Chris Newlands: Is SRI in Sweden still about excluding “sin stocks” and negative screening or has it moved on?

Carina Silberg: I think we are seeing an increased interest not only in negative screening, but also in the move towards shareholder engagement. Negative screening is still a mainstay for many investors, as they will always want to avoid certain controversial investments. But there is definitely an increased interest in engagement, although I think behind the scenes it has existed for quite some time in Sweden .

Ulrika Hasselgren: I agree with Carina that selling sin stocks or controversial holdings will always hold true for any institution with its own values. In Sweden, particularly over the last six years, quite a few investors have seen that the norm-based approach to screening has become an effective way of identifying companies of concern. It has helped them avoid investment in firms that, for example, breach human rights or other international norms. In that way, negative screening is very well established and I think it is here to stay. One of our clients has said that this type of negative screening is the lowest common level of decency, so it is a good platform. But has SRI moved on? I do not think so, but it will when more and more investors see the benefit that a clear, defined policy on SRI, which they can communicate to asset managers and other stakeholders, can bring.

Robert Barrington: I speak from a position of being less well informed on screening in the Swedish market. It is said in the UK market and elsewhere in Europe – for institutional investors in particular – that there are a couple of difficulties with screening. The constricted universe it creates could mean that returns are not necessarily as good. In addition, as an individual I might know my ethics so I can decide what I do not want in the fund, but if you have five people as trustees in a panel then getting that panel to agree on the ethics for the fund is actually quite difficult. How do you deal with that in Sweden?

Christian Ragnartz: As a state-owned fund we are a government entity, so we take the position that we should have the same policy as our stakeholders – the people of Sweden. And our policy is that companies should follow Swedish law as well as the international conventions that Sweden has signed up to. For us, this is a very clear objective and in a sense a democratic way of implementing a screening policy.

Robert Barrington: Do you find that many companies are excluded under such a broad criteria of conventions?

Christian Ragnartz: If you look at the number of companies, it has varied between approximately 20 and 45. If you look at market value, it has been somewhere between 5 to 10 per cent.

Robert Barrington: By contrast, we in the UK run quite a big screen fund called the Stewardship fund. We exclude 70 per cent of the FTSE 100 by market capitalisation, and it has screen upon screen. But it is quite difficult for institutional investors to choose that fund because of the exclusions.

Christian Ragnartz: I do not think that the number or percentage is the most important thing. I think it is more important that you are clear about what you sell. If you sell a fund that excludes a great deal of companies then you must be very clear that you are selling such a product. We sell a broad global fund with more or less the same ethics as the average Swede. We do not say that tobacco or spirits are bad, because they are allowed by law and most people drink and smoke and so on. Your Stewardship fund is probably a good product for those who choose it, as long as they are aware of what they are choosing.

Alf Guldberg: The problem is information. It is important that any fund offering a special investment policy is clear about its nature and restrictions. I know that all pension funds have investment guidelines; some are very detailed and others might be less specific. To me, it is vital that you explain your policy in this area.

Christian Ragnartz: If people really want to move on from screening to engagement, where people take active steps with companies and ask for change, then this market will grow. If they are transparent and clear, and if there is a demand for this type of fund, then the market will take care of it. I do not want to say that the market is always right; it might need help on the way but in the long run I think that this will be the case.

Annika Andersson: Today all you hear about is exclusions. Engagement is not on the agenda because it is not interesting enough to write about. Much more noise is created if you exclude a big company or, even better, a Swedish company. Engagement is otherwise of no interest to the media until we exclude as a final step because the engagement process has not worked.

Chris Newlands: Christian, at AP 7 you are not allowed to vote. Will that change?

Christian Ragnartz: I hope so. I believe that we should because it is more politically correct now for owners to take responsibility. The reason we cannot goes back to when some people thought that the state had too much influence over Swedish companies. When the current pension reform was made, some politicians did not want a state alternative at all within the Premium Pension System and one thing they wanted to see in order for us to become a fund was that we did not vote.

Carina Silberg: Is that also true for your foreign assets?

Christian Ragnartz: We are only allowed to vote if the return is severely jeopardised.

Chris Newlands: Annika, what SRI tools do you use at AP 4?

Annika Andersson: In Sweden, we have a history of engagement. But voting in that sense is considered a failure, so it is not essential for us to be able to vote or not. If a Swedish company were violating in some way, we would contact that company via the chief executive or chairman and open a dialogue. Other funds will hopefully do the same, and the pressure will make them change quite quickly if they can. But we have never been close to divesting a holding in the Swedish market because of an SRI matter.

