RESPONSIBLE INVESTMENT POLICY Approved by Ilmarinen s Board of Directors on 20 December 2017
CONTENTS INTRODUCTION...2 DIRECT INVESTMENTS IN SECURITIES...3 SPECIAL CHARACTERISTICS BY ASSET CLASS...3 DIRECT NON-LISTED EQUITIES AND LENDING OTHER THAN PREMIUM LOANS...4 SPECIAL CHARACTERISTICS BY ASSET CLASS...4 REAL-ESTATE INVESTMENTS...4 FUND INVESTMENTS...4 SPECIAL CHARACTERISTICS BY ASSET CLASS...5 1
INTRODUCTION Responsible investment is an integral part of Ilmarinen s investment operations. Ilmarinen s mission is to invest pension assets in a profitable and sustainable manner that enables us to pay out pensions well into the future. We are a long-term investor, and our obligation is to work for the benefit of our customers and pensioners. As part of realising this task, our investment decisions take into account environmental, societal and governance aspects, which could influence the financial returns of the investments. We actively manage sustainability risks linked to investments and recognise investment opportunities in the solutions to sustainable development challenges. Furthermore, we promote sustainability through both our own investment activities and our selected asset managers. The objective of our responsible investment policy is to guarantee that we operate according to Ilmarinen s values. Ilmarinen s sustainability is steered by three key principles, which are: 1 Following international norms 2 Active ownership/dialogue 3 Integrating sustainability analysis into investment decisions We have specified more detailed asset-class-specific procedures and tools in order to implement the policy. Table 1 illustrates how the responsible investment procedures are used in each asset class. The Ilmarinen ownership policy management team s chairman is the Chief Investment Officer and includes representatives of the investment lines, legal matters and communications. It is responsible for drawing up and updating Ilmarinen s responsible investment policy. Ilmarinen s investment organisation is in charge of implementing the policy. Ilmarinen has signed the UN s Principles for Responsible Investment (PRI) and reports annually on its implementation of these principles. Listed equities and shares Integration of sustainability Active participation in General Meetings Active ownership/dialogue Engagement x x x x x Corporate bonds x (x) x x Government bonds x x Derivatives (with single company as underlying security) Non-listed equities and shares Lending other than premium loans x x x x Real estate x x Funds, including co-investments x (x) Monitoring violation of norms and/or exclusions x Table 1. Responsible investment procedures by asset class. The parentheses around the x indicate that the procedure is not the primary one used for the asset class, but that the procedure may still be used. 2
DIRECT INVESTMENTS IN SECURITIES This policy applies to Ilmarinen s direct securities investments in listed equities and shares, bonds and derivatives with a single company as the underlying security. Monitoring violations of norms and ruling out investments We expect the companies we invest in to comply with the principles of the UN Global Compact and related international norms concerning human rights, labour rights, the environment and corruption. We do not invest in companies that manufacture arms prohibited by international treaties, including nuclear weapons, cluster munitions and anti-personnel mines. Our service provider reviews our securities investments biannually and reports any detected norm violations or suspicions thereof. We take the norm violations that we are aware of into account in making new investment decisions and regularly monitor new suspected violations. In addition to international norms, we have ruled out specific companies from our investments based on their sector. Ruled out sectors are: Tobacco product manufacturers, for whom tobacco makes up more than 50% of their net sales. Companies dependent on coal, whose share of coal used for energy production accounts for at least 30% of their net sales or energy production, when at least 30% of the company s net sales comes from energy production and the company does not have any credible plans for reducing their consumption of coal in the future. We do not invest in the government bonds of countries that, according to the public statement of the Financial Action Task Force (FATF), do not meet the international obligations for combatting money laundering and terrorism financing. 1 We do not invest in the government bonds of countries where investments are barred by the EU s economic sanctions 2. We additionally use classification methods, particularly when investing in emerging market government bonds, including criteria linked to corruption and the implementation of laws. Active dialogue and engagement We actively hold discussions with our investees with the goal of improving sustainability and addressing controversies. If an investee fails to comply with the UN Global Compact, we will deepen our dialogue into an engagement process that aims at ending the undesirable activity and the adoption of responsible procedures. If the undesirable activity does not end as a result of the engagement process, Ilmarinen s last resort is to exit from its ownership in the company. We carry out the engagement process both alone and together with our service provider and other investors. In our international investments we engage with companies particularly as part of the Nordic Engagement Cooperation, which includes a Swedish, Danish and Norwegian investor in addition to Ilmarinen. We do our part to improve companies environmental reporting and engage, particularly through the CDP (formerly Climate Disclosure Project), to increase climate, water and forest reporting. Integration with investment activities: sustainability ratings The environmental and social impacts and governance of business operations influence companies profit, expenses and reputation. Accordingly, they are important also in terms of return on investment and risks. Ilmarinen has an influence on companies as an investor especially when we make decisions to participate in share or bond issues. In order to integrate sustainability analysis into its investment activities, Ilmarinen uses a responsible investment rating system. The basis of the rating system is a combination of responsibility rating standards created by third parties, which we adapt with analyses and conclusions from internal and external sources. The analysis on which the corporate responsibility ratings are based involves a broad spectrum of risks and opportunities linked to corporate responsibility as well as already realised controversies and norm violations in corporate responsibility. Investing in companies with lower ratings always requires a