responsible investment & governance annual report 2011

We create Responsible ReturnsIdentifying companies performing wellProducts & solutions

Responsible Investment & Governance Annual Report 2011

Dear reader

Asset management is all about value creation, and we believe that responsible value creation is what makes all the difference. Economic growth and profi tability can only be sustainable when businesses behave responsibly and look beyond the immediate present by giving appropriate consideration to environmental, social and governance (ESG) aspects in their operations.

Nordea’s1 commitment to being a responsible asset manager has deep roots in our corporate culture and business model. We believe that this innate responsible perspective constitutes a valuable distinguishing edge. It makes us steer clear of risky short-term behaviour and helps us anticipate infl uential trends and – most of all – it strengthens our position as a reliable, trustworthy partner, capable of creating sustainable value for clients in a rapidly changing world.

2011 has been a year of concrete achievements. We have engaged and successfully completed engagements with a number of companies verifi ed for violation of international labour and human-rights-related norms. We have also visited a number of companies in which we invest in Asia, Europe and Africa and managed to exert infl uence regarding their approach to managing key ESG risks in their operations.

Our products with specifi cally integrated ESG approach have delivered performance and value in terms of ESG. Our focus on solutions for our clients has resulted in a number of partnerships we believe will lead us to develop more comprehensive client solutions.

We are also continuously building our knowledge and competence, writing white papers and thematic reports, in the areas we consider to have an impact on our ability to deliver value creation for our clients from fi nancial, environmental, social and governance perspective.

Enjoy reading!

Sasja Beslik Head of Responsible Investment & Governance

1. Throughout the report Nordea is used as a reference to Nordea’s fund companies and Nordea Investment Management. Processes andpractices described in this report cover our role and responsibility as anasset manager.

We create Responsible Returns

Since the fi rst Responsible Investment (RI) policy was launched in 2007, all funds managed by Nordea are screened for companies verifi ed for violation of international norms regarding environmental protection, human rights, labour standards and business ethics. The results of the screening, conducted twice a year, are reviewed and assessed by Nordea’s RI committee. The committee decides on the level of engagement with companies verifi ed for violations. Moreover, Nordea does not invest in companies involved in the production of illegal weapons2.

Analysis & engagementThe core of our RI strategy is in-depth environ-mental, social and governance (ESG) analysis and engagement activities. Throughout our ESG analysis companies’ overall management practices regarding key ESG issues are assessed together with their governance structure for these issues. Based on the analysis, companies are selected for proactive engagements dialogues. The focus is on transferring knowledge and active participation in the development process.

Products & solutionsDuring 2011, we have launched unique RI funds where ESG is part of the product’s DNA. These funds are in the forefront of RI developments.

Knowledge & competenceNordea has a dedicated Responsible Investment and Governance team, comprising 7 employees. The team has long experience within the area and was awarded “Best team within the ESG sector in Sweden” by Financial Hearings in 2010.

Sasja Beslik, who heads the team, was awarded the title of Young Global Leader 2011 by the World Economic Forum. The title means that Sasja will for fi ve years serve as an ambassador of a global network aiming to infl uence international companies to increase their social responsibility.

The team also cooperates with several well established external partners and participates in international and local initiatives to further expand and spread its knowledge.

In 2007 we signed the Principles for Responsible

Investment and developed our own Responsible

Investment framework. In 2010, a new strategy

and policy was adopted and we have taken further

steps on our journey in 2011.

2. Illegal weapons comprise biological weapons, chemical weapons, non-detectable fragments, blinding laser weapons, anti-personnel mines and cluster munitions.

RESPONSIBLE INVESTMENT & GOVERNANCE 2

Identifying companies performing well

In 2010, we initiated our in-house environmental, social and governance (ESG) analysis and deve-loped our own criteria and methodology. Our analysis is based on a positive approach. Throughout the analysis companies’ overall management practices regarding key ESG issues are assessed together with their governance structure for these issues. The analysis aims to identify best company practices and companies that manage their risks, opportunities and/or develop sustainable products. Our in-house analysis focuses mainly on Nordic companies, since the Nordic region is our home market. For non-Nordic companies we process and assess ESG analysis conducted by a number of external service providers, our main provider being MSCI Inc.

Major focus on enhanced RI fundsDuring 2011, the focus of the ESG analysis was on analysing companies for our enhanced RI funds. The funds have both local, Swedish Stars, and global focus, Emerging Stars. We have thus analysed a wide range of companies on the Swedish market and emerging markets to fi nd companies performing well environmentally, socially as well as fi nancially.

During the year, we have also conducted in-depth ESG analysis of our largest Finnish holdings.

Emerging market companies: Best PracticePetrobras in BrazilThe Emerging Stars Fund makes us constantly look for the actual Emerging Stars, companies from the

global emerging markets that have the star poten-tial to be a global leader in their industry both in traditional industry and fi nancial terms as well as from ESG point of view.

