louise Sander, Chief Executive of Handelsbanken Liv. Pär Nürnberg, Chief Executive of Xact Kapitalförvaltning. Elisabet Jamal Bergström, Head of Sustainability, Handelsbanken. Seated: Carl Cederschiöld, Chief Executive of Handelsbanken Fonder. Table of contents Sustainability in Handelsbanken 4 Sustainability in asset management 6 Our asset management methods 8 Continued focus on the climate 12 Active engagement 16 Sustainability-audited fund offerings 20 A selection of initiatives 23 3

4 Sustainability in Handelsbanken In 2015, the UN adopted Agenda 2030, which includes 17 Sustainable Development Goals. All parts of society must get involved if we are to achieve these goals. Thus, the business community also has a vital role to play in this endeavour. One of the main challenges in Agenda 2030 is to combat climate change. Radical changes to the conditions worldwide require us to reconsider energy production, transportation and consumption patterns. Not only are politicians at the national, regional and local level assuming their responsibilities and proposing plans to reduce greenhouse emissions. Many companies have already made significant progress. It is clear that the strategic sustainability work is vital for company management as well as for employees, customers and the world. This is also true in Handelsbanken. We are a company with a business- and corporate culture characterised by a longterm approach, low risk tolerance and cost-awareness. The local presence and roots in the community make our role vital it s about making positive contributions and not be a burden on society. Thus, sustainability has been a natural part of our day-to-day business decisions. This is demonstrated in the carbon dioxide emissions generated in our operations from energy consumption, business travel and transport, for example. These emissions have been reduced by more than 40 per cent over the past five years. Given that we are entrusted by our customers to manage their savings capital, our focus on sustainability plays a prominent role. Customers want their savings and investments to yield good returns, at the same time as investments are made in equities or bonds issued by companies who in turn have sustainable business models and are not contributing negatively to performance. As a bank we can contribute to sustainable growth through advisory services, the products and services we offer to our customers. This does not mean that we can just sit back with regard to day-to-day issues such as how we travel or how our branches are heated. But we can partner with our customers and work together to create a value chain, where not only projects or assets are sustainable, but also the financing of this, whether this is on the capital market or in the Bank. And there is a demand an increasing number of investors are requesting sustainable investment alternatives and we all benefit from highlighting that portion of the economy attributed to this. Sustainability is already a pre-requisite for good business and will be an even stronger factor going forward. This is also seen in the Bank s corporate lending. A small portion of this consists of exposure to sectors that may have the highest transitional risks energy production based on fossil fuels, for example. 40% of the Group s managers are women. Close to two-thirds of the Bank s own equity funds report their carbon footprint. 146 years of availability. 4

5 We are integrating Agenda 2030 and the Sustainable Development Goals. We are focusing on the following six goals at Handelsbanken: Goal 5: Gender equality Goal 8: Decent work and economic growth Goal 9: Industry, innovation and infrastructure Goal 11: Sustainable cities and communities Goal 13: Climate action Goal 16: Peace, justice and strong institutions Sustainable Development Goals The UN General Assembly adopted Agenda 2030 and 17 Sustainable Development Goals in September Handelsbanken s Responsible Investments Committee has analysed these to determine which of these should be focused on in our business operations. More satisfied customers than the sector average in all of our six home markets. Source: SKI/EPSI Handelsbanken has arranged green bonds for SEK 8 billion during Over 800 branches in our six home markets. 5

6 Sustainability in asset management Many sustainability issues are substantial and complex, particularly in relation to our role as an asset manager. Sustainability issues, as well as risks and opportunities associated with these, vary significantly depending on the company s specific business operations, products and services as well as the geographic location of the business operations. We have a wide scope in the sustainability analysis and engagement activities that are conducted within the realm of asset management. We carefully follow the developments in the companies, sectors and regions where we see increased risks relative to sustainability, such as mining, companies with operations in countries with a heightened risk of corruption, low-cost countries and in countries that disregard democratic principles. We also work with focus areas to identify sustainability risks and opportunities more easily as well as to increase our shared expertise within these areas. This helps us understand new perspectives, discuss difficult considerations with other investors or stakeholders as well as evaluate potential positions within various areas. In addition, we seek active collaborations to expand our knowledge and to increase our ability to influence companies to head in more sustainable direction. The range of sustainability issues is continuously increasing. Both new and old issues are discussed based on new perspectives, such as the use of plastics, the excessive use of antibiotics, travel and consumption patterns, just to name a few examples. There are many aspects to consider and it is not always easy to identify the right solution. ESG stands for Environmental, Social and Governance. It is a standard used to categorise sustainability criteria. The matrix below provides examples of sustainability issues that we have analysed within the framework of company research or that we have pursued in our active engagement. Environment Social Corporate governance Climate change Water pollution Soil contamination Bio-diversity Resource efficiency Deforestation Labour law and work conditions Health and safety Child labour Data security Gender equality Corruption, bribes Business ethics Protection of minority shareholders Sustainability reporting and follow-up Policies and guidelines 6

