2012 Report on progress for responsible investments DNB ASSET MANAGEMENT

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1 2012 Report on progress for responsible investments DNB ASSET MANAGEMENT

2 2012 Report on Progress for responsible investments DNB is one of Scandinavia s largest asset managers of private capital. DNB Asset Management and DNB Livforsikring have around retail clients and hold leading positions in the institutional markets in Norway and Sweden with 520 billion NOK in assets under management. DNB Asset Management has been named best asset manager in Norway three of the last four years by Morningstar. In Sweden, DNB is the only asset manager that has been in the very top in the three latest evaluations of the institutional Swedish market. 1 To achieve these fantastic results it has been essential that we have been able to deliver strong financial performance and high quality in the service we offer our clients. It is of the utmost importance that we are able to do this also in the future. Other central components in DNB s success are how we aim to operate with the highest ethical standard in everything we do as well as our reputation as a responsible investor. Our clients expect DNB to act responsibly and to stay clear of ethically doubtful investments. DNB s investments should never contribute to human or labour rights violations, corruption, serious environmental harm or other actions which may be perceived to be unethical. Over the past few years, the DNB group has consolidated its position as one of the best financial services groups within corporate social responsibility. This is confirmed by its inclusion in the Dow Jones Sustainability Index for the fourth consecutive year in This index includes only the top ten per cent in the world in the individual industries and measures performance within social, environmental and economic sustainability. we have practices and products within responsible investments that can keep up with these changes. DNB s company brand is our gold and all products and services that we offer to our clients must be of the highest standard. In 2013, we aim to increase our efforts to integrate sustainability into our investment analysis and portfolio management. We have come quite far in Sweden but we need to increase our efforts in Norway as well. It will be very important to the DNB brand and our competitiveness to take a leading position in this area. During 2013, DNB will most probably start a new fund with high emphasis on sustainability factors. This fund will not only avoid the bad companies, but actively identify and invest in the most sustainable and profitable companies. With this kind of product we want to give our clients the opportunity to combine great returns with a sustainable future. Torkild Varran, CEO DNB Asset Management To succeed in the long term as an asset management company we also need to be ahead of the curve with regards to the large global challenges the world faces. How is economic growth affected by energy supply and demand, scarce resources and social change? What industries and companies will be winners and losers by changing regulations and consumer patterns due to climate change and demographic shifts? The international markets for investments are constantly shifting and we need to ensure that 1 TNS Sifo Prospera 2

3 DNBs work with responsible investments - guidelines and strategies DNB wishes to operate in an ethically responsible and honest manner. We will facilitate and contribute towards sustainable development, because we know that you care! Rune Bjerke, CEO DNB Group DNB operates with ethical guidelines for all investments, the DNB Ethical Investment Guidelines. The Guidelines signify that DNB Asset Management will exercise special care with respect to transactions and acts which represent a risk of involvement in unethical conduct, infringement of human or labour rights, corruption or harm to the environment. We are certain that this respect for people and our planet is something that our clients find very important and the guidelines therefore applies to all investments within DNB Asset Management, not just to specific ethical funds. Also, all externally managed funds that DNB offer to clients are screened for compliance with our guidelines. The investment considerations we make are based on international principles and guidelines for environment, human rights, labour rights and corruption. The Guidelines also states that DNB will not invest in companies that are involved in anti-personnel landmines, cluster weapons or nuclear weapons or the production of tobacco or pornography. For 2013, we aim to add specific guidelines also for government bonds. DNB has established a Committee for ethical investments who implements and monitors the Guidelines. If a company has been identified to be involved in controversial weapons, tobacco or pornography as mentioned above, all holdings will be sold and the company will be excluded as a possible investment. Where a company is considered to violate other parts of the guidelines, we primarily try to influence the companies through active ownership engagement. In DNB Asset Management we also have products for clients who want to raise the bar further on sustainability. We have a family of exclusionary funds, among others DNB Global SRI and DNB Barnefond that in addition to the Ethical Guidelines exclude companies that are involved in alcohol production, weapons or gambling. DNB Renewable Energy and DNB ECO Absolute Return invest in companies who provide solutions to the challenges of climate change. The funds invest in companies in solar-, water- and windpower but also in companies that help us to a more efficient use of the electricity that is produced, such as more efficient power transmission and electrical batteries. For some clients portfolios, DNB uses sustainability analysis and financial analysis in an integrated manner to make portfolio management decisions. These clients share a belief that sustainability factors will have material impact on company valuations. For these portfolios we identify risks and opportunities in the sustainability area that can be expected to affect share prices. This integrated approach is under constant evaluation. DNB Asset Management puts considerable resources into ensuring high quality in our responsible investments and in 2012, three analysts in Oslo and Stockholm worked on sustainability issues. We also engage the analytic capacity of an external consultant company who screens companies on sustainability issues on a daily basis. The consultant also helps DNB to engage companies to improve their sustainability performance. 3