Among the brightest of these stars is the Brazilian energy company Petrobras. By most ESG metrics Petrobras is the best energy company domiciled in emerging markets. It is also by our analysis and numerous external studies, among the most sustainable companies compared to western peers, which is a rare feat for an emerging market company. Petrobras recently made massive oil discoveries in the coast of Brazil. The depth of the reserves presents an engineering challenge that someone has compared to the Apollo mission that landed man on the moon. At the same time Petro-bras has been voted to be the most sustainable Brazilian company among Brazilian people.

ISO standards in TaiwanIn Taiwan the client is king, especially among the electronic companies. Due to specifi c client requests, most of the manufacturers supplying the global electronics giants have certifi ed their operations against various ISO standards. ISO certifi cation in many cases facilitates “engineer-ing” approach of these companies in measuring and managing their corporate responsibility. This “let the numbers speak for themselves” – approach would surely be useful for some of our Nordic companies that produce more wordy corporate responsibility reporting.

We consider acting responsibly a prerequisite

for a company to achieve long-term good

returns. Our ESG analysis enables us to

identify companies that operate in line with

our policy and deliver long-term value.

3 RESPONSIBLE INVESTMENT & GOVERNANCE

We consider acting responsibly a prerequisite

for a company to achieve long-term good

returns. Our ESG analysis enables us to

identify companies that operate in line with

our policy and deliver long-term value.

Our favourite companies in Taiwan include Delta Electronics, who demonstrate a thorough under-standing in their implementations of many best case practices related to corporate responsibility and who are well geared to capitalise on the sustainable development. Among other things, they have ISO9001 and ISO14001 certified all of their production facilities and are proactively working with standardisation authorities in developing other related standards.

Corporate Governance in SingaporeTraditionally, stock market operators are cautious in increasing transparency requirements as they assume that companies seek listing in places where there are theleast regulatory constraints. More modern, ESG integration point of view says that since ESG issues are increasingly material, stock market operators cannot afford big incidents at their watch as it would scare away potential investors. With regard to this, the Singaporean stock exchange operator, SGX, enforced new corporate governance listing requirement for all listed companies.

These changes do not take the Singaporean listing requirements anywhere near western standards; we do however, applaud SGX for taking a decisive step in the right direction in increasing corporate transparency and accountability and making it easier for responsible investors, such as ourselves, to increasingly invest in Singapore.

Conclusions from Swedish analysisThe Swedish market is in terms of ESG a mature

market with well performing companies. The focus is slowly shifting from risk management to capturing opportunities. It all started with corporate management of environmental impact, followed by including social aspects such as human rights and labour rights. Environmental and social risks still need to be addressed, but the focus is shifting. Companies are now increasingly integrating their commitment to sustainable business development with group visions, mission statements and strategies.

Conclusions from Finnish analysisAn overwhelming majority of the large Finnish companies manage their ESG risks reasonably well. Many companies have worked with environ-mental issues for decades and, while most efforts are in compliance with law, the top-tier compa-nies are showing signs of integrating sustainable-development-related issues in their strategies and with this, are capturing market segments that have grown from sustainable-development-related trends.

However, Finnish companies tend to lack interna-tional peers where social issues are concerned. Relationships with labour unions tend to escalate into strikes too frequently, the health & safety performance leaves considerable room for improvement, and only recently the companies have been able to work together with government and local communities to prevent the adverse impact of unnecessary corporate restructuring and related lay-offs.

Analysis dialogues 2011

•Atlas Copco

•Axis Communication

•Boliden

•BP

•Campari

•Chroma ATE

•Delta Electronics

•DS-Norden

•Enel

•ENI

•Getinge

•Golden Agri

Resources

•G&S Engineering

•Handelsbanken

•HM

•Husqvarna

•Intesa Sanpaolo

•KB Financial group

•Kepco

•Kuala Lumpur

Kepong

•Kulim

•Lassila&Tikanoja

•Lundin Petroleum

•Neste Oil

•Nordea

•Nibe

•Oriflame Cosmetics

•Outotec

•Outokumpu

•Rautaruukki

•Samsung Fire&Marine Insu-

rance

•Samsung Electronics

•SCA

•Scania

•Securitas

•Shell Production &

Development Company

•Sime Darby

•Snam Rete Gas

•SSAB

•Stora Enso

•Swedish Orphan

Biovitrum

•Tele 2

•Tieto

•Trelleborg

•TSMC

•Unicredit

•Wartsila

•Wihlborgs

•YIT

•ÅF

”Kommunalarbetarförbundet was looking to investment in emerging markets. When Nordea

presented Emerging Stars we felt that it fitted perfectly with our ethical policy and guidelines.