7 A selection of sustainability-related issues Focus on gambling companies In 2017, our thematic work targeted the gambling sector and issues related to responsible gambling (RG). Companies accountability is essential, given that approximately two per cent of the population has gambling problems according to the Swedish public health authority (Folkhälsomyndigheten). The purpose of the study, which included five Swedish listed gambling companies and the state-owned companies, was to conduct a deeper analysis of the work with responsible gambling and evaluate whether the companies management systems for responsible gambling are sufficient. The study reported that there has been a wide range of progress made in this regard by the different companies. Based on our conclusions, we have continued the dialogues and clarified the improvements we expect to see going forward. We continue to monitor the companies work to develop systems and procedures for responsible gambling. Countries on sanctions lists As a result of international agreements and sanctions lists, we do not invest in a few countries that are found on these lists. We do not invest in government bonds in countries that do not meet international obligations in order to combat the financing of money laundering and terrorism in accordance with the proclamation of the Financial Action Task Force (FATF) 1. Moreover, we do not invest in such government bonds that are banned for investments on the basis of the EU s financial sanctions 2. 1 Iran and North Korea are currently banned countries. 2 North Korea and Syria are currently banned countries. Swedish gambling regulations are expected to be implemented during 2019 to create a sound and safe gambling market. The regulations include, for example, strict requirements for moderation in marketing, requirements for responsible gaming measures and a national shutdown register under the responsibility of the new gaming authority. Common value base Handelsbanken supports international initiatives and guidelines with the common aim of encouraging and facilitating corporate sustainability. These initiatives and guidelines provide guidance for Handelsbanken s work. Together with the values expressed in our corporate culture, they form a clear, common basis for the structure of our financial services. Asset management To more clearly delineate Handelsbanken s range of actively-managed mutual funds and index-based funds, the Swedish fund operations are managed by two separate companies. Actively-managed funds are offered by Handelsbanken Fonder AB, while the index-based and exchange-traded funds are offered by Xact Kapitalförvaltning AB. Handelsbanken also offers mutual funds managed by fund management companies in Luxemburg (SICAV). All fund management companies are subsidiaries of Svenska Handelsbanken AB (PLC). Pension and insurance Handelsbanken offers pension solutions and other insurance solutions for private and corporate customers through its subsidiary, Handelsbanken Liv. The majority of customers pension capital is managed by Handelsbanken Kapitalförvaltning, which was thus the largest provider of Handelsbanken Liv s traditional pension management and unit-linked fund management services in

8 Our asset management methods All of our asset management is founded on a common value base: a combination of Handelsbanken s corporate culture and a framework based on international norms and conventions. We integrate financial, social and environmental sustainability into our asset management operations. However, the approach we take in our daily operations can differ depending on the type of assets and the investment focus. Responsible investments the starting point for all of our investments Responsible investments are an integral part of the investment process for all of our mutual funds. This means that the funds asset managers take sustainability risks and opportunities into account in the investment analysis. Asset management also works in a structured manner with focus areas and education. All of our investments are founded on a common value base, which is summarised in our policies for responsible investments. Thus, all asset management is governed by international norms and conventions, which comprise the environment, human rights, work conditions and corruption. We have also undertaken several voluntary frameworks, such as the UN initiative Global Compact and the UN s principles for responsible investments. Additional information about these commitments is available on page 23. Pursuant to our policies on responsible investments, we do not invest in the following business operations: companies that are involved in the production or distribution of banned weapons in accordance with international law, such as: cluster munitions, anti-personnel mines, biological and chemical weapons. We also do not invest in companies involved in the production or distribution of nuclear weapons. companies with significant operations within the mining of coal or in power plants that use coal as a major energy source. In practice this means that a maximum of 5 per cent of a company s turnover may be derived from coal mining. A maximum of 30 per cent of the power company s turnover may be derived from coal power generation. Norm-based screening As part of our commitments, we also conduct a review of all of our holdings twice each year to identify companies that do not comply with international norms and conventions. This means that we review the company holdings and any committed crimes or violations of international norms in the four principle areas of human rights, work conditions, environment and corruption, based on the UN initiative Global Compact. Sustainability integrated into the investment processes Criteria related to the environment, social issues and corporate governance are integrated with financial criteria by the fund s asset manager to produce better background documentation for decisions in the investment process. Sustainability issues are vital for making better investment decisions and are an important pre-requisite for generating good returns over the long term. In day-to-day operations, the approach for integrating sustainability can differ depending on whether the activity is choosing individual companies to invest in or choosing mutual funds to include in our fund portfolios or insuranceand pension-related offerings. The choice of asset class and management focus also influences the approach. Three directions to take Inclusion We integrate sustainability in our investment processes by selecting the right companies, the right index or the right mutual fund, depending on the type of asset management that applies. Exclusion We exclude companies with operations that are incompatible with our policies for responsible investments and companies that do not meet our specific sustainability criteria in our Criteria range. We also exclude companies we deem have an insufficient level of sustainability work and where our ability to influence in the right direction is judged to be too low. 8 Engagement We try to proactively influence companies to improve their sustainability work in general or within specific issues. We influence companies through our corporate governance work by participating in nomination committees and voting at annual general meetings. Through the use of dialogue, we try to influence companies to comply with international norms and conventions. Additional information is available on page 16.