Robert Barrington: From my point of view, voting and engagement are almost the same thing; they are absolutely integral. As a fund manager, we vote on all the stocks we hold, and that was about 3,200 last year. When you get into issues of board structure and independence, there is such a close link between corporate governance and the ability to step back and look at issues like environmental management and human rights, that if a company is well-governed and has a high-quality board, then you will usually find it hits a lot of the right buttons on the social and environmental side as well. Therefore you can put those two together. We should also remember that the annual general meeting is a time when the whole board’s attention is focused on the ballot, so you can really get heard by using the vote, which at some companies might be difficult at other times of the year.

Chris Newlands: Is engagement effective in all markets?

Ulrika Hasselgren: For me, engagement is company-specific. Having said that though, it can be effective in any market but it is also very different in each market. If you go into Russia or other long-term emerging markets, it is very difficult to engage. But you can still be effective with a company specific approach.

Carina Silberg: I think there are also some general traits for the different domestic markets. I guess you could compare the US tradition with the European tradition, but I completely agree with the company-to-company approach. One general trait, however, is that it is much more confrontational in the US, whereas Europeans are perhaps a bit more diplomatic.

Christian Ragnartz: If we just look at the companies we have excluded by region, only two are in the Nordic markets. There were also few companies excluded in Japan, and more or less the same number in Europe and the US. From a portfolio perspective, this marks a shift away from the original allocation that you follow. If you, say, put 20 per cent of your assets in Japan and 30 per cent in Europe but exclude a lot of companies in one particular part, this will affect this allocation and hence the returns quite a lot.

Robert Barrington: Broadly, I think it is possible to engage in all markets but I think the activity of companies varies considerably in each market. We have found that in Asia, for instance, if we have someone who speaks the language and visits the company in person – which, from time to time, we do – then of course the company is more receptive than it would be if we engaged solely by sending a letter from London. If you are a global operation, you can engage globally. However, it is difficult if you are not global. I think the effectiveness of engagement also depends very much on what size of shareholder you are. If you are a big shareholder in any market, then of course you are going to have far more sway than if you are not.

Alf Guldberg: I noticed when I was a more active investor that if, for example, you went to the US as part of a group of Swedish investors, doors were opened for you. If I had gone on my own, they would perhaps have left me with the assistant investor relations person or whoever. When you are trying to influence firms, you must try to find colleagues who have aligned interests.

Robert Barrington: I think it is necessary to align social and environmental issues with shareholder value. If a company feels that you are not just criticising it from a solely ethical perspective, but that you are really trying to understand that company’s business and analyse it in a financial way to see where human rights, climate change or biodiversity link to the business, then the conversation is much easier.

Alf Guldberg: There are questions about where you should draw the line. When I was working as a portfolio manager my responsibility was of course to look at how a company was developing in all aspects, even when it came to environmental, legal and ethical issues. If markets are efficient, analysts and portfolio managers should already price this in. I agree that it is an important issue, but is it an SRI issue? I am not sure.

Robert Barrington: I think that is because the markets are not efficient, while most fund managers do not understand the nature of these issues. The focus is often shorter term rather than longer term.

Nadine Viel Lamare: That is a big issue. Sometimes what you do on the SRI front only makes a difference after six years, not six months. When you have a shorter focus, you do not look at these softer risks, even though I think you should.

Ulrika Hasselgren: That suggests that SRI has to be driven forward by institutional, long-term investors having a clear policy that can be communicated. They can put demands on their asset managers as well as leading the move to engage and intervene with companies.

Nadine Viel Lamare: That simplifies the issue, I think. We are long-term investors, but we are measured in the short term.

Robert Barrington: It is true, and I think it is the same all over the world for pension funds. I think the way in which pension funds appoint, remunerate and judge fund managers is effectively short-term over a one-, two- or three-year horizon. Biodiversity, however, is a 10-year issue and will affect the people in your pension fund in 10 years’ time. The market has not quite managed to put those bits together yet.

Ulrika Hasselgren: In this case, I think the initiative from the UN on principles for responsible investment is highly important for identification and action on common ground between institutional investors’ goals and the sustainable development objectives of the UN. I think the world can come together somewhat on a global basis.

Chris Newlands: Does the market need to change in any way to help you in terms of engagement? Is anything preventing you becoming more active in engagement or SRI as a whole?

Annika Andersson: Performance is holding back the SRI market somewhat. We are measured short-term, as every quarter the results of the AP funds are compared and that influences fund managers. Even if managers were remunerated on a basis of two or three years, every quarter the performance is out there. How do you make a fund manager focus on SRI if he or she thinks it will influence performance negatively over the short term?