After having participated to a study tour in Asia with the investment team we are very satisfied with

the investment process in terms of both the high responsible investment standards as well as the

business case. ”

Anders Bergström,

National treasurer/Third vice president, Kommunalarbetareförbundet

“Church of Sweden has worked with Responsible Investment (RI) for many years. We place great

demands on our external asset managers who commit to integrating environmental, social and

governance-related aspects into their investment decisions. Nordea has been managing parts

of our buffer capital since the autumn of 2011 through Swedish Stars. The asset manager picks

both companies that are leaders in sustainability and companies that have lofty ambitions. We

believe in that combination. Nordea’s RI team possesses impressive competence, and we plan to

jointly engage with companies in the portfolio through shareholder dialogues.” Anders Thorendal,

Treasurer & Chief Investment Officer, Church of Sweden

Church of Sweden about Swedish Stars

The Swedish Municipal Workers’ Union about Emerging Stars

Products & solutions

In our ongoing work with development of products and solutions we focus on three core characteris-tics we consider to add long-term value; know-ledge, proactiveness and innovation. By continu-ously seeking knowledge about ESG issues impacting companies, we are able to identify potential material risks and hidden opportunities for our investments. Proactiveness in our app-roach means that we use various tools, for example engagement activities and fi eld visits in order to secure that our funds live up to high ESG standards. Knowledge and proactiveness are key factors for innovation.

“Best practice” as a strategyThe core focus of our activities in 2011 concerned innovation. We have launched one unique RI fund, Emerging Stars and re-launched Swedish Stars where we have applied our “delta” analysis

approach. This approach combines fi nancial and ESG parameters in order to fi nd the best compa-nies from both perspectives. The ESG analysis contributes to identifying companies that are developing their businesses and risk management.

Identifying companies with a positive trendNordea has in its research methodology decided to seek out companies that have adopted a systematic approach to managing key ESG risks and opportu-nities. Furthermore, we want to identify companies that from an environmental and social perspective will be the stars of tomorrow. We have therefore prioritised identifying companies that have a positive trend and the ones that have identifi ed sustainability as a platform for growth.

We believe that companies with strong ESG

potential and performance are interesting

from an investment perspective, which is

why we are developing products and

solutions of the future.

36 % of our funds managed externally is managed by fund manager that has signed PRI .

In our process of selecting external funds and managers, we place emphasis on managers having investment processes addressing RI in an adequate manner. As a signatory to the PRI, we encourage our selected funds and managers to actively support these principles.

We report on our screening and active ownership activities regularly and request feedback using a “comply or explain” approach.

We believe that companies with strong ESG

potential and performance are interesting

from an investment perspective, which is

why we are developing products and

solutions of the future.

Our approach to external funds


Emerging Stars & Swedish Stars

Selecting companies to invest in

In Emerging Stars and Swedish Stars we only invest in companies performing well from an environmental, social, governance and financial perspective.

Em

ergi

ng S

tars

110

527-

120

217


Performance Emering Stars & Swedish Stars

The diagrams shows the perfor-mance for Emerging Stars since the launch in May and the performance in Swedish Stars since the re-launch in February 2011.

Sw

edis

h S

tars

110

228

-12

021

7

Step 4: Ongoing evaluation of companies performance with a focus on ESG aspects

Step 3: The portfolio is constructed through an integrated approach

Step 2: Analysis of financial aspects

Step 1: Analysis of ESG aspects

South Africa

• The first stock exchange in the world to require mandatory integrated sustainability disclosure in 2010 with the so called King report of corporate governance

• Sustainability indices encouraged ESG disclosure since 2004

India

• Reporting consists of lot of policies and cases studies, not much targets and goals

• National Stock Exchange of India proposes to initiate awareness programmes for listed companies on ESG reporting


ESG aspects in the emerging markets within Emerging Stars

China

• The least companies reporting among Asian peers

• China tops list of ESG-related corporate incidents and allega-tions, where most of the incidents are heavy manufactu-ring and mining-related

• Sustainability indices encour-aged ESG disclosure since 2008

Korea

• Most active among Asian companies in reporting, we estimate that around 50% of the large companies have dedicated CSR person-nel

• Environmental issues generally well governed, most problems related to governance and social issues

• Sustainability indices encouraged ESG disclosure since 2009

• Korea Exchange is planning to provide CSR guidelines for listed companies

General in Emerging Markets

• Governments wield comparatively stronger influence over companies’ CSR behaviour compared to western counter-parts.

• ESG implementation and transparency are well below Western standards at the country level, but at the company level the implementation rates can be as high as that of Western companies.

• GDP per capita is a poor predictor of CSR behavior. Some comparatively poor countries have strong ESG initiatives in place, some comparatively wealthier nations might have weak practices.