9 Decision-making body for sustainability work The sustainability work in our asset management is based on three pillars: our Responsible Investment Council, an operational function, and the fund administrative organisation. The Responsible Investment Council addresses matters of principle, such as which companies should be subject to special dialogues, any exclusions of companies as well as positions taken on vital matters. The operational function runs the work of integrating sustainability into the investment process. Lastly, the fund administrative organisation is responsible for the actual implementation of sustainability in the investment process, in research and in investment decisions. Responsible Investment Council Operational function for responsible investments Fund administrative organisation Active equity and fixed income management Fundamental research is crucial in active asset management. The process is designed to identify and invest in the right companies. Given our long-term investment horizon, we are not interested in investing in companies that focus primarily on the short-term. The sustainability analysis is an integral part of the asset manager s investment research. The analysis contributes to the identification of risk in the companies business models and the development of investment ideas. Index management Index management is a rules-based form of management approach and no company research is carried out. Instead, the fund management company decides that its funds will track the index whose method and composition reflect the fund management company s values with respect to sustainability. A vital part of sustainability work is to encourage the long-term creation of sustainability-oriented indexes and tracking based on sustainability criteria. 9

10 Examples from our fund management Inclusion In our Thematic funds we have identified themes based on changes in the world that can drive growth and impact a company s profitability over the long term. Global water supply management and energy efficiency are two examples of investment themes. Within these themes we identify companies that contribute to effective solutions to the global challenges of water shortage and energy consumption, which we believe have the potential for strong profitability. Handelsbanken Hållbar Energi (Criteria)* has a strategy to invest worldwide in companies that develop or use technologies and methods to limit global warming. Handelsbanken Hållbarhet Hedge Criteria* invests in companies that understand the importance of longterm sustainability, given that these companies are expected to have a greater potential to generate higher returns over time. The asset manager identifies a number of themes that can contribute to selected Sustainable Development Goals over the long term. The fund s ability to short-sell companies, i.e., the opposite of investing in companies, strengthens the strategy of creating returns with a focus on sustainability. Exclusion We exclude companies with operations that are incompatible with our policy for responsible investments and companies that do not meet our specific exclusion criteria in our Criteria fund range. Within index management, we exclude companies that do not meet our sustainability requirements through the use of sustainability-oriented indexes. Engagement We pursue active engagement activities, partly through company dialogues and partly through our work within corporate governance. Read more about how we pursue active engagement activities on page 16. *A fund s historical return is no guarantee of future returns. Investments made in the fund can rise or fall in value, and it is not certain that you will get back all the capital you have invested. Information and fact sheets are available at Criteria funds* All of the Criteria funds* exclude companies in which the primary business operations are within controversial sectors such as alcohol, tobacco, commercial gambling, warm materials, pornography and fossil fuels. The funds also exclude companies that are regarded as contravening international norms and conventions. The funds also hold a restrictive position to investments in companies in which a smaller share of the business operations associated with the aforementioned sectors. The range comprises index funds, actively-managed equity funds, fixed income funds and an allocation fund with a special investment focus. 32 per cent of the fund volume of the Bank s own assets under management have specific sustainability criteria and are called Criteria funds.* Percentage of Handelsbanken s total fund volume in Criteria funds % of fund volume % % % % 2017 Criteria Investment decisions also follow criteria that include the following: companies that systematically violate international norms and conventions. Sector Tobacco Pornography Alcohol Gaming War materiels Fossil fuels ** Max. of 5 per cent of earnings from production or distribution of: Zero tolerance regarding production of: * *Do not invest in companies that explore or extract tar sands. For other fossil fuels, a maximum of 5 per cent of the company s earnings may be derived from production or distribution. 10

