Varma s responsible investment policy

Transcription

1 responsible investment policy Contents Varma s responsible investment policy for hedge investments 2 Varma s hedge investment portfolio 2 Assessing the fund management company 2 Hedge fund 3 Investments of hedge funds 3 Reporting 3 Special issues relating to hedge investments 3 Varma s responsible investment policy for real estate investments 4 Introduction 4 Indirect real estate investments 4 Direct real estate investments 4 Rental activities 5 Maintenance 5 Construction 5 Co-operation, programmes, plans and follow-up 5 Varma s responsible investment policy for investments in listed corporate bonds 6 Introduction 6 Varma s investments in listed corporate bonds 6 Indirect fixed-income investments 6 Direct fixed-income investments 6 Including ESG matters in the investment process 6 Engagement 7 International norms and conventions 7 Varma s responsible investment policy for equity investments 8 Introduction 8 Varma s equity portfolio 8 Indirect equity investments 8 Direct equity investments 9 The investment process 9 Engagement and voting 9 International norms and conventions 9 Varma s responsible investment policy for private equity investments 10 Introduction 10 Varma s private equity investment portfolio 10 Assessing the fund management company 11 Private equity fund s Advisory Committee 11 Private equity fund 11 Private equity funds investments 11

2 responsible investment policy for hedge investments Varma is committed to taking responsibility into account in its investment operations. Varma s Principles for Responsible Investment provide general guidelines, which are applied differently for the different asset classes, depending on their characteristics. Varma s hedge investment portfolio Varma s hedge investments comprise indirect fund investments, which have several investors (commingled hedge funds). Varma s investments are units, which can be redeemed as defined in the fund agreement, typically several times a year. The assessment of fund investments focusses primarily on the fund management company s principles and policies for responsible investment. The fund s investment strategy is at the core of this assessment, as it provides the basic criteria for the funds investments. More detailed fundspecific requirements depend on the fund s investment strategy and the market in which the fund invests. Varma is a member of the Investor Chapter of the Hedge Fund Standards Board (HFSB). The HFSB is an initiative that is aimed at creating standards of good governance, transparency and ownership practices for the hedge fund industry. The role of the members of the Investor Chapter is to encourage hedge funds to adopt the standards and, of course, to use the criteria in their own investment processes. In the following we will discuss the key matters related to the hedge fund management company, individual funds and funds investment objects. We will also provide more detailed information on a few specific issues relating to hedge funds. Assessing the fund management company As regards fund management companies, key factors to assess include the principles and policies for responsible investment. This means above all assessing governance, i.e. reviewing the incentive systems, conflicts of interest, internal processes and control measures. With respect to oversight of fund management companies operations, we recommend that the majority of the members of its Board of Directors be independent of the company. Varma encourages fund management companies to publish their principles outlining governance policies and practices for implementing the principles. The HFSB standards cover core governance issues and provide the minimum requirements that Varma recommends for fundgovernance. 2