• Reporting on policies and systems are more common to be in place than performance numbers and related measures and targets.



IT/Telecom• Environmental: clean production, energy consumption• Social: protecting privacy, working conditions• Governance: expanding in countries with high risk for

bribes and corruption

Consumer dicretionary

• Environmental: Climate mitigation and adap-tion, Pollution, Resource Management, Waste Management

• Social: Child and forced labour, Workers rights, Working conditions

Financial

• Environmental: investment or credit lending to companies or projects

• Social: investment or credit lending to companies or project, responsible lending

• Governance: risk management

Industry

• Environmental: product innova-tion and business development

• Social: working conditions, indirect complicity in relations to clients

• Governance: purchasing and sales

Materials

• Environmental: clean production, energy intensive sector, water management

• Social: community involve-ment, use of security forces, working conditions

• Governance: purchasing and sales, license

The core elements of our ESG research and analysis are constructed to provide insight and understanding regarding:

1. Overall governance structure regarding management of relevant ESG aspects

2. How companies address and manage key ESG risks and opportunities in their business operations

3. How companies develop sustainable products and services in order to strengthen overall develop-ment of their business activities

Below we present a selected number of sectors which we invest in within Swedish Stars, and what risks we analyse within these sectors.

Sector risks in Swedish Stars

Our engagements & dialogues

Nordea prioritises engagement with companies identifi ed as being involved in verifi ed breaches of international environmental, human rights, labour rights and business ethics-related norms. As of December 2011, Nordea is engaged in 12 norm-breaching companies worldwide. We also priori-tise proactive engagement dialogues with our

largest holdings. This is carried out by in-house expertise, our external engagement service provider Hermes Equity Ownership Services or through cooperation with other stakeholders. During 2011 we have met about 50 Nordic and global companies. It is our practice to engage in direct face-to-face dialogues with companies.

We engage to change. Nordea initiates

engagement dialogues to change behaviour and

to enhance business performance by addressing

business practices used by the companies we

invest in.

Responsible Investment - Internal governance structure

The RI committee was formed in 2007, when Nordea adopted its fi rst policy for Responsible Investment, and consists of representatives from differ-

ent units within the organisation. The responsibil-ity of the committee is to decide on the policy and strategy framework, as well as the level of engage-ment with companies and whether a company should be excluded from the investment universe.

“For Nordea it has been important already from the beginning to have a clear governance structure for the management of RI aspects. Even thus the Responsible Investment & Governance team is responsible for the day-to-day management of RI

activities; the committee has an important role to play in ensuring that Nordea Asset Management follows the intention of the policy.”

“Part of the RI committee’s responsibility is to review our engagement process and on-going engagement dialogues. During 2011, we have successfully completed two engagement dialogues; this clearly shows that we can infl uence company’s behaviour by being an active and responsible owner” Allan Polack comments.

“Furthermore, we clearly see that our engagement for RI aspects is shared by our clients - in our dialogue with them we see a constantly increasing awareness of the responsibility of the investor in the global fi nancial market.”

Allan Polack, Head of Nordea Asset Management and Chairman of the RI committee

We engage to change. Nordea initiates

engagement dialogues to change behaviour and

to enhance business performance by addressing

business practices used by the companies we

invest in.


Focus area – Human rights

International human rights norms aim to protect people from political, legal and social abuse. The business reference states that companies should support and respect the protection of these norms and ensure that they are not complicit in activities involving human rights abuses.

Western Sahara Western Sahara has been on the UN’s list of Non-Self-Governing Territories since the 1960s. Western Sahara was invaded by Morocco in 1975 and has been occupied ever since. Sourcing natural resources from this occupied area contra-venes the right to self-determination unless carried out with full respect for the interests and

needs of the indigenous people. The business reference requires companies to adopt human rights policies and ensure that they take into account the right to self-determination. Compa-nies should also require all business partners to do likewise.

Controversial sourcing of phosphate rockIn recent years several companies have been criticised and alleged to have acted in breach of international norms by exploiting natural resourc-es in Western Sahara. Nordea has been engaged with several companies in this area; all of them have been involved in sourcing of phosphate rock. However, we are also investigating companies

Environmental norms establish a commitment aimed at upholding the world’s ecosystems and biodiversity in the face of economic development. The business reference states that companies in sectors facing great environmental risk should be sure to have enhanced policies and practices in place to handle this.

Lack of transparency a problemNordea is engaged with companies that are failing in their environmental responsibilities by lacking in their remediation work. Some companies are unwilling to disclose information and lack trans-parency as to how operations are managed from an environmental perspective. We have encouraged these companies to improve their disclosure on environmental policies and practices. One company has been provided with best practice examples for its own sustainability reporting and concerning the company’s participation in the Carbon Disclosure Project (CDP) survey. Our engagement with one of the companies took a significant step forward when they published their

first Corporate Social Responsibility (CSR) report specifically addressing its approach to overseas operations. Following our discussion concerning the CDP survey, the company also notably improved their answers in this year’s survey.

