Stockholm (NordSIP) – On May 10, Swedish insurance company Länsförsäkringar AB has announced the divestment of all holdings in tobacco producers as well as Brazilian mining company Vale SA, until further notice. NordSIP asked Kristofer Dreiman, Head of Responsible Investment at Länsförsäkringar to explain the rationale behind this decision and tell us what the consequences are for the external management selection process.
A perfect ESG storm
The health problems associated with tobacco consumption are well known. Tobacco producers also threaten the environment and biodiversity. Two-thirds of the world’s tobacco is grown in emerging markets. An estimated 200,000 hectares of forest, primarily rainforest, are harvested every year for the benefit of tobacco cultivation and for drying the leaves. The tobacco industry in general presents very limited social benefits and labour practices often involve child labour.
Meeting customers’ priorities
“Our decision to exclude tobacco companies (and Vale) was primarily driven by our internal holistic analysis, considering both financial and ESG perspectives,” Dreiman starts. “We are a mutually owned insurance company. One of our drivers for responsible investment is to mirror our customers’ and ultimate owners values in our investments and engagement activities with companies.”
“Several studies on customers’ preferences linked to ESG have been conducted by external parties. Avoiding investing in companies involved in child labour is often ranked as a top priority. We know based on research from external parties that the tobacco industry has had issues with child labour, especially in the supply chain. With this in mind, our divestment can also be seen as a way to meet our customers’ expectations,” he continues.
Prior to the decision, Länsförsäkringar has also engaged with some tobacco producers through a third party service. “The engagement service provider we have appointed and some external managers have engaged with a subset of the now excluded tobacco companies based on results of our systematic norm-based screening of holdings. The violations have in most cases been linked to social issues, including labour rights and human rights,” Dreiman explains.
A long time coming
In parallel to the tobacco industry exclusion, Länsförsäkringar will also divest from Vale SA, the mining company responsible for the dam accident in Brazil last January, which resulted in over 300 deaths. The company belongs to the 100 largest greenhouse-gas emitters and it violates a number of human rights conventions. Länsförsäkringar’s rationale for exclusion in this case reflects the high risk of the stock.
“We have jointly, together with our appointed engagement service provider, engaged with Vale since the Samarco incident in 2015,” says Dreiman. “Improvements were made by the company but not to sufficiently to mitigate and avoid new incidents. After the most recent dam collapse in January, we have collaterally engaged with Vale via the PRI and a group of investors. We have also joined the ‘Investor Mining & Tailings Safety Initiative’ to address this industry-wide issues related to tailings dams.”
Selecting external managers
The exclusions will affect all direct investments, as well as the holding of Länsförsäkringar’s own funds. The divestment will not have an immediate consequence on the external mangers, but it will affect the selection process to some degree.
“Last year we introduced new ESG requirements for external managers,” Dreiman says. “One evaluation criteria focuses on outcomes of the manager’s ESG integration and engagement efforts. The ambition on our end, both in selection and on-going monitoring of managers, is to make sure that the managers minimise climate risks and controversial holdings. Tobacco will form part of the evaluation going forward.”
“Engagement with managers is an important tool for us to influence change and strengthen ESG considerations. In these interactions, we do express our views, requirements and existing exclusion criteria. The managers are given a grace period to implement changes in the portfolio, if they express a will to do so. We have discontinued contracts with a number of external managers during previous months, on the back of the ESG requirements that we finalised last year,” explains Dreiman.
Focus on Climate
Going forward Dreiman and his team are looking further into climate-related risks, but it may not necessarily end with divestments. “We are currently developing new ESG guidelines for our listed equity holdings,” he says. “Minimising climate risks is prioritised in these guidelines, including both physical and transition related risks. Rules to exclude and avoid certain companies, e.g. those with significant fossil fuel reserves, will be added. However, we also want to highlight that more emphasis will be placed on sector tilts and inclusion criteria in order to stimulate a transition towards a more sustainable and low carbon society. In due course we will also share our ideas linked to the guidelines with the investor community, in the hope to provide inspiration.”
Taking into account deforestation and agriculture
Dreiman and his team have also looked into the effects of agrigulture on climate change. “Deforestation is an important element in relation to climate change and should be discussed much more,” he states. “Deforestation is strongly linked to agriculture and the food sector, especially around the equator and the Amazon. These insights combined with our increased focus on climate risks led to a decision last year to join the UK-based FAIRR Initiative. We have actively participated in and supported engagements with companies throughout the food supply chain, e.g. linked to meat sourcing and development of plant-based food. We also signed the Cerrado Manifesto to halt deforestation and improve land management in the Cerrado region (Brazil).”
Photo © NordSIP (Binniam Halid)