11 40 per cent of the portfolio, measured in the companies turnover, contributes directly to several targets in Agenda 2030 Lisa Synning / Asset manager of Handelsbanken Tillväxtmarknad Tema (Criteria)* Significant sustainability risks are often mentioned in emerging markets. As the asset manager of an emerging markets fund, what is your view? As with many things, you can t make generalisations. There are major distinctions between companies and risks are not the same in different countries and sectors. In some cases, there clearly are higher risks, but these higher risks aren t equally divided and it is possible to identify them. In our active management we can decide to invest in companies with lower sustainability risks or in companies that are aware of the problems and are making efforts to improve the situation. Could you comment about the areas where you often see higher risks within emerging markets? Issues related to corporate governance are different and are very important in emerging markets where we often see conglomerates and family-owned companies, for example. As a result, we thoroughly analyse the principle owners and company management, their past performance and results. A strong corporate governance is essential to how well the company will perform financially as well as how the company will manage sustainability issues and retain value growth over the long term. There is a clear connection between how a company handles corporate governance and corruption on one hand, and other sustainability issues on the other hand. The existence of corruption is a reality that we need to relate to when we make our investment decisions. For example, corruption in the form of bribes occurs when major contracts are on the line, but we also see bribes used to over-exploit the workforce or exceed emissions limits. As a result, corporate governance becomes a natural and powerful part of our sustainability analysis. and well-managed companies that we believe have good growth potential. In many cases, these investments also contribute to sustainable global growth given the obvious and natural overlap between our themes and the Sustainable Development Goals. In 2017, we began a more in-depth analysis of the contributions our investments are making to Agenda 2030 and the Sustainable Development Goals. The results for Tillväxtmarknad Tema* showed that 40 per cent of the portfolio, measured in the companies turnover, contributed directly to several of the targets in Agenda There are many societal challenges in emerging markets with a close connection to global sustainability issues. These are used as investment opportunities in the thematic investment process. Could you explain what this means? In the thematic investment process we have identified a number of themes that are driven by structural changes, such as demographics, productivity, the environment and lifestyles. Based on these themes, we look for sustainable *A fund s historical return is no guarantee of future returns. Investments made in the fund can rise or fall in value, and it is not certain that you will get back all the capital you have invested. Information and fact sheets are available at 11

12 Continued focus on the climate At the COP21 climate conference in Paris during 2015, the world s countries agreed to limit global warming to a maximum of 2 degrees by Combatting climate change is also one of the Sustainable Development Goals Goal 13. If we are not successful in fighting climate change, there will be serious consequences on the ecosystem, the acidification of oceans, human security, food production, access to water and health. This would also increase the risk for weather-related natural catastrophes and conflicts. Reporting of financial risks related to climate change The effects of global warming will impact the world economy to an ever greater extent, with consequences for companies in numerous sectors, including financial services. For this reason, the international Task Force on Climate-related Financial Disclosure (TCFD) was formed. The working group has formulated recommendations for correcting deficiencies in information on companies work on and management of climate change. A central component covering the financial sector consists of expanded reporting of exposures to assets associated with climate risks. Climate-related scenario analysis Together with the 2 Investing Initiative, we have performed the first scenario analysis of the Bank s mutual funds based on a two-degree scenario, as part of the work in implementing the TCFD s recommendations. The analysis targets investments in three sectors: energy production, automotive manufacturing, and extraction of fossil fuels. The overall results show that Handelsbanken s funds are well aligned with the two-degree target and confirm that the climate issue is an integral part of our fund management operations. Investing in the climate One important contribution to the Climate action (SDG 13) is to invest in solutions for a sustainable energy system. Energy efficiency has long been an investment theme in several of our actively managed funds. The strategy of the Hållbar Energi fund* is to invest worldwide in companies that develop or use technologies and methods to limit global warming, for example, solar panels, electric cars or companies with focus on energy efficiency. Consequently, the fund s investments contribute to Goal 13, Climate action and Goal 7, Affordable and clean energy. Measuring the carbon footprint in our mutual funds Major efforts will be required to achieve the climate goals, not least from the business community. Emissions from greenhouse gases contribute significantly to the rise in the global temperature. To increase our understanding of the climate risks, we measure the carbon footprint of our equity funds twice each year. This gives us as asset managers increased knowledge of the companies environmental risks as well as an increased understanding of how the funds composition impacts the carbon footprint. Our first Svanenmärkt fund When the Nordic Swan environmental certification for mutual funds was launched in October 2017, Handelsbanken Hållbar Energi* was certified as Svanenmärkt. This means that the fund fulfils the Nordic Swan environmental certification s 25 mandatory criteria for sustainable investment. The purpose of the certification is to make it easier for consumers to choose sustainable funds. *A fund s historical return is no guarantee of future returns. Investments made in the fund can rise or fall in value, and it is not certain that you will get back all the capital you have invested. Information and fact sheets are available at 12

13 We want to invest in companies that help rather than hurt the planet. Karin Askelöf / Acting Head of Sustainability, Handelsbanken Fonder How do you work with sustainability issues in active funds? Active asset management identifies and invests in future champions. The way companies are equipped to manage their sustainability risks, or how they develop their businesses and take advantage of growth opportunities when the rest of the world is tackling major societal challenges is an integral part of the company analysis. For us it s simply making better investment decisions. The demands on companies responsibility are increasing and there are higher expectations on companies to deliver long-term value to all stakeholders, not just shareholders. As asset managers, we have a high degree of responsibility to invest in companies that contribute positively and help rather than hurt the planet. Global water supply management and energy efficiency are two examples of areas where companies that contribute with effective solutions have good growth and strong potential for profitability. Our active engagement activities are an important part of the work with sustainability. We engage in dialogues with the companies and try to influence them to develop within various sustainability issues that are important from both a risk perspective as well as for commercial success. What are your next areas of focus? We want to continue to focus on investing in the future by investing in companies that offer solutions in the form of products and services to address the major challenges the world is facing. We will continue to develop funds that have a strong focus on sustainability and investments that contribute to the Sustainable Development Goals. We continue to see strong pressure on transparency, both in the companies work with sustainability but also our sustainability work as asset manager, for example through the new legislative requirements on sustainability information for mutual funds. Transparency in sustainability issues will be increasing, which will simplify the process for those who want to save and invest with a sustainability focus. 13