separate permit, which can only be granted based on a more detailed assessment. SPECIAL CHARACTERISTICS BY ASSET CLASS Equities and shares In terms of equities and shares, the means of engagement available to us include ownership rights. We attend the General Meetings of the companies in which we are a major owner or where participation is otherwise deemed important. We draw up Ilmarinen s voting instructions ahead of time, paying special attention to the share issue and authorisations pertaining to the purchase of own shares, remuneration plans, compensation paid to Board members, independence of Board members and having both genders represented on the Board of Directors. We engage with Finnish companies through their General Meetings and participation in the nomination process, and in particular in non-listed companies also on the companies Boards. We also participate in the General Meetings of foreign companies through proxy voting. In addition, our engagement extends to shareholder meetings, for example by co-filing shareholder resolutions related to climate impacts and supporting similar relevant and purposeful resolutions filed by other shareholders. We use sustainable benchmark indices extensively in our stock selection: they cover around half of the listed equities in our portfolio. Portfolio managers compare their stock selections against the indices, which include the most sustainable companies in each sector and geographical area. We actively look to invest in companies that promote the achievement of sustainable development goals in their businesses. 1 Countries that are currently prohibited are Iran and North Korea. 2 Countries that are currently prohibited are North Korea and Syria. 3
Corporate bonds In the case of corporate bonds and their sustainability ratings we pay special attention to investments with the highest sustainability risks and to the management of these risks. Derivatives We primarily engage with companies in which we have equity or bond investments. We do not initiate an engagement process with companies based on derivative positions. DIRECT NON-LISTED EQUITIES AND LENDING OTHER THAN PREMIUM LOANS Ilmarinen has direct investments in non-listed equities and lending other than premium loans. Lending other than premium loans are loans that Ilmarinen grants to companies for investment purposes. Ilmarinen also grants premium loans in which the pension company lends to its clients funds that have accrued on pension contributions. Premium loans do not apply the responsible investment policy because customers are entitled by law to premium loans. Integrating sustainability into investment activities Sustainability is taken into account when making investment decisions. Reporting by non-listed companies is less comprehensive than that of listed companies. For this reason, the questions posed by Ilmarinen play a greater role when evaluating non-listed companies. We have defined industry-specific sustainability questions for companies whose business operations entail high sustainability risk. The scope of the evaluation can vary depending on the size, industry and risks of the investment opportunity in question. Active dialogue/engagement We discuss corporate responsibility themes with executives. If necessary, we will deepen the dialogue into an engagement process. SPECIAL CHARACTERISTICS BY ASSET CLASS Non-listed equities and shares As an owner in non-listed companies we are, on a caseby-case basis, involved in the Boards of Directors of our investees and, in this way, we are also able to influence and improve their sustainability. Lending other than premium loans We grant loans other than premium loans to both listed and non-listed companies. For some listed companies Ilmarinen has a sustainability rating system for securities. If a rating exists, we follow a similar process in making a decision as we would for a listed investment made in a company with 4 the same rating. For companies that lack a rating, we abide by the above-mentioned practices that we have created for non-listed companies. REAL-ESTATE INVESTMENTS Ilmarinen owns commercial and residential real estate. Ilmarinen functions as a lessor, maintainer and developer of real estate. The environmental impacts of buildings and the design and use of the built environment are key issues in terms of societal well-being. Owning real estate (leasing and maintenance) We invest in resource-efficient buildings that are healthy and safe for their users and located along good traffic connections. We work closely with tenants throughout the life-cycle of the investment. The goal of this co-operation is to improve customer satisfaction by, for example, obtaining information about any modifications required by the intended use of the premises. We work closely with our tenants in improving environmental issues, for example, by financing energy-efficient solutions. In addition, we are applying for LEED environmental certification for some of our existing commercial real estate. In terms of maintenance, the co-operation can be used to combat the shadow economy, minimise the negative environmental impacts of buildings and improve energy efficiency. We manage real estate systematically and proactively, which means long-term planning and implementation of maintenance that spans the entire life-cycle of the real estate. We address problems quickly and know our tenants and properties well. We maintain our real estate portfolio in a way that preserves the value of the buildings. We own several buildings that are integral to the cityscape, in particular in central Helsinki, and are mindful of our responsibility in terms of maintaining the city s cultural heritage. For us, responsibility for cultural history means carrying out renovations in a manner that preserves the cityscape, offers high-quality architecture and takes contemporary urban culture into account. Property development As property developers, we require a LEED Gold or corresponding environmental label at the very least. The label sets strict requirements on the selection of building materials, energy efficiency, water consumption, indoor air quality and the location of the building, for example. In addition, we require our service suppliers to fulfil their contractor s liability, combat the shadow economy and adopt safe working practices. We are involved in developing these practices in the real estate and construction industry, for instance, by participating in working groups and taking part in public dialogue. FUND INVESTMENTS Ilmarinen has fund investments in equity, corporate bond, private equity, infrastructure, forest, private debt, hedge funds and real estate funds. With regards to fund investments, Ilmarinen s investments are indirect, i.e. the investments are managed by an external asset manager.