3 The hedge funds we use typically have several investors, and Varma s key principle is for all investors to be treated equally. Fund management companies can best follow this principle by seeing to the fair treatment of investors and sharing of information. Varma recommends that the fund s Private Placement Memorandum (PPM) include all information relevant to investors (typically fees, expenses and redemption rights) and that deviations from these through individual agreements are made in special cases only. In our view, valid reasons for deviation include early commitment, the size of the investment and redemption restrictions, among others. In order to avoid double taxation on the investment returns, hedge funds often domicile in an offshore financial centre. However, fund management companies should not choose their domicile on the basis of tax benefits that are contrary to the intention of applicable tax legislation or that lead to a situation where income is not subject to any taxation. Varma advocates full transparency of taxation and exchange of information between national tax authorities. Varma also requires that the jurisdictions of hedge funds participate in the exchange of tax information between authorities. Varma expects fund management companies to fulfil their tax obligations in accordance with applicable laws and regulations. Varma expects fund management companies, their partners and those employed by the management company to pay their taxes to the jurisdiction where they work and where the economic activity or work is deemed to take place. Varma looks into the taxation practices of fund management companies when making new investments. Hedge fund Varma considers that for the effective control of the fund s operation it is vital that the majority of the Board of Directors of the fund are independent of the fund management company and that the Board members can allocate sufficient time to the Board s activities. Investors should have access to clear documentation on the key elements concerning the fund s governance, such as valuation principles and conflicts of interest. Additionally, investors should receive regular reports on key risk factors that have an effect on investment returns. In practical terms this means that the more focussed the investments in a fund are, the more information must be available on them. Varma promotes standards set by the HFSB, and expects fund management companies that have joined the HFSB to follow the comply or explain approach with respect to the HFSB standards. For hedge funds with several investors the equality principle means that Varma cannot expect the fund to follow Varma s own investment exclusions for direct investments as regards its own shareholding. Investments of hedge funds Varma encourages fund management companies to define their own principles for responsible investment and to apply those principles in their investment policies and selection of individual investments. We engage in regular dialogue with fund management companies on the various aspects of responsible investment. If necessary, we also discuss individual investments, although Varma s influencing opportunities with regard to individual fund investments are limited. Reporting Responsible investment is currently a new approach for most fund management companies focussing on hedge funds. Varma is willing to discuss its Principles of Responsible Investment and the related policies with fund management companies to clarify the benefits of responsible investments. In the longer term, we expect fund management companies to develop a deeper understanding of the matter so that we can apply the inclusion of ESG criteria in the investment processes of funds as one of our investment criteria. In the longer term we will also expect our hedge funds to report on ESG matters on an annual basis, preferably as an integral part of normal reporting. Special issues relating to hedge investments It is estimated that certain investment strategies and practices used by hedge funds involve various risks relating especially to responsible investment. Below are our views on a few of the most common practices. High frequency trading (HFT) is considered to cause market disturbance from time to time due to, for example, software faults. Varma approves HFT as an investment transaction type, but does not invest in funds focussing on HFT. It is estimated that speculative commodity derivative investments cause, at times, increases in food prices, among other things. Varma strives to take this into account in its investment process, which in practical terms means that we do not invest in hedge funds focussing on food derivatives. Hedge funds investment strategies often include the possibility of shorting. Varma is aware of the risks linked to this strategy and considers shorting in general to be an acceptable market practice. We do not find naked shorting (shorting without first borrowing the asset that is being sold) to be, however, an appropriate market practice. Our principle concerning voting based on shares is that the amount of votes used should correspond to the holding. As a rule, empty voting, i.e. borrowing shares for the purpose of voting is problematic. 3

4 responsible investment policy for real estate investments Introduction Responsibility is implemented in all areas of the real estate business: leasing, maintenance, real estate investments and construction. Varma s real estate investments are divided into indirect and direct investments. Investments include blocks of flats and various business premises, such as office, retail and warehouse properties. Varma manages, leases and maintains the properties under its direct ownership, and actively manages its portfolio of direct real estate investments through purchases and divestments. Below we discuss in more detail what Varma s responsible investment policy mean in terms of everyday investment, leasing, maintenance and construction processes. Indirect real estate investments When making indirect real estate investments we perform a comprehensive due diligence (DD) procedure on the fund or any similar investment instrument, covering the investment s strategy and structure, and the background, fees and operating policies of the fund management company. During the DD process the fund representative is required to fill in INREV s DD questionnaire for real estate funds, which also covers questions on how ESG factors are taken into account in the fund s operations. As a rule, making an investment in a fund requires that the fund management company take ESG factors into account in its operations. As a rule, making an investment in a fund requires that the fund management company take ESG factors into account in its operations. With regard to real estate funds in which Varma has already invested, the inclusion of ESG factors is re-viewed and monitored, for example, through fund management company interviews. Direct real estate investments New real estate investments Potential real estate investments must have a favourable location with services nearby and good public transport opportunities. This requirement does not apply to warehouse and production properties, which are often located outside public transport networks and commuting takes place primarily by car. New office buildings and shopping centres to be purchased must have environmental certification or a nearly equivalent quality level. These requirements do not apply to older properties. The objective behind the criteria concerning the location, environmental certification or a nearly equivalent quality level is to secure stable returns on the properties to be purchased and their liquidity. 4