14 Additional information about sustainability in our mutual funds Our website and mobile app provide you additional information and give you the opportunity to evaluate our mutual funds from a sustainability perspective. Sustainability rating measures how well the companies in a fund have invested in managing sustainability compared to other mutual funds in the same category. The analysed funds can receive a rating between 1 and five globes, with 5 being the highest rating. Sustainability value is shown on the website and shows how the fund s holdings compared to Morningstar s sustainability rating. A value over 50 means that the holdings are above average. Sustainability declaration is shown on the website and in the mobile app for the majority of our funds. Additional information is also available regarding how our mutual funds work with sustainability. To make it easier to select funds based on sustainability criteria, a filter was added in 2017 that allows you to filter by inclusion, exclusion and engagement. Svanenmärket shows that the mutual fund fulfils the Nordic Swan environmental certification criteria for sustainable investments. 14

15 We have worked extensively to spur the development of more sustainable indexes. Emma Viotti / Head of Sustainability at Xact Kapitalförvaltning How do you work with sustainability issues in index funds? Choosing the right index is essential. Given that the index management is rules-based, we do not carry out any company research and are not able to exclude individual companies. Thus, it is even more important to influence companies and our ownership is often over the long term. What has been your focus during the year? We have worked extensively to spur the development of more sustainable indexes. This gives us a greater opportunity to exclude companies that don t comply with our sustainability policy. The Nordic markets have a relatively similar view of sustainability, although this can look different in other parts of the world. In the United States, for example, nuclear weapons are not viewed as controversial. Could you provide some examples? As a global asset manager, we have chosen to work together with index providers such as US-based MSCI. We have engaged in dialogue on sustainability from a Nordic perspective and initiated the development of more sustainable indexes for the United States, Europe and emerging markets. Thus, we now have indexes that comply with our sustainability requirements for both our traditional index funds as well as our Criteria funds. During 2017, we changed the index for our global index funds, which led to the exclusion of a number of companies. What are your next areas of focus? We are also looking at being able to offer sustainable exchange-traded funds (ETFs). In addition, we hope to continue improving our engagement process and to further integrate the Sustainable Development Goals in our asset management. 15

16 Active engagement Our goal is to generate good, long-term returns, which requires that we invest in a sustainable, responsible manner. A vital part of taking responsibility as an investor is to exercise our role as owner and influence the companies in which we invest. We can accomplish this through company dialogues and corporate governance work. The basis for our engagement work is Handelsbanken s value base, our commitments, and the international norms and conventions that we respect. We engage with companies in which our funds invest through: Targeted dialogues with direct contacts between our asset managers and companies Dialogues together with other investors Collaborations and sector-wide initiatives, often through international collaborations such as the UN, PRI and CDP Our role as shareholder also means that we can influence companies through corporate governance. This occurs primarily through our: Representation in nomination committees Voting at Annual General Meetings Active engagement Dialogues Corporate governance Targeted dialogues Dialogues with other investors Collaboration and sector-wide initiatives Nomination committees Voting at AGMs Dialogues Dialogues are an important method for contributing to sustainable development. This applies to both proactive dialogues aimed at influencing companies to improve their sustainability efforts, as well as to dialogues with companies which we feel have not complied with the international norms and conventions that we respect. Engagement activities are performed on our own, through direct contact with companies, as well as to a great extent in collaboration with other asset owners and through sector-wide initiatives. Targeted dialogues We initiated 23 targeted dialogues in 2017 intended to proactively influence how companies work towards sustainability. In 2017, our asset managers had meetings with some 1,500 companies to closely monitor the companies performance, business methods and opportunities. Dialogues with other investors We participate in dialogues with companies together with other investors. Collaboration is a strength and sends clear signals to companies that we expect the issues to be taken seriously. The starting point for these dialogues is often suspected or confirmed violations of international norms and conventions. We focus primarily on the UN initiative Global Compact s principle areas of human rights, labour law and work conditions, the environment and anti-corruption. We participated in 99 such dialogues during