Another company has appointed a Chief Sustain-ability Officer and conducted an external audit of its current sustainability practices and reporting. The company has committed to implementing the findings from the external audit and is now in the process of developing and implementing new sustainability policies and practices. In our dialogue with this company we have also questioned the board’s lack of involvement in sustainability aspects. Our aim is now to influence the company to appoint a board member with sustainability expertise.

Ongoing engagements: Chevron, CNOOC, Vedanta Resources, Royal Dutch Shell and Lukoil

Focus area – Environment


involved in sectors such as shipping, fisheries and oil and gas.

Positive results – Controversial sourcing Nordea’s engagement with the Mosaic Company was successfully terminated in June 2010. Mosaic disclosed that they have discontinued their purchase of phosphate from Western Sahara, which also was independently confirmed. The company has acknowledged the human rights issues involved with importing phosphate from Western Sahara. Our engagement with the Australian company Wesfarmers was successfully concluded in 2009. The company decided to invest in a new facility, enabling it to use a wide range of suppliers from areas other than Western Sahara.

Completed engagementsThe Mosaic Company (ended 2010) and Wesfarmers (ended 2009)

Positive results – human rightsNordea has been engaged in a dialogue with ICICI Bank since the beginning of 2008. The company is known to have employed recovery agents who used

illegal coercive methods to recover loans. ICICI Bank has now improved procedures for audit and training of its recovery agents. It has also signifi-cantly increased the board’s supervision of this issue. Actions taken by the company have been effective in curbing violent behaviour among the bank’s recovery agents, and we therefore success-fully completed our dialogue with the company in the end of 2010.

Completed engagementsICICI Bank (ended 2010) and TransCanada (ended 2011)

Operations in controversial regionsIn our dialogues with companies failing to respect human rights we have urged them to improve their human rights policies as well as their practices for how to implement and follow-up on these policies within their own organisations as well as within the supply chain. As a result, one company has strengthened its supply chain control procedure.

Ongoing engagements: Cemex SAB de CV and Nissan Motor

Focus area – Labour rights

Work is part of people’s daily life and is vital for a person’s dignity, well-being and personal devel-opment. International norms set standards which encompass freedom of association, the right to collective bargaining, forced labour, child labour and discrimination. The business reference states that companies should ensure that their labour policies are based on ILO conventions and that they should actively inform their employees of labour rights.

Violation of trade union rights Most of Nordea’s engagements in this area are with companies which are known violators of trade union rights. In our dialogues we have expressed the importance of developing coherent policies

regarding organised labour which should also apply to all subsidiaries. In one dialogue, we conducted a two-day on-site visit to investigate how the company in practice managed staff-relat-ed issues. We have also addressed how overall ESG issues are managed across global operations, particularly in developing markets. particularly in developing markets.

Ongoing engagements The AES and Wal-Mart Stores

Positive result – labour rights Nordea has been engaged in a dialogue with Hankook Tire since the end of 2009. The company had been violating labour laws and trade union



Focus area – Business ethics

Corruption is considered to be one of the greatest obstacles to economic and social development. It also distorts competition and impedes the devel-opment of fair market structures. For companies to be able to handle these issues they need to develop effective anti-corruption policies and manage-ment systems.

Corruption – institutionalised phenomenonIn some countries the lack of good business ethics practices is institutionalised. We have therefore addressed the issue on a policy and industry level in addition to engagement with specific compa-nies. This has been conducted by participating in local industry forums to promote increased

transparency regarding bribery and corruption. The company engaged has been provided with best practices examples on anti-corruption policies and structures. Since we started our engagement the company has established a set of relevant guidelines on ethics and anti-bribery and created a website to encourage employees as well as suppliers to engage in whistle-blowing. The company has now committed to increasing its transparency on sustainability issues, and a further explanation on its compliance system will be included in the next CSR report.

Ongoing engagementsHyundai Motor

rights at its plant in Hungary. In our first meeting with the company they acknowledged that they lagged behind peers and indicated willingness to change their behaviour. The company has now taken positive steps forward and is engaging its workers and their representatives in a dialogue to

address the contentious issues.Completed engagementsHankook Tire (ended 2011)

• Nordea believes in positive means of engage-ment by which we actively contribute to improvement of company’s management of key environmental, social and governance practices.

• We also believe that exclusion is seldom constructive and long-term oriented. Direct divesting from companies with poor manage-ment practices is used as a last resort.

• We exclude companies when violations are severe and when companies are unwilling to change or improve their behaviour. Nordea does not invest in companies which are involved in the development, production and maintenance of illegal weapons.