5 Prior to an investment decision we carry out a comprehensive survey that covers the property s financial, legal, technical and environmental features. Technical and environmental features are primarily investigated by external experts, who analyse the building s technical condition, building materials, technical systems and the condition of the soil on the plot. The soil must be clean or be possible to clean and the building must be in good condition with healthy and safe rooms, unless the purpose is to develop the property whereupon these criteria will be left to be met by us. Rental activities Varma leases premises under its ownership to both businesses and private persons. Varma s real estate managers are in charge of leasing business premises and an external partner for leasing flats. We expect our partners to fulfil their social obligations. Tenants in our business premises must be financially solvent and engaged in legal business operations. Additionally, Varma has issued money laundering guidelines with the purpose of identifying the tenant and tenant s business in order to prevent any money laundering when leasing business premises. Our aim is to organise appropriate, functional and safe working and living quarters for the tenants. In order to reach this objective we will make changes in tenants, if necessary, while taking into account the profitability of the investment. When any immediate repair needs are identified, those are carried out without delay. We review our tenants satisfaction with their premises and the care and maintenance services through an annual survey. Varma s results are compared to those of other property owners and to Varma s earlier results. We take action to address any deficiencies that emerge in the survey. The customer satisfaction survey is carried out by an independent external party. At least once a year, business premises tenants are presented with everyday examples of Varma s responsible operations, such as measures to reduce energy consumption. The purpose of this is to motivate tenants to take an interest in responsibility issues. Tenants are not required to sign a Green lease with Varma, but Varma is ready to enter into a Green lease with tenants if they wish to do so. Maintenance Varma is responsible for the care and maintenance of the real estate under its ownership, together with external managers we cooperate with. Our external managers must have the required competence and resources to support our targets for responsible maintenance. We also require them to take responsibility issues into account in their operations and to fulfil their social obligations. We strive to reduce the energy consumption and carbon dioxide emission of Varma-owned properties, and in this way reduce the environmental load of the properties and create savings in maintenance costs. We regularly monitor the buildings consumption of heat, electricity and water, address any deviations in consumption and aim to reduce the consumption levels. Regular audits are performed in order to survey the potential for more energy-efficient use of the buildings technical equipment. When repairs are carried out in a property or its equipment is upgraded, we look into the possibility of implementing more energyefficient solutions. The maintenance costs for our property are regularly compared to costs in previous years and to the general level by an independent external party. Construction When commissioning new buildings and renovation projects, we examine the possibilities to use energy-efficient building solutions and environmentally sound building materials on a case-by-case basis. We will take advantage of these possibilities, as far as it is possible within reasonable cost. The objective is to apply for an environmental certificate for office premises and shopping centres developed by Varma, or to have them built to a level of quality that is virtually equal to that of certified properties. The construction companies we use must have experience in energy-efficient methods of building. We also require our managers to take responsibility issues into account in their operations and to fulfil their social obligations. Co-operation, programmes, plans and follow-up We draw up an annual plan that covers the implementation of the Principles for Responsible Investment in the following year and review the plan for the previous year and its implementation. We take part in responsible real estate investment programmes and co-operation, whenever possible. Such programmes may target a reduction in energy consumption, and examples of co-operation include responsible investment research and its promotion. We actively monitor any new regulations and laws relating to responsible real estate investment, and implement them without delay. We also take into account statements on responsible real estate investment issued by the real estate and construction sector organisations and associations. 5