17 Collaborations and sector-wide initiatives In 2017, we participated in several international collaborations with focus on specific sustainability issues. Below is a short description of these collaborations: PRI Methane Engagement The aim of this initiative is to increase investors understanding for methane exposure risks in global portfolios and to increase the understanding for best practices relating to the management of risks related to methane. The initiative also has the objective of sharing knowledge between companies about the risk of methane and to encourage companies within energy supply to improve their handling of methane and thereby reduce emissions. The objective is to study how close to 40 companies manage and follow-up their methane emissions. The initiative will continue through PRI Cyber Security Engagement The initiative focuses on increasing investors knowledge regarding cyber security and how their portfolios are positioned to manage cyber risk. The initiative also deals with establishing investor expectations on what companies can and/or should disclose regarding cyber risk governance. The initiative also aims to improve the amount and quality of company disclosure on cyber risk and governance. FAIRR Antibiotics Engagement The initiative aims to reduce the use of antibiotics in large food companies. Investors went together to ten of the largest restaurant and fast-food companies in the UK and US with a challenge to phase out the overuse of antibiotics. This was coordinated by the FAIRR Initiative and Share- Action. Investors engagement is a response to the warnings from the World Health Organisation (WHO) regarding irresponsible antibiotic practices that can lead to resistance problems, which can make many infections untreatable. The initiative is currently supported by 71 institutional investors. Additional information is available at fairr.org PRI Sustainable Palm oil The production of palm oil is a sector with significant sustainability risks relating to both the environment and work conditions. Therefore, PRI is serving as the coordinator and has formed a working group to provide a unified voice in support of sustainable palm oil. The aim is to raise awareness of these issues among investors. The working group is also supporting the development of more sustainable practices and is engaged in influencing companies to purchase RSPO-certified palm oil. RSPO is a member organisation for various stakeholders (including other producers, consumers and non-governmental organisations) engaged in the production of sustainable palm oil. Total number of company dialogues 1 (including international collaborations and initiatives) In 2017, we conducted dialogues on specific sustainability issues with 251 companies. The dialogues have addressed corruption, environmental destruction and labour laws. A list of these companies is published at handelsbanken.se/hallbarhet. 1 Refers to the number of companies covered by all types of dialogues Distribution dialogues and engagements Environmental issues 34% Social issues 44% Corporate governance 7% Overlapping sustainability areas 15% Total: 251 dialogues Since 2009, Handelsbanken is a signatory to the UN Principles for Responsible Investment (PRI) Gender equality is often reduced to an issue of equity, but more important is that equal representation on boards can add diversity to decision making, which is something we all benefit from. Magdalena Wahlqvist Alveskog, Deputy Chief Executive, Handelsbanken Fonder 17

18 Corporate governance An active and responsible corporate governance in the companies we select for our mutual funds is an essential part of our assignment as asset manager. The starting point for our work are our Corporate Governance Policy and guidelines for work on nomination committees. We expect the Swedish companies in which we invest to follow the Swedish Code of Corporate Governance, a code that complements regulations and other rules by stating a norm for corporate governance that has a higher level of ambition, while providing the opportunity for justifiable deviations. In the same way, foreign companies should follow relevant statutes and also follow or provide an explanation for any deviations from the corporate codes applicable on the markets in which the companies are listed. These guidelines are complemented by other areas within the framework of our corporate governance policies. As owners, we also act in accordance with the principles for governance set out in the Swedish Code of Corporate Governance, as well as in the relevant sector regulations from the Swedish Investment Fund Association, the Swedish Code for Mutual Fund Companies and the Guidelines for investment fund managers as shareholders. Examples of issues we believe are important in our work as owners include: Transparency and good information sharing Composition of the Board and selection of an auditor Fees and remuneration to Board members Remuneration system and incentive programmes in the companies Sustainability work and vision Annual general meetings The annual general meeting is the highest decision-making body and the forum where shareholders can exercise their influence. We exercise our voting rights at the annual general meetings of the companies in which we are major shareholders, as well as where we believe a company has shortcomings in its governance or is exposed to other risks on which we want to take action. In 2017, Handelsbanken Asset Management voted at 272 annual general meetings (153 during 2016), of which 112 of these were in Swedish companies. Many of the companies in which we invest are located outside our home markets. As a result, we began using global proxy voting during the year, which increases our participation and our active engagement. We use external analysis to professionally manage the large number of companies in which we are major shareholders. The analysis is based on applicable rules and practices on the various markets in which the companies are listed. The analysis plays an advisory role in our decision making. Nomination committee work We aim to expand our ownership role in those companies where our mutual funds represent one of the major shareholders, most notably by influencing the composition of the companies boards through the work of the nomination committee. The guidelines for the nomination committee work are sent to all companies where we have been offered to serve on the nomination committee: focus on the Board s competence and needs analysis, importance of sustainable competence and focus on attaining diversity on the boards. Ahead of annual general meetings (AGMs) in 2017, Asset Management participated in the work of 33 nomination committees. We currently qualify for 35 nomination committees, and we have staffed 21 of these with women in an effort to contribute to gender equality in nomination committees. In the nomination work, we especially emphasise gender equality and diversity by striving for a more even gender distribution on the boards of Swedish companies. The proportion of women on the boards of listed Swedish companies has increased in recent years but has a long way to go before reaching gender balance, particularly in small and mid-sized companies. The proportion of women on the boards of small and mid-sized companies where we have been involved in the nomination committees was on average 38 per cent (36 per cent in 2016), which is higher than the average for that segment. Corporate governance Nomination committees* Annual General Meetings* of which were in Swedish companies of which were in foreign companies *number of occasions