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5 Active ownership engagement in DNB To ensure the compliance with our ethical investment guidelines DNB acts as an active owner regularly engage in constructive dialogue with the companies we are invested in. The objective with this engagement is to influence company practices in a positive direction. The cause for engagement is often specific concerns related to environment, social issues or business ethics, but could also originate from a need to raise companies general performance or processes within sustainability. Active ownership engagement is also one of the bearing principles in the UN-backed Principles for Responsible Investment (see page 9); which DNB Asset Management has committed to adhere to by signing the principles already in Which companies DNB choose to engage in is decided by the DNB Ethical Council. Incident based engagements are selected as a function of the severity of the suspected breach, our ownership status in the company and the likelihood for the engagement to have an impact on the situation. We also work within proactive engagement themes. These themes are continuously revised. For 2012, Sustainable cotton and Sustainable aquaculture and fisheries were two selected themes we worked with. The objective in running these themes has been to increase knowledge internally in DNB about the environmental and social challenges in these industries, get a better basis for our investment decisions and to influence companies operating in these industries in a more sustainable direction. Read more about these themes on page 7. Qualitative dialogues with companies are very resource and time demanding, but in our experience this type of engagement is effective and will continue to be a priority for DNB. In 2012, DNB s sustainability analysts met 29 companies in person with the primary aim to discuss different sustainability issues (see table below). Through an external engagement service provider, GES Investment Services, DNB has been in dialogue with more than 250 companies related to suspected breaches of international norms or otherwise ethically doubtful actions. TeliaSonera an engagement with many twists DNB met with TeliaSonera several times in In April, a Swedish investigating TV-show ran a program on how customers of TeliaSonera s subsidiaries in Eastern Europe and Central Asia were being monitored by the security service, and as a result DNB met with the company to discuss this issue. TeliaSonera has now come up with an action plan on integrity and human rights and a new privacy policy is currently being implemented. Later in 2012 the same TV-show aired a new program, this time accusing the company of bribery and money laundering in several countries, with a focus on Uzbekistan. The case is now being investigated by the Swedish and Swiss prosecutor. An independent audit commissioned by TeliaSonera in 2012, points at severe ethical shortcomings at all top levels of the company. DNB has again participated in several meetings on this topic, and also attended a joint investor meeting at the Swedish Finance ministry in February Whilst the company is showing several signs of progress, many of the problems are so entrenched in the company culture that it will take time before the results of the recently launched action programs and new policies can be assessed. The fact that a new Board has been elected which now also consists of people with sustainability expertise is indeed very positive and a step in the right direction. As problems of corruption and integrity are similar to all telecom companies present in the Eastern Europe and Central Asian regions, DNB decided to more closely study the major Nordic players in order to assess how they are dealing with the issues. As a consequence we have had meetings with Telenor, Tele2 and Millicom. 5

6 Voting DNB publishes voting for companies annual general meetings in cases where we choose to vote against the recommendations of company management. For 2012, 16 such cases were recorded. DNB also gives information on how we have voted in cases of large public interest or of special interest to the fund unit holders. Voting efforts are concentrated to DNB s home market in Norway but we also voted on a handful companies internationally in DNB s Norwegian voting records are published on dnb.no 2 Screening of externally managed funds In 2012, DNB screened more than 150 externally managed funds in order to secure that all funds we offer to clients are compliant with the DNB Ethical Investment Guidelines. We were also engaged in dialogue with several fund management companies to discuss their practices in responsible investments. Direct company dialogue in 2012 Theme Number of companies Waste and pollution 3 Labour standards 5 Local communities 1 Bribery and corruption 3 Human rights 5 Other sustainability issues 13 Other environmental issues 5 Total 35 We met with 29 companies in person in The table sums up to 35 as we met some of the companies on several occasions. Excluded companies in 2012 Companies that are in breach DNB Ethical Investment Guidelines and do not show the willingness to change their practices, can be excluded from our investment universe. As of 31 December 2012, DNB excluded 58 companies that were assessed to be in breach of our Guidelines. Breach of criterion Number of companies Anti-personnel landmines 1 Cluster weapons 9 Nuclear weapons 11 Environment 8 Labour rights 1 Human rights 6 Pornography 2 Tobacco 20 Total 58 Numbers in these tables are externally verified by Ernst & Young as a part of DNB s Corporate Social Responsibility report