6 responsible investment policy for investments in listed corporate bonds Introduction Varma is committed to taking responsibility into account in its investment operations. Varma s Principles for Responsible Investment cover the company s investment operations in their entirety. These principles are applied differently depending on the specific characteristics of each asset class. Below we outline how Varma s Principles for Responsible Investment are applied in the investment process for listed corporate bonds. Varma s investments in listed corporate bonds The type of investment whether a direct or indirect investment in corporate bonds plays a key role in the application of the principles. Varma primarily makes direct investments in corporate bonds. Most investments are located in Europe and are essentially companies with a higher credit rating. Currently our indirect investments consist mainly of passive fixed-income funds. Indirect fixed-income investments We do not apply responsible investment criteria in passive corporate bond funds, which are based on different market indices and which do not involve active portfolio management. Our objective is to incorporate ESG (environmental, social and governance) aspects into the investment process. Direct fixed-income investments Direct fixed-income investments provide investors with the best opportunities to gain company-specific information and to follow the principles for responsible investment. Varma s Principles for Responsible Investment are applied in direct fixed-income investments as described below. Including ESG matters in the investment process Our objective is to incorporate ESG (environmental, social and governance) aspects into the investment process. We aim especially to look into the risks that the company we plan to invest in is exposed to as a result of these aspects, since the ultimate goal for fixed-income investments is to avoid the risk of default. A business analysis traditionally focusses more on the financial position, competitor analysis and other financial facts with less emphasis on ESG criteria. 6

7 We strive to improve the availability of ESG information in several ways. We ask for information and engage with company representatives on ESG issues during roadshows for a new corporate bond issuance. Furthermore, we use the availability and quality of the ESG analysis as one criterion in broker assessments. The third important means of obtaining information on ESG matters is the use of databases and analyses provided by specialist companies for a fee. To date a common problem associated with these has been the poor coverage of the databases, especially of Nordic companies. We actively monitor the development of the offering of, for example, credit rating companies as it would benefit everyday investment activities. Engagement In comparison to equity investments, Varma s opportunities to influence the companies directly are different for fixed-income investments. As a fixed-income investor Varma is a borrower of capital and not an owner, and therefore has fewer chances of influencing the companies. A fixed-income investor may not vote or speak in a general meeting, for example. Instead Varma has the best influencing opportunities in meetings with company representatives, especially during roadshows for the issuance of new corporate bonds. In cases where Varma has investments in both corporate bonds and equities of one and the same company, Varma can co-operate with the portfolio manager of the equity investments. International norms and conventions The international norms and conventions defined in Varma s Principles for Responsible Investment lay down the basic requirements that we expect the companies in Varma s corporate bond portfolio to comply with. Varma engages an external service provider to survey the infringements of these norms and conventions. We meet regularly with equity and corporate bond portfolio managers to discuss the companies we engage with. In the meetings the equity portfolio managers review companies in their own sectors which have been found to have infringed international norms and make proposals concerning future measures. The final decision on the measures is made by the Director for Capital Markets. When a company infringes the aforementioned norms, our primary objective is to engage with the company in order to bring about a change. We may engage in discussion with the company in question together with Varma s equity portfolio managers if we have a major ownership of the company s bonds outstanding (primarily Finnish companies). As regards smaller ownerships, we engage in dialogue through an external service provider. The company in question always has the right to know our identity during the dialogue process. As a final step in a long, nonproductive engagement process we may decide to divest the corporate bonds of the company in question. 7