19 Examples of our active engagement activities and connections to the Sustainable Development Goals. Goal 8.5: By 2030, achieve full and productive employment and decent work for all women and men, including for young people and persons with disabilities, and equal pay for work of equal value. In Q4, we began a dialogue with a company with operations in a country where immigrant workers are particularly vulnerable. The company has focused its work on improving its management within the area and has also transparently disclosed the analysis that was conducted on human rights. However, we saw a need for follow-up on certain parts of the work and measures adopted. The response from the company has been extensive and informative. We are currently analysing the measures the company has taken and how we should proceed further. Goal 12.2: By 2030, achieve the sustainable management and efficient use of natural resources. Goal 12.6: Encourage companies, especially large and transnational companies, to adopt sustainable practices and to integrate sustainability information into their reporting cycle. In 2017, we had a dialogue with a company that is a major purchaser of palm oil. Our goal with the dialogue was to influence the company to make the majority of palm oil purchases and over time, all of the purchases, in certified sustainable palm oil. The dialogue continues and the company has communicated that it will be setting relevant goals during We have requested a more comprehensive account of sustainability information from a number of companies. For some of these companies this has been about specific sustainability issues and risks that are relevant for the specific company. We have also requested key figures related to specific sustainability areas and risks. We believe that companies need to increase reporting so that we, and other stakeholders, can perform a more comprehensive analysis and assessment of companies sustainability work and related risks, such as how well the companies are equipped to address climate risks. Goal 16.5: Substantially reduce corruption and bribery in all their forms. In 2017, we began a dialogue with a company regarding a heightened risk for corruption. We have requested additional information on parts of the company s anti-corruption management system. We have also requested additional information from another company on how it rectifies the non-compliance of business ethics and suspected cases of corruption in its business operations. Goal 5.5: Ensure women s full and effective participation and equal opportunities for leadership at all levels of decision-making in political, economic and public life. Within the scope of our corporate governance work and through our representation in nomination committees, we are striving to actively increase gender equality on company boards. Working actively for gender equality is a part of our Corporate Governance Policy. The number of women on the boards of Swedish list companies was 33 per cent on average in The number of women in the nomination committees where we have representation increased from 36 per cent to 38 per cent. Goal 6: Clean water and sanitation, Goal 8: Decent work and economic growth, Goal 12: Responsible consumption and production, Goal 15: Ecosystems and bio-diversity In 2017, we completed a detailed analysis of the lithium industry on site in Chile, partly from an environmental perspective (particular challenges within water consumption, Goal 6; bio-diversity, goal 15). We also developed and conducted a dialogue with companies and relevant authorities on how they can improve production and their processes to increase collaboration with the local communities as well as increase the effectiveness of investments made in the local municipalities (Goals 12 and 8). 19

20 Pension and insurance Sustainability in our fund selection The mutual fund offerings in insurance and in our fund portfolio holdings are audited and qualityassured based on sustainability. Inclusion and the evaluation of mutual funds To simplify saving sustainably in unit-linked insurance, we review all of the mutual fund offerings from a sustainability perspective. The review is based on the analysis used by Handelsbanken s allocation management in the fund portfolio s investment process. Each fund is evaluated using a qualitative analysis that includes organisation, sustainability, asset management team and investment process. A prerequisite for the qualification of a fund management company is fulfilling financial criteria as well as sustainability criteria. Requirements are set for systematic sustainability work and for taking into account international norms and conventions. The fund management company s own ability to integrate sustainability into its asset management operations is also reviewed. Information from the fund management companies At least once a year, we meet with those fund management companies we collaborate with. Extensive information is gathered of a fund management company with regard to the fund s conditions to manage its capital while taking sustainability into account. Analyses are also conducted on performance and the consistency of the I nvestment process. We also follow-up on areas from the previous years meeting and highlight the best practices where we want to encourage progress. Sustainability criteria To ensure the quality of our offerings, we expect the funds selected and the fund management companies we work with to strive to follow our sustainability criteria. Stricter sustainability criteria were implemented during The criteria are based on the policies and guidelines that govern the work with responsible investments within Handelsbanken and emphasise: Sustainability in our mutual fund offerings Inclusion We include funds that take sustainability into account in the asset management. Exclusion We exclude companies whose business operations are incompatible with our policies for responsible investment. Engagement We work actively to influence companies to improve their sustainability work. Evaluation methodology The mutual funds are evaluated through an extensive analysis of the fund management company. The starting point for the evaluation includes the guidelines for responsible investments, the capacity in the organisation for systematic sustainability work and the effect of follow-up processes. At the fund level, we then judge how well sustainability is integrated as well as future ambitions. The approach is adjusted to the types of asset in the fund and the investment focus. Based on our methodology, we then rate the fund s sustainability work. Within the selection process, funds that integrate sustainability as well as have active engagement and corporate governance work are applauded. As a result of this work in 2017, a number of funds that did not meet the requirements were excluded from our mutual fund offerings. The funds that have been i ncluded have a clearer sustainability focus. Engagement activities All of the mutual fund offerings are screened semi-annually to identify holdings that are on our exclusion list or systematically violate international norms for the environment, human rights, labour law, anti-corruption and controversial weapons. If the evaluation of a mutual fund indicates non-compliance with these norms, a dialogue is initiated with the asset manager of the fund with the aim of influencing the manager to review the fund s holdings. If the dialogue with the asset manager does not lead to a change, the mutual fund may be excluded from the offerings as a result. Handelsbanken Liv s fund selection committee compiles the reviews and prepares supporting documentation to determine which mutual funds will be included or excluded from the range of funds. Decisions are made by Handelsbanken Liv s Chief Executive. Collaboration In an effort to contribute to sustainable development, we have identified focus areas, such as the climate impact. We encourage our fund service provider to exclude investments in coal, for example, and to report its carbon footprint. We can also highlight the best practices within a specific area. Handelsbanken Liv has been engaged in Svensk Försäkring s working group on green bonds and climate scenario analysis during the year. We have also mapped out and identified responsibilities and potential contributions to Agenda 2030 based on the insurance operations, which is work that will continue throughout