Nordea is exercising active ownership through engagements and dialogues. During 2011, Nordea was engaged in 15 norm-breaching companies worldwide.

Active ownership

1614

10

Engagem

ents &

dialogues

20102009

20082011

15

Exclusion


Global outreach

NigeriaIn February the Responsible Investment & Governance team conducted a fi eld visit to Nigeria. The purpose of the visit was to meet with Royal Dutch Shell, a company accused of violating environmental norms.

Shell Production and Development Company (SPDC) has a long and complex history on environmental issues in the Niger Delta. Oil operations started in 50s and have over the last 50 years evolved in all parts of Niger Delta and have due to several interrelated reasons caused severe environmental impact in many areas. SPDC conducts third party verifi cation Our dialogue with SPDC started with thorough analysis of SPDC’s technical capacity to maintain, replace as well as safeguard 7,000 km of pipelines in a very diffi cult and demanding environment.

Our initial fi ndings gave us a good understanding of key issues needed to be addressed in our meeting with the company, which mainly was pipeline integrity in terms of lack of access, maintenance and investments as well as its gas-fl aring practices. After our dialogue, SPDC committed to conduct 3rd party verifi cation of its pipeline integrity status which is a source of the most severe environmental damage in Nigeria. A review will be conducted in stages and will be completed by the end of 2012.

This is a big step forward in order to examine and later mitigate pipeline integrity and prevent future

oil spills. Furthermore, after our dialogue the company communicated that they have initiated the phasing out of gas-fl aring practices and plan to phase out all fl aring by the end of 2014.

Singapore, Indonesia and MalaysiaIn May the Responsible Investment & Governance team conducted a fi eld visit in Southeast Asia. The purpose of the visit was to meet with companies and other organisations involved in the palm oil industry.

Palm oil is the world’s most prolifi c vegetable oil and the demand for it has surged in recent years. Along with the demand, palm oil production has expanded and the industry’s management practices of environmental and social issues have become increasingly scrutinised and inevitably questioned.

The challenges that the industry faces were well expressed by the companies and organisations we met during our visit. The major sustainability risks and issues are not derived from the established plantation; it is rather from when companies expand into new plantation areas. When expand-ing the companies’ face several issues, such as logging without proper permits, expanding on prohibited peat land and virgin forests, corruption etc. In these situations the companies need to manage challenges related to the rights of indig-enous people to their land, the risk of destroying the habitat of many species as well as climate change issues etc.

We believe that understanding of business

conditions in the companies we invest in is one

of the key elements influencing positive change.

Field visits are one way to learn more.

We believe that understanding of business

conditions in the companies we invest in is one

of the key elements influencing positive change.

Field visits are one way to learn more.

During 2011 we have conducted proactive engagement

dialogues with companies on the ground in Africa, Asia,

Europe and the Nordic countries.


Palm oil can, however, be sustainably produced. But for this to be a reality, companies need to have solid management systems that address not only the above challenges but also the risks related to established plantations, as well as migrant work-ers, hazardous chemicals, heavy machinery etc.

And this has sometimes been managed in very remote locations. Since the middle of 2000, companies can certify their operations against the environmental and social standard developed by

the Roundtable on Sustainable Palm Oil (RSPO). The RSPO standard address main parts of key issues, thus companies striving to RSPO certify their plantations are going to the right direction from our point of view.

South Korea & TaiwanIn October the Responsible Investment & Governance team together with a group of institutional investors conducted a fi eld visit in South Korea and Taiwan. The purpose of the visit was to meet the key holdings and

Singapore, Indonesia and Malaysia

• ESG challenges related to the palm oil industry triggered our field visit to Asia

• Companies operating in this relatively high risk industry need to have solid management systems in order to address the diverse range of ESG challenges they face

Singapore, Indonesia and Malaysia

• ESG challenges related to the palm oil industry triggered our field visit to Asia

• Companies operating in this relatively high risk industry need to have solid management systems in order to address the diverse range of ESG challenges they face

Cambodia • There have been several reports indicating poor

workingconditions at H&M’s supplier in Cambodia• We recommended the company to improve its cooling

system and improve the access to drinking water

Cambodia • There have been several reports indicating poor

workingconditions at H&M’s supplier in Cambodia• We recommended the company to improve its cooling

system and improve the access to drinking water


the most important prospects in the Emerging Stars Fund.

During the visit we met over ten companies and various other corporate responsibility experts in Seoul and Taiwan. It turns out that global compa-nies domiciled in Asia are not that different after all. All companies are ultimately driven by external stakeholder pressure. The major difference between Nordic and Asian companies is their perceived importance of different stakeholders.