8 responsible investment policy for equity investments Introduction Varma is committed to taking responsibility into account in its investment operations. Varma s Principles for Responsible Investment cover the company s investment operations in their entirety. These principles are applied differently depending on the specific characteristics of each asset class. Below we will discuss what Varma s principles mean in terms of the investment process and ownership practices for equity investments and the reasoning for this. Varma s equity portfolio The type of investment whether a direct or indirect investment in companies plays a key role in the application of the principles. Varma s equity investments are primarily direct investments with the clear majority made in Europe, especially in Finland and other Nordic countries. Investments outside Europe are handled indirectly in most cases, i.e. through active and passive equity funds. Varma also has direct investments in unlisted Finnish companies. The same policy, where appropriate, are applied as for investments in listed equities. Indirect equity investments When making investments through active funds, the assessment focusses on the principles and policies for responsible investment of the fund management company. Furthermore, we examine the asset manager s governance practices, such as incentive schemes. We favour fund management companies which have adopted principles for responsible investment and integrated environmental, social and corporate governance (ESG) criteria in their investment process. More detailed content requirements depend on the fund s investment strategy and the market in which the fund invests. We do not apply the our responsible investment criteria in equity index funds, which are based on different market indices and which do not involve active portfolio management. When making investments through active funds, the assessment focusses on the principles and policies for responsible investment of the fund management company. 8

9 Direct equity investments Direct equity investments provide investors with the best opportunities to gain company-specific information and, if necessary, engage with the companies it has invested in. Varma s Principles for Responsible Investment are applied in several different ways in equity investments. The investment process Our objective is to analyse the companies ESG criteria that are relevant for their financial performance as part of the investment process. The relevant criteria vary greatly depending on the sector and the company itself. However, poor availability and comparability of company-specific information makes the use of ESG criteria challenging. We strive to improve the availability of ESG information in several ways. We encourage companies to report on corporate responsibility issues, preferably as a part of financial reporting. Furthermore, we use the availability and quality of the ESG analysis as one criterion in equity broker assessments. The third important means of obtaining information on ESG matters is the use of databases and analyses provided by specialist companies for a fee. To date a common problem associated with these has been the poor coverage of the databases, especially of Nordic companies. Engagement and voting We regularly engage with company representatives and bring up questions on responsibility, when the situation requires. In the past, dialogue has focussed on governance issues but recently environmental issues and questions relating to employees have made it onto the agenda. Taxation questions are another area which will be receiving increasing attention. We encourage companies to apply maximal transparency in taxation issues, for example by publishing a tax policy. We exercise our voting rights in all Finnish listed companies in which we have invested and in those companies listed outside Finland in which we have a major holding. Our recommendations on corporate governance are discussed in Varma s share ownership policy. It is the responsibility of portfolio managers to review Annual General Meetings agendas, and to bring controversial issues before the investment management for them to decide on. As a rule, a representative of Varma participates in the Annual General Meetings of Finnish companies and is ready to vote in accordance with Varma s guidelines. Outside Finland we may use external service providers but the final voting decision is made by Varma s investment function. We inform the companies beforehand if we are planning on voting against a proposal by the Board of Directors. International norms and conventions The international norms and conventions defined in Varma s Principles for Responsible Investment lay down the basic requirements that we expect the companies in Varma s equity portfolio to comply with. We regularly review the companies situations. We meet with equity and corporate bond portfolio managers on a regular basis to discuss the companies we engage with. In the meetings the portfolio managers review companies in their own sectors, which have been found to have infringed international norms and make proposals concerning future measures. The final decision on future measures is made by the Director for Capital Markets. When a company infringes the aforementioned norms, our primary objective is to engage with the company in order to bring about a change. Provided that we have a major holding, we conduct the dialogue ourselves. When it comes to smaller ownerships, we engage in dialogue through an external service provider. The company in question always has the right to know our identity during the dialogue process. As a final step in a long, nonproductive engagement process we may decide to divest the equities of the company in question. 9