21 Sustainability in pension savings Sustainability in relation to pension savings can have multiple meanings: to save in sustainable mutual funds, to save a sufficient amount to maintain your standard of living or to create security regarding your income in the event of an accident. Handelsbanken s pension offerings range from initiating savings for pension to investing, planning and then living on the pension capital. 21% of the fund volume in insurance is fossil-free* and is managed in the Bank s Criteria funds (2017) *according to the Swedish Investment Association s definition. Many face a shortfall between their desired and actual pension Save and invest It has become more important for an increasing number of customers to be able to make informed and sustainable choices in their pension savings. We offer mutual funds for pension savings that are reviewed based on sustainability criteria at both the fund- and the fund management company level. As a result, we work to include mutual funds eligible for unit-linked insurance that take into account the financial, social and environmental sustainability in their management. We review our mutual funds on a regular basis and exclude those funds that do not meet our sustainability criteria. Plan Many people face a shortfall between their actual and desired pension. One approach to decrease the shortfall between your expected and actual pension is to work longer. Another is to save over the long term. The foundation in all pension savings is that the money earned during your working life should be sufficient for consumption even during retirement. Thus, all of the choices that impact earnings during a working life also impact the pension. We help our customers to review their financial situation and plan for retirement. All advisory services are based on the customers needs and preferences. Live on the pension capital The average life expectancy is increasing at a faster pace, which also means that there are many years left to enjoy life once you have stopped working. Therefore, we want to offer products that will be sustainable over the long term. These investments should provide good returns over the long-term savings period, at the same time as the pension payments should be stable and reliable. Climate action In 2017, Handelsbanken Liv expanded the proportion of mutual funds which it offers that avoid investments in fossil fuels, from 14 per cent to 21 per cent. In the traditionally managed portfolios, Handelsbanken Liv contributes to reducing climate impact by investing in equity funds that exclude fossil fuels or take a restrictive approach to coal. Investments in green bonds also increased during Pension offers to companies Our corporate customers can become more attractive employers by offering occupational pension schemes to their employees. Companies that offer pension-, health-, life-, and accident insurance to their employees increase the sense of security for employees and employers, as well as society in general. We offer company- and individual pension advisory services at Handelsbanken s branch offices. Additional information is available at handelsbanken.se/försäkring 21

22 Sustainability work must be a natural part of asset management Johann Guggi / Chief Investment Officer, Asset Allocation, Handelsbanken How do you integrate sustainability issues into your fund portfolios? The fund portfolios invest in other mutual funds instead of directly in companies. Sustainability is a critical factor when we evaluate funds. The fund management company, the mutual fund and the investment process must meet our requirements. If this is not the case and the fund continues to be of interest, we have a dialogue with both the company and the asset manager to exert influence in a more sustainable direction. If the dialogue with the asset manager does not lead to a change, the fund will be excluded. We want all of the funds we invest in to meet the requirements we have established for responsible investments. What has been your focus this past year? We have more stringent requirements for the sustainability activities for the mutual fund service providers. We are continuously looking for additional fund management companies and mutual funds that meet our objectives for sustainability work and can also generate good returns. We work proactively so that products and external service providers can be more sustainable over time. Sustainability work must be a natural part of asset management. If two or several funds are relatively similar in terms of returns and risk, we always choose to invest in the fund that we judge will be more sustainable. Could you provide some examples? During the year we have taken part in the construction of a new global fund with an ESG* focus. The fund has a transparent investment process and strategy that has shown strong results in its investment management mandate. The fund s transparent and obvious sustainability focus has convinced our fund portfolios to invest in the fund. *Environmental, Social and Governance (ESG). 22