Nadine Viel Lamare: I agree that this is a problem. At AP 1 our overall goal is the attainment of the highest possible returns so where does engagement fit into that? As a public entity you are scrutinised in every way, especially your costs, and if you cannot prove that engagement gives you higher performance over the long term then you have a problem.

Christian Ragnartz: When it comes to return, my view is that ethics is very objective. It is not something that should increase your return and we have been explicit in this from the beginning. Ethics just means that we exclude companies that break laws and conventions. This is a cost that we want to take and we believe that this is a cost the majority of our savers are willing to take. To me, return is not the most important issue.

Nadine Viel Lamare: But for us return is the most important thing. We should engage, but it is secondary. If engagement results in a reduction of returns then we need to be aware of that.

Robert Barrington: I think there is a danger that we set up a dichotomy between ethics and returns, which I do not think exists in reality. We try to engage solely on the grounds of financial returns, which for the majority of our investors is their primary concern. We therefore try to engage where there is an overlap between the financial return and the social and environmental issues. If you take the social and environmental issues that are linked to financial returns on a risk basis, my perception is that there is a very big overlap of perhaps 80 to 90 per cent. On this basis, one is only left with about 10 per cent that should not lie with the fund manager but lies elsewhere.

Chris Newlands: Do you agree with the view that engaging is the easy way out of socially responsible investing, given that you can hold whatever stocks you want as long as you engage?

Ulrika Hasselgren: I would say that is a difficult question because socially responsible investing is never an easy way out. It may be an easy way out for some; but for a responsible investor, it is never an easy way out. I think we are all here to be responsible investors. If you decide to be an active shareholder and engage with companies it is because you believe you can achieve change and hopefully also add value to the companies and your holdings. You are therefore talking about shareholder value and that should never be an easy way out. But I know exit strategies have been quite popular in Sweden and some are concerned that the list of exit companies will grow in the future. That immediately makes you think that people look at engagement as the easy route, but that is a very short-term perspective.

Carina Silberg: I think you should perhaps have a timeline for an exit. The main purpose of engaging is to achieve a difference, but there are only so many means you can use to engage actively. When you vote it is almost a failure because you have not been able to put the question on the company’s agenda before. However, should the voting prove successful and achieve change, that is good. There are only so many ways in which you can engage. Within some companies it might take one or even five years but sooner or later you have to exit.

Robert Barrington: I am not entirely sure I agree with that. I think you can carry on engaging with a firm, and that will bring results. It is quite rare that you do not get some kind of change if you carry on for long enough and in an intense enough manner. You might tighten the screws each year so that one year you talk to the company secretary, the next year to the chief executive, the next year you abstain on a shareholder resolution, and then vote against the company the following year. Part of the interest of engagement is that sometimes it is a long process and on rare occasions you can take five or six years to achieve the change. Some companies might change within a year, the majority over perhaps a couple of years, but with others you can eventually get there. You could also make the argument that if you exclude companies or sell the holdings, you are in practical terms being less ethical because you are removing the possibility of engaging and changing the company.

Carina Silberg: I agree that it can definitely be a long process with many small positive steps towards a resolution. However, I think we also have different approaches.

Nadine Viel Lamare: Engagement, as well as SRI, needs to be defined because it is different from investor to investor. Some may engage merely not to end up in the media and want to avoid negative exposure. You may want to engage so that you have some degree of comeback when the media comes after you, and in that way you may also want to exit the company because the pressure on you is too high. If you engage because you have a strong belief that you can add value and where engagement is part of the overall investment strategy and the evaluation of the company, certain issues of concern are just a small part of the evaluation of the corporate governance and strategy. Engagement then takes other forms. It and voting are parts of a larger picture.

Alf Guldberg: For me, the question is wrongly put. To engage costs you money. What you are looking for, if you invest in an unknown little company, is a higher yield that outweighs the costs of engagement. It is an investment problem.

Robert Barrington: I think that is true, and it then puts the focus back on how effective the engagement is. One of the problems in the industry is that you can talk to many fund managers who say they will vote with your stocks at the annual general meeting and engage on your behalf when they think there is a material environmental issue, but it is quite hard to judge if the fund managers are actually doing that effectively.

Nadine Viel Lamare: I think there are two sides to this. You can engage on a specific issue by going alongside aggressive NGOs, or you can engage on an overall strategic level.

Carina Silberg: The cost is also high if you do not succeed. If you do not succeed, it would have been better to sell at an earlier stage. You have to decide whether you think you can succeed, and if you do not think so then maybe it is better to sell.