For Korean companies, the role of government and the related regulators is signifi cant. Many of the companies we met cited direct government infl uence, another regulatory-related reasons as the main drivers of their corporate responsibility behaviour. In Taiwan, especially among the electronic companies that we mostly met, the client is the king. Most of the manufacturers supplying the global electronics giants have undergone the effort to certify their operations against various ISO standards. The greatest

Africa• Royal Dutch Shell has been alleged to violate

environment-related international norms• We recommended the company to conduct 3rd party

verification of its pipeline integrity status in Nigeria, which the company committed to do and complete the process by the end of 2012

Africa• Royal Dutch Shell has been alleged to violate

environment-related international norms• We recommended the company to conduct 3rd party

verification of its pipeline integrity status in Nigeria, which the company committed to do and complete the process by the end of 2012

surprise for us was that for most of the companies we met, we were the first western investors to ask questions related to corporate responsibility and sustainable development. We were not expecting there to be many investors going through the effort, but we were surely surprised to be the absolute first ones to do so, especially with the largest and most global companies.

ItalyIn December the Responsible Investment & Governance team conducted a field visit in Italy. Italy is among the worst performing countries in the Corruption Percep-tion index. Tax evasion is a prevalent problem and, most worryingly, the big ticket incidents, at least used to be, all too frequent. With this in mind we wanted to explore risks related to corporate governance and business ethics among our largest Italian holdings.

Our findings confirm that corruption is an endemic problem in Italy and ranges from recom-mendation systems to secure employment, to prevalent use of cash in small businesses to enable tax evasion. In the business environment, Italian law can make corporations liable for the actions of the individual employee, which gives a strong incentive for a company to establish at minimum a code of ethics for employees to mitigate the liability of actions resulting from actions of a corrupt employee.

Because of the prevalence of corruption and the liability legislation, the largest companies have good programmes in place to proactively prevent the corrupt practices and retroactively monitor compliance. The best practices, which would definitely benefit Nordic companies as well, include comprehensive communication, both virtual and classroom learning, involving external expertise, engaging top management in the effort and linking compensation to the trainings. Best

retroactive measures revolve around well-func-tioning, externally available whistleblowing mechanism, which has to be backed up with stringent processes to handle the incoming cases. Naturally, transparent reporting on both proactive and retroactive measures is always appreciated.

Cambodia In September the Responsible Investment & Govern-ance team conducted a field visit in Cambodia together with local Hennes & Mauritz (H&M) representatives. The purpose of the visit was to investigate working conditions at one of H&M’s suppliers.

There have been several reports concerning poor working conditions at one of H&M’s suppliers in Cambodia, one report for example concerned almost 300 workers having fainted. During the visit we discovered that local reports on the incidents were incomplete, some pointed at exhaustion while local officials saw the incidence of fainting as a mass hysterical phenomenon. The visit also revealed that there still are issues that need to be better managed at the Cambodian supplier. We specifically recommended the company to address the following issues: the cooling systems which were not sufficient to keep temperatures at a decent level, working hours at peak periods were very long and access to drinking water during work hours was limited/non- existent.

Both H&M and Nordea were satisfied with the open and positive approach from the factory’s Chinese management team. Immediate action in terms of access to drinking water was taken and the local management initiated a plan to improve overall working conditions. Nordea will re-visit the factories during 2012 to conduct a follow up.


Corporate governance is about safeguarding

shareholders’ interests in the best way possible.

Good long-term development benefits share-

olders, employees as well as other stakeholders.

Corporate Governance

Corporate governance deals with the relationship between shareholders and the companies’ boards and executive management. From the standpoint of Nordea, corporate governance shall be exercised on the basis of the shareholders’ common interest in good investment returns.

A long tradition of active ownershipNordea is an active owner and has a long tradition of handling corporate governance matters such as voting and engagement with companies. Nordea generally considers good corporate governance crucial to the creation of value in companies, and it plays a key role in promoting companies’ development towards better results through active ownership. We have voted regularly at general meetings since the 1980s and have participated in nomination committees of a large number of listed companies since the 1990s.

Engagements in companies began in the early 1990s and have since increased successively over the years with the main focus on listed companies and stock markets in the Nordic region.

Corporate governance guidelines

Nordea’s fi rst guidelines on corporate governance were adopted in 1996. The last revision, the seventh, was adopted in 2009. Long-term value creation through engagement and voting is the overall aim of our corporate governance activities.

In line with our guidelines we believe that the following issues are of importance: composition and function of the board of directors, share-holder rights, disclosure and transparency, compensation and range of takeover defences.

Corporate governance is about safeguarding

shareholders’ interests in the best way possible.

Good long-term development benefits share-

olders, employees as well as other stakeholders.


Nordea is exercising active ownership through participating in general meetings. During 2011 we have attended 115 general meetings.