With regards to equity and corporate bond funds, this policy only applies to actively managed equity funds and corporate bond funds, i.e. funds that make active investment decisions. The policy does not therefore apply to index funds, which do not take a stand on investees from a responsibility viewpoint, instead, their goal is to achieve the average return for the market at the lowest possible cost. Selecting an asset manager and fund The best opportunity to impact a fund s operating principles is at the investment process stage because the key decision-making power will be transferred to the fund management company after the investment has been made. When selecting funds, we extensively evaluate the implementation of a responsible investment policy. Our minimum requirements for asset managers include responsible investment principles regarding funds, a clear definition of roles and responsibilities, integration of responsibility analyses into investment decisions and reporting to investors. The asset manager need not have all of the above-mentioned procedures in place when the fund agreement is signed. Instead, the asset manager may continue to develop them during the co-operation in compliance with the agreement. Furthermore, we consider it an additional advantage if the asset manager is committed to following and promoting compliance with the UN Global Compact and the underlying norms in the fund investments investees. Ilmarinen considers the asset manager s commitment to international initiatives that promote sustainability, such as the PRI (Principles for Responsible Investment) or a similar initiative/programme for the asset class, to be a positive factor. Asset manager monitoring We annually monitor the compliance of each asset manager or fund with the responsible investment policy either through a fund query or a personal meeting with each asset manager. The objective is to gain information on best practices and development areas. We discuss this information with the asset managers at fund meetings, for example. We encourage asset managers to monitor the sustainability performance of the investments and their impacts, and to report on the sustainability of the asset managers responsible investment practices and the sustainability of the investees. SPECIAL CHARACTERISTICS BY ASSET CLASS Equity and corporate bond funds Whenever possible, we use Ilmarinen s direct security investment sustainability ratings in our investments in equity funds and corporate bond funds. We do not require asset managers to use Ilmarinen s ratings, but we will use them as starting points for discussions on a case-by-case basis. Our objective is for the private debt funds that we invest in to avoid investing in sectors in which we do not make direct listed investments (see p. 3) When drawing up fund contracts, we aim to exclude the investments of certain industries. Private equity and infrastructure funds, including co-investments Our private equity investments are made up of investments in private equity funds and co-investments, where we invest in an individual investee both directly and through the fund. Also with regards to co-investments, the fund management company manages the investment. In co-investments, the sustainability of a private equity fund manager can easily be analysed as part of the investment process. A special characteristic of private equity funds is the ability of the private equity investor, as an owner, to influence business operations and the creation of a sustainable business culture. Through its significant voting power, a private equity investor is able to promote corporate responsibility, reduce sustainability risks linked to the operations of the company and benefit from value creation opportunities. Our objective is for the private debt and infrastructure funds that we invest in to avoid investing in sectors in which we do not make direct listed investments (see p. 3). When drawing up fund contracts, we aim to rule out the investments of certain industries. Absolute-return funds (hedge funds) In the case of absolute-return funds, Ilmarinen s responsible investment practices focus on good governance. It is important in our view that a fund has a person appointed to monitor compliance with the rules who is independent of investment operations (e.g. a compliance officer) and who has the required authorisation to intervene in the portfolio manager s actions. In addition to governance, we look into how environmental and social responsibility are taken into account in the funds operations. The minimum requirements defined by Ilmarinen for fund investments cannot be applied as such to defining the sustainability of absolute-return funds. Ilmarinen is an investor member of the Standards Board for Alternative Investments (SBAI) and promotes compliance with SBAI standards among selected asset managers. SBAI s standards are mainly focused on good governance and include recommendations, for instance, on independent management of funds, investment valuation and appointment of third party service providers. Real estate funds Ilmarinen does not currently make new investments in real estate funds. The existing investments will mature within the space of a few years. They are monitored to a lesser extent than fund classes in which Ilmarinen makes new investments. Private debt and corporate bond funds Funds can best influence the sustainability of their investments when the investment decision is made. Since a debt investor does not have voting rights in the company, they have more limited opportunities to engage with the company than an equity investor. 5