Robert Barrington: I half agree with that. When you are engaging, you have to be very careful in choosing what the issue is, how material it is to the company, how you approach the company, which company it is you are going to approach if it is a wide-ranging issue, and what your ultimate objective is. I think there are also shades of grey in engagement when having done all that, it can take a long time and you can make incremental steps towards your objective even if you do not achieve it immediately. Ideally, we would clearly be adding value to the companies through engagement and therefore to us as shareholders, but if you are protecting value or avoiding negative consequences, it is impossible to measure in the portfolio. A lot of the engagement, if it is successful risk management, is about protecting value in the portfolio and that is not measurable. A problem with engagement is trying to prove to clients that it adds value to them as a client.

Chris Newlands: How do you overcome that problem?

Robert Barrington: We measure things where we can. For instance, we clearly report to clients every time a company has changed after intervention by us. We publish all those statistics and analyse them in quite a lot of detail for the clients. Last year we measured 272 instances, of which those you could measure financially are a small fraction. However, you could probably do it sufficiently to show that the case is there. For the ones you cannot measure, a business case certainly exists even if it is not absolutely provable by a cause-and-effect argument. There is no doubt that one of the difficulties in the whole area of SRI is measuring the value of engagement. You can measure it ethically and socially quite well, but measuring it financially is very hard.

Christian Ragnartz: To me that is the important thing. Measuring it ethically is easy. Measuring it financially is very hard and I doubt one should even try to do it. But SRI is very valuable. When a lot of investors come together, and hopefully more people will do this, companies will hopefully change. If a lot of investors exclude a company, it will realise it has to change. Even if it is hard to measure, it is extremely important. I am not quite sure that we need to verify it in any other way; I do not need to verify it, at least. When you try to verify your existence by saying that you can add value, it might be so, but you do not need to because it is a good cause in itself.

Alf Guldberg: At AP 7 you have made a very intelligent choice for your screening, which I like very much. The problem is how the screening works. For example, I like to smoke a cigar, so what to do about the tobacco industry? There are many other industries in which you will find different views among the investor community. That is why I think transparency is so important.

Annika Andersson: What I think may be holding us back are the rules from the government. My primary goal is return and SRI is a secondary issue. If that were to change so that SRI was equally important to returns, then of course we would act differently.

Christian Ragnartz: One then has to go back to the government and say empirically and theoretically that the two targets are not going to meet.

Robert Barrington: I think the challenge is also trying to get other pension funds and investors to understand that there is not a dissonance between financial returns and responsible behaviour socially and environmentally. A big challenge for our industry is to put those together, and it comes in a way from measurement. Of course there is an additional cost involved but if you appoint one of the consultancies to engage or vote on your funds that cost is marginal compared with what you are paying your fund managers.

Christian Ragnartz: I agree that the costs are different for hiring a portfolio manager, but it also depends on what you are expecting them to deliver. You have to look at it from a return-adjusted perspective. Once again, I think it is well worth paying the costs of having an ethical consultancy. They are two different products, but I think that within the industry SRI consultants are sometimes trying to enter the field of the portfolio manager.

Robert Barrington: We certainly are and are unashamed about that being our intention.

Carina Silberg: To me, the border is not as clear anymore.

Chris Newlands: Do you feel a weight of responsibility to lead the market in Sweden and the rest of Europe in terms of SRI? Does it feel like a burden?

Christian Ragnartz: Within AP 7, ethical issues have always been positive to deal with. It has strengthened our brand name and has been something with which people enjoy working with. It has not been a burden at all.

Annika Andersson: I do not feel any pressure because of the rules that we have; they say that return is the most important issue for us. If SRI was of higher importance in the set of rules that we have, it would be a burden. Right now, everything we do is on the positive side; it is a bonus, so to speak. It is not a burden.

Christian Ragnartz: It has also been very rewarding for us to hear other pension managers applaud us. Some companies have contacted us directly to see what they can do to avoid being blacklisted by us. That is not directly a financial result, but it is an ethical result. Once again, they are different issues.

Ulrika Hasselgren: It is very important that the AP funds, and specifically AP 7, have communicated clearly what they are doing on the SRI front, where they are doing it, and the result they are getting. It is a way of helping others to form an opinion and strategy. We have had new clients calling us asking for the AP 7 model, so it creates goodwill and good branding.

Nadine Viel Lamare: We do not see this particular issue as a burden; we have selected the engagement approach and we have also chosen to engage abroad. We have faced many difficulties and you have to have a good network, so it is a burden in that we have to build and find unions. However, we strongly believe in what we do and think highly of it. We are convinced that in the long term we will get higher returns. I do not see it as being a burden to be a role model for other investors.

