The Sustainable Asset Owner

    Stockholm (NordSIP) – While some investors consider sustainability a “nice to have”, Folksam, one of Sweden’s largest insurance companies, has chosen a more radical route.  Instead of considering it an afterthought that merely complements their investment strategy, Folksam has prioritized sustainability internally while outsourcing passive investment management. Emilie Westholm, deputy head of Corporate Governance at Folksam, explains how her department operates and how stockowners can make their vote count.

    Sustainably and responsible investing (SRI) has been on the agenda of Folksam since 2001. Already early on, the process was very much driven by the company’s owners. The insurance company’s customers are also its owners and sustainability ranks high amongst their priorities. As a result, the board, which is composed of customer representatives, including union members, has been very focused on this topic. The first steps were easy as the company excluded ethically questionable industries such as controversial weapons and tobacco from its investment universe. “To implement exclusions is easy”, comments Westholm, “but the hard work is to get companies to improve.” In other words, there is an important step between sustainable investing and responsible ownership.

    Interestingly, Folksam made a decision to focus its internal resources on active ownership, a skill where the company could develop an edge. When it comes to the portfolio management of its SEK 400 billion equity portfolio, not only is the mandate passive but it is also outsourced to Swedbank Robur, one of the largest asset managers in the Nordics. Of course, the investment guidelines allow for the exclusions dictated by the SRI screening and the work of the team. The responsible investment analysis and monitoring are performed by Folksam’s team and the exclusions are reviewed every quarter and sent to the portfolio managers at Swedbank Robur. Nowadays, exclusions are not only prescribed by a simple screening such as in the case of tobacco companies or weapons manufacturers but Folksam also takes active measures. The team considers ESG incidents as they are reported, either in the news, by NGOs or by a consultant, and then communicates with the offending companies. Interactions with companies imply letters and phone calls but also AGM participation, and even AGM resolution filing. In the case of Shell and BP, the team co-filed resolutions on climate-change strategies together with other large institutions. All the questions and company responses on ESG topics are published in the AGM report that Westholm’s team writes. The AGM attendant even tweets directly from the AGM since access is not always granted to market participants that do not own at least one share. Issues are also discussed more in detail on the team’s blog.

    Exclusions are followed through mainly when companies do not make enough of an effort to improve as suggested. For instance, if a case of child labor is reported the team will initiate contact through a phone call, and follow up with a meeting in which they will ask for a commitment beyond the resolving of a specific incident. The violating company will be required to show how they will prevent the same issue from recurring in the future, by updating their policies and their internal structures and explaining the concrete changes they envisage. “If the companies say that it is none of their concern”, Westholm adds, “we will have to take the decision to no longer own shares in the company, but it is actually unusual. Nowadays, most companies realize they have a responsibility.”

    Emilie Westholm, deputy head of Corporate Governance, Folksam

    As an example of exclusion, Westholm mentions Lundin Petroleum, for which human rights violations were reported in relation to their operations in Sudan and the company has not addressed them sufficiently, Folksam felt. Other examples include Ryanair and Wal-Mart for non-respect of trade-union rights. “Mining is also a sector with many exclusions, especially when too many injuries or fatalities are reported and the company doesn’t take it seriously”, says Westholm. More often than not companies actually respond favorably to investors’ concerns on ESG factors. “When I started in 2007”, she explains, “companies answered: We don’t do charity! Now most people are aware of climate change and want to do something about it.” In fact, a few times the persons responsible for sustainability within Swedish companies have thanked Folksam’s team for their intervention at the AGMs, as it highlighted the importance of their work within the organization and helped escalate the urgency of ESG issues at the board level.

    At Folksam, corporate governance means being proactive as opposed to only responsive. “In Sweden”, she says, “our work is not only incident based. We sit down with the companies we own shares in on a regular basis and talk about how they can improve. It depends on where they are on their own sustainability journey. It can be about environmental issues for some, or gender issues for others. We meet with the sustainability representatives, but also with the CEO, the legal counsel or human resources when it comes to equality or human rights questions.” Westholm’s team makes a point to send a representative to every one of the 45-50 Swedish holdings, whenever scheduling allows. Increasingly, companies also spontaneously invite their investors to sustainability round tables. This openness has seen a positive trend that has accelerated in the past couple of years. At the beginning of her career at Folksam, Westholm remembers, if companies were not ready to listen and embrace the necessary changes demanded by investors, they risked to see their names in the papers. They realized that defending themselves once a scandal had broken out was difficult, so they started opening their ears more willingly, and sooner.

    For its foreign holdings, Folksam mainly uses the proxy voting system when ESG-related resolutions are passed. Whereas Swedish AGMs are large open meetings, it is not the case everywhere. In the US for example, all the owners regularly vote electronically by proxy. The AGM may be attended only by the CEO and the legal counsel, so it would be pointless to waste time on the trip. This being said, it is always possible to make a difference, even from afar, even electronically, and even without a large stake in the company. “It only takes one share to file a resolution”, Westholm reminds us.

    Despite the strong progress that has been made in the past few years in all ESG dimensions, Westholm believes that there still is room for improvement. The low-hanging fruit of environmental improvements has been or is being addressed, as it is most visible and perhaps most measurable. In addition, energy efficiency also represents immediate cost savings for companies, so resistance to change can be more easily overcome. However, Swedish companies are still often naïve when it comes to governance issues such as corruption. At the employee level, most agree that corruption is an evil notion, but when they get confronted with the situation on the ground, they may not actively oppose it, especially if the instructions from above are to get the deal done no matter what. The remedy for these behaviors is mostly information. In some instances, where corruption was discussed in forums, Westholm was positively surprised to see how engaged employees were. Clearly in specific situations or regions, business cannot profitably be conducted without corruption; but in that case, the answer may be that business should not be conducted in that part of the world at all. Skanska for example, decided to leave Russia altogether. In the end, it all comes down to money – unethical behavior has increasingly proven to be costly for companies, and therefore also for their investors. “From an investment perspective, sustainability has become synonymous with profitability”, Westholm says. “Before, you thought you had to give something up to be responsible, but that is no longer the case. If a company handles risks within sustainability, then they also handle their other risks.”

    As a result of the resource focus on corporate governance, responsible investing has always been a key aspect at Folksam but it is constantly evolving, improving and gaining in importance. As of January 2016, the Corporate Governance team was integrated to the Asset Management team and as of January 2017 the questions of sustainability was incorporated into other aspects of the investment process, such as in the case of external manager selection for alternative investments. Responsible investing is already part of the selection process, but ESG criteria and the Sustainability Development Goals in Agenda 2030 are on the way to be reinforced even further.

    Picture (c) Khakimullin-Aleksandr—shutterstock

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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