7 Sustainable cotton and sustainable fisheries DNB s proactive engagements In addition to our incident based company engagement, DNB has identified certain areas of concern where we focus our engagement efforts proactively to raise companies or whole industries general performance or processes within sustainability. We have selected focus areas in industries where DNB have large holdings and thus have greater possibilities to influence. One such area has been Sustainable cotton and the cotton industry s special challenges when it comes to sustainability and child labour. The project was initiated in 2011 and has focused on Swedish textile companies and how they manage sustainability risks in the supply chain, with special emphasis on small scale cotton farming. DNB has been in dialogue with six Swedish textile companies during 2011 and 2012 to discuss the issues and will conduct follow up meetings the next two years. The aim with the engagement process is to analyze how the companies handle both the challenges and opportunities that they face in the cotton industry and to assess how they develop over time. The lesson learned so far is that all companies are well aware of the complexity and challenges within the cotton supply chain, but have different approaches and resources allocated to manage these risks. Despite the current trends within sustainability most of the companies claim that they do not experience serious pressure from consumers and it remains to be seen if and how much this will change in the future. A Norwegian focused theme is Sustainable fisheries and aquaculture. The objective of this engagement project is to increase knowledge and awareness internally about the environmental risks associated with fisheries and aquaculture, thus improving risk assessment and attaining input for analyses and investment decisions. The project also aims to influence the biggest players in the industry in a sustainable direction. Within aquaculture, the main themes discussed have been parasites and disease and escaped farmed species, as well as resource scarcity and the use of marine resources in fish feed. The DNB sustainability analysts met with four Norwegian fisheries and fish farmers during the year as part of the theme. Photography: yaymicro.no 7

8 Sustainability an important factor in financial analysis DNB started ethical asset management already in For many years, the funds focused on excluding bad companies. While exclusions are very important to assure clients that their money does not contribute to unethical behavior or products, they have not always added to positive performance. Exclusionary strategies still play an important part in DNB s ambition to be a responsible and sustainable investor, but the exclusion strategies have today been joined by strategies of active ownership engagement and integrated analysis. This analysis aims to integrate financial analysis and sustainability analysis in order to get better perspectives of how sustainability issues affect the long term profitability of companies. The objective is to identify companies with profitable and sustainable business models to be able to invest in a way that is beneficial to both to people and planet and the financial performance of the fund. Globalisation has meant that Nordic companies today are exposed to a new set of risks. Today, our companies have both production and suppliers located in developing countries to a much higher extent than before. This means that companies are faced with all the challenges that characterises these markets, for example weak environmental law, undemocratic rule, corruption and low economic standard. In addition to these new risks we are hit by an ecological crisis, climate change and resource shortage, implying that companies that want to be a part of a sustainable future must change methods of production and energy consumption. In DNB, analysis of long term factors has always been an important part of the investment decision. Our sustainability analysts identify risks and opportunities in the sustainability area that is expected to affect share prices in a material way. We observe risks in companies with high carbon emissions, bad labour relations or weak anticorruption systems, while opportunities lie in companies with products like energy efficiency, water purification or healthy food. Integrating sustainability in Swedish equities In 2012, we started to make the analysis of sustainability issues in a more structured way within the Swedish equity team. Sustainability analysts and equity analysts have regular meetings to discuss companies and portfolio investment decisions. Analysts from the two teams frequently attend the same company meetings to gain insights in the long term profitability of the company. In 2013, we will evaluate the outcome of this cooperation and see how we can do this for Norwegian and Global equities or if another approach is better for these portfolios. This is no revolution of our portfolio management, rather a natural evolution. For years, we have been looking at sustainability issues when they have been expected to influence share prices. Integration means a larger focus on sustainability issues, issues that have become much more important for Swedish companies the last couple of years. Sustainability risks in a globalised world can be large, but so are the opportunities for companies that can adapt and integrate sustainability into their business strategies in a smart way. Our sustainability analysts bring new and sometimes eye opening perspectives when we evaluate the longer term valuations of companies. Henrik Asplund, Head of Swedish Equities 8

9 NORSIF In 2012, the Norwegian Sustainable Investment Forum was launched. DNB, Nordea, Folketrygdfondet and KLP are behind the initiative. Together we want to show that ethics and responsibility are not in conflict with financial performance demands. Norsif will aim to promote and contribute to the development of the field of responsible investment and increase awareness of responsible and sustainable investment practices in the Norwegian financial industry and among other stakeholders. The initiative is open for asset owners and managers, service providers and industry organisations with interest in, and activities related to, responsible and sustainable investments. Principles for Responsible Investment (PRI) Initiative The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors working together to put the six Principles for Responsible Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment decision making and ownership practices. DNB signed the principles already in 2006, the same year as the principles were launched. 1. We will incorporate ESG issues into investment analysis and decisionmaking processes. 2. We will be active owners and incorporate ESG issues into our ownership policies and practices. 3. We will seek appropriate disclosure on ESG issues by the entities in which we invest. 4. We will promote acceptance and implementation of the Principles within the investment industry. 5. We will work together to enhance our effectiveness in implementing the Principles 6. We will each report on our activities and progress towards implementing the Principles. The DNB team of Responsible Investment analysts Josefine Ekros Pär Löfving Kristin Voll 9

10 DNB Asset Management AS Postal address: Postboks 1600 Sentrum N-0021 Oslo Visiting address: Dronning Eufemias gate 30 Bjørvika, Oslo