Carina Silberg: I think that whether it is a burden or not also depends how clearly you have defined your policy. You can have very different policies, but the main issue is developing a clear policy. It has not always been like that, so as you go along and clearly define your policy I do not think you will experience it as a burden. It is your assignment.

Chris Newlands: Alf, through SIRP you represent a lot of other institutional investors. Do they look to the AP funds as a barometer on SRI?

Alf Guldberg: If you are discussing any guidelines for investment, of course you look to the market to see what is going on. I would say that among the first tasks of a chief investment officer reviewing the investment policy is to find out what is happening elsewhere. You can then make a decision on what would be a good thing to do and what would not be acceptable. Of course, AP 7 is among the input you would get.

Chris Newlands: Robert, having heard what is going on in the Swedish market, is there anything that you think is happening here that is not happening in the rest of Europe or vice versa?

Robert Barrington: It may be a reflection of the funds or the people around the table, but it strikes me that the debate about engagement is still quite strongly rooted in ethics. I have to say that I personally find that very interesting and appealing. In the London market, there tends to be a much clearer debate that this is solely about adding or protecting shareholder value. It is thus about identifying those environmental or social factors that are going to add or protect shareholder value, but today’s debate has been as much about ethics as it has been about protecting returns, which has been quite refreshing.

Chris Newlands: Are the questions you receive in the UK then more about track records and performance?

Robert Barrington: The questions we have on engagement are about success. People are very interested to know how successful the engagement is and the quantity of the engagement. How does the client know that we are not just picking off the two easiest companies to engage? There is then the overarching question of how this links to shareholder value. I think our answer to that is that in some cases you can prove it. It is quite difficult to prove it, though, so what you can do is make sure that your inputs are adequate and that your relationship with the company is such that you are always talking about the business case for the issues on which you are engaging. Even if shareholder value is not currently provable, you have 90 per cent of the building blocks in place and you are just waiting for the other 10 per cent to be developed.

Chris Newlands: How do you monitor how well your asset managers are doing in terms of SRI?

Annika Andersson: We do not, and we have not outsourced the SRI part. We are engaged for all our holdings because we have different managers for the same markets. If they engage on their own behalf, it is not on our behalf. They could have other clients with other agendas, so we do it on our own for all our holdings. If it ends up that we have to exit a stock, we will and the manager will have to too.

Christian Ragnartz: For us, they just have to follow the same guidelines that we do so they do not invest in the blacklisted companies. It is the same internally and externally for us.

Robert Barrington: For those who are outsourcing to fund managers, which I think is the majority of the market, it is quite difficult to measure the job those managers are doing. There are some basic measures, such as seeing how well resourced your fund manager is. Is there a team and if so how many specialists are in the team? You can look for statistics on voting and engagement; when they vote, do they just tick a box or is it considered voting? You can look for how many companies are engaged, on what issues and so on. However, I do think it is quite difficult. Unless you as a client have quite a sophisticated understanding of social and environmental engagement, which the majority of clients do not, then they will not necessarily ask the right questions of their fund manager to be able to differentiate those doing it well from those doing it badly.

Chris Newlands: Finally how do you see the market progressing? Do you think engagement will become more important in the Swedish market or will screening remain prominent?

Christian Ragnartz: If our rules were changed in terms of being able to vote then that would obviously be a big progression for us. We would have to consider how to set up a new policy for corporate governance but right now I could not say how that would be done. We would, however, be happy to take on that responsibility. People want owners to take responsibility and us not being able to do so with the capital invested in our funds is a waste.

Carina Silberg: I think there will be an increased interest in understanding the process of engagement. More and more people are pooling resources more visibly in order to enforce certain changes on companies. I think it might be more about visualising the results of engagement, because I believe engagement has been happening here in Sweden although it has not been as visible as in other countries.

Annika Andersson: I think engagement is definitely the way to move SRI forward. With transparency increasing around the world, I think there will also be more cases of corporate behaviour that is negative, which will lead to divestment. I believe engagement will allow a more complete view of the company as a whole, rather than just engaging on just one certain issue where you cannot clearly add value.

Robert Barrington: Ultimately in terms of the future of engagement, it will depend on whether it works or not. My belief is that engagement works for everyone; I think it works ethically, socially and environmentally if you are engaging on the right issues. Fundamentally, I do think it helps to protect shareholder value. We can prove that in some cases although we cannot prove it in all cases. I think measurement techniques will develop, but for the time being there is a sufficient body of evidence to suggest that, when done effectively, engagement is successful, and the market is moving in that direction.

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