10 responsible investment policy for private equity investments Introduction Varma is committed to taking responsibility into account in its investment operations. Varma s Principles for Responsible Investment provide general guidelines, which are applied differently for different asset classes, depending on their characteristics. Below we will discuss the way in which Varma s principles are applied in the investment process for private equity investments and the reasoning for this. Varma s private equity investment portfolio Varma s private equity investments consist mainly of indirect private equity fund investments, which have several other investors besides Varma. In legal terms Varma is a limited partner in the funds it invests in and has no decision-making powers concerning the investments. When a fund is being established, Varma agrees to commit capital to the fund. The committed capital is typically contributed over a five-year period and the investment is liquidated within years. In addition to fund investments, we make, together with private equity funds, co-investments in selected objects. When making investments through funds, it is essential to assess the fund management company s principles and policies for responsible investment and corporate responsibility. The assessment method depends on the investment strategy of the fund. Some funds amount to billions and invest in companies with large turnovers, but our portfolio also includes funds which make smaller investments in growth companies. Varma s private equity portfolio is international with the majority of investments made in Europe and the US. Varma also has direct investments in unlisted Finnish companies. The same policies, where appropriate, are applied as for investments in listed equities. When making investments through funds, it is essential to assess the fund management company s principles and policies for responsible investment and corporate responsibility. 10

11 In the following we will discuss the key matters related to fund management companies (General Partner, GP), individual funds and the investments of the funds. Assessing the fund management company When it comes to a fund management company, key factors for assessment include the principles and policies for responsible investment and corporate responsibility. Varma encourages the fund management companies to publish their principles for both responsible investment and corporate responsibility. The private equity funds we use always have several investors. As a fund investor Varma s guiding principle is the equality of investors; this means that all fund-related information must be equally accessible to all investors of the fund. The side letters between individual investors and the fund must be accessible to all investors. The reporting of a fund management company should be extensive and transparent, and the valuation principles for the funds investment objects must conform to the IPEV Valuation Guidelines. In the longer term, we expect fund management companies to report on their responsibility matters on an annual basis, preferably as an integral part of normal reporting processes. In order to avoid double taxation on the investment returns, private equity funds often domicile in an off-shore financial centre. However, fund management companies should not choose their domicile on the basis of tax benefits that are contrary to the intention of relevant tax legislation or lead to a situation where income is not subject to any taxation. Varma advocates full transparency of taxation and exchange of information between national tax authorities. Varma also requires that the jurisdiction of a private equity fund participate in the exchange of tax information between authorities. Varma expects fund management companies to fulfil their tax obligations in accordance with relevant laws and regulations with respect to their own operations and the portfolio companies under their control. Varma expects the fund management companies, their partners and those employed by the management company to pay their taxes to the jurisdiction where they work and where the economic activity or work is deemed to take place. Varma looks into the taxation practices of funds when making new investments. Private equity fund s Advisory Committee Varma s opportunities for influencing a fund s policies are greatest when the fund is being established. At that time, the detailed investment strategy and practices are outlined in the fund documents for the life of the fund. Following the establishment of a fund, the fund management company has full authority over the investments of the fund within the framework of the investment strategy, and Varma has no influence over individual investee companies. Varma participates actively in the funds Advisory Committees, which serve as a good forum for discussing issues relating to responsibility with both the fund management company and other investors of the fund. Varma may also choose to bring up questions on the matter in direct discussions with the fund management company. Private equity fund A fund management company exercises major shareholder control over the investee companies of a fund, holding, as a rule, a majority of the shares. A fund management company controls the operation of fund portfolio companies as regards to corporate responsibility by means of its own practices and possibly the more detailed requirements laid down in the fund agreement. Fundamentally Varma expects the private equity funds portfolio companies to operate responsibly. Reporting on corporate responsibility by companies, especially large portfolio companies, is recommended. Varma s intention is that the private equity funds used by it do no invest in sectors in which Varma itself does not invest when making direct equity investments. Varma aims to achieve this when making fund agreements, at which time Varma may, in certain cases, withhold the right to exclude investments in defined sectors. Private equity funds investments Varma encourages fund management companies to define their own principles for responsible investment and to apply those principles to individual funds in their investment policies and selection of individual investments. If necessary, we engage in dialogue with fund investors on the various aspects of responsible investment. We also discuss individual investments, although Varma s influencing opportunities with regard to individual fund investments is limited. 11