Active ownership

2008

General m

eetings in the N

ordics

20112010

2009

171

158147

115

Nomination committees are well established and the Swedish nomination committee model helps to:

• Create a structured and transparent process governed by the owners.

• Separate and clarify the roles between shareholders and board.

• Enable shareholders to create value in the long term when they have more influence on the composition of boards.

Progress made in Sweden

Does financial speculation impact food prices?

United Nations Food and Agriculture Organiza-tion (FAO) reports that almost 1 billion people in the world do not have suffi cient food to eat. During 2011, the global food price index produced by FAO reached a historic peak. The high food prices have put pressure on the already tight food budgets of the world’s poor, and it has as well made it more expensive to give them assistance in the form of food aid.

Responsibility of financial industry It has been debated in the fi nancial industry and political spheres whether fi nancial speculation in agricultural commodities is contributing to increasing volatility and higher food prices. Rising transaction volumes on the derivatives markets and the sharp rise and volatility of food prices have led stakeholders to examine the potential responsi-bility of the fi nancial sector.

Financial players’ part of the agricultural futures and options markets has grown signifi cantly over the last decade. Those with direct commercial interests in food production used to be the main participants, but today hold less than 40 % of the market compared with 88 % in 1996. Based on this it cannot be out ruled that agricultural markets no longer respond to underlying fundamentals of

supply and demand and therefore fail to provide producers with an effective way to hedge their risks.

Although the providers of fi nancial products have legitimate objectives; it raise questions as to their impact on commodities prices and thus their impact on the lives of the world’s most exposed populations. With global population now exceed-ing 7 billion with a continuously high growth rate, food supply and food prices is a fundamental concern and it raises questions about the appro-priateness of basic food commodities as basis for fi nancial investment products.

Our actionOn the basis of this debate, Nordea has decided to no longer produce any wrapped investment products where basic food commodities are included in underlying assets.

Information presented above are derived from UNC-TAD report published in June 2011 and refl ects views indicating impact fi nancial markets have on soft commodities.

Food prices have reached an historic peak,

exacerbating global hunger and poverty. At the

same time, a number of international studies

indicate that financial speculation is contributing

to the volatile and record high prices.


Food prices have reached an historic peak,

exacerbating global hunger and poverty. At the

same time, a number of international studies

indicate that financial speculation is contributing

to the volatile and record high prices.


As the largest asset manager in the Nordic

region we seek to encourage best practice

through active participation in international

initiatives.

International initiatives & participation

Principle for Responsible Investment

As one of the first major banks in the Nordic countries,

Nordea on 1 November 2007 signed the Principles for

Responsible Investment (PRI). In connection with this our

policy for responsible investment was launched. This

policy shows how we adhere to the six principles. We

report on our activities and progress towards implement-

ing the PRI. This report is public and available on the PRI

website.

During 2011 Nordea has been engaged in PRI

collaborative engagement activities focusing on

improving transparency and communication from

companies both on developed and emerging markets.

We have also been engaged in an activity concerning

sustainable fisheries

Water Disclosure Project

Nordea is a signatory to the Water Disclosure Project.

The project is an initiative run by the Carbon Disclosure

Project and is supported by institutional investors. The

aim of the project is to collect and spread information

concerning water-related risks and possibilities and

addresses 300 global companies with water-intensive

production and water-related challenges.

Carbon Disclosure Project

Nordea is a signatory to Carbon Disclosure Project

(CDP), a project which aims to collect and spread

information concerning greenhouse gas emissions and

climate change strategies. Nordea uses the information in

the database in its ESG analysis. CDP is a cooperation

arrangement between 551 institutional investors who

together account for over a third of the world’s

investments.

Sustainable Investment Forums

Nordea actively participates in local sustainable

investment forums, so-called SIFs, which are independ-

ent national forums that promote responsible investment.

Nordea became a member of SWESIF in 2008, in

DANSIF 2010 and was founding member of FINSIF

when the association was launched in June 2010.

Nordea is represented on the boards of SWESIF

and FINSIF.

During 2011 Nordea has, among other things, partici-

pated in two SIF initiatives; the Broker initiative and the

Sustainability profile. The Broker initiative involved encour-

aging brokers to incorporate ESG information into their

company analysis. The other project aimed at improving

the financial industry’s RI communication to clients. The

result of the project was that all project participants

launched Sustainability profiles describing in detail how

RI is implemented in their specific funds.


Sustainable value creation is a cooperation project involving some of Sweden and Norway´s biggest investors. The aim of the project is to influence listed Swedish and Norwegian companies in sustainable development and long-term value creation. Nordea considers it essential for companies to work actively with environmental and social aspects in its business; we therefore take part in the working team that runs the project in Sweden. During 2011, the survey was, for the second time, sent out to the 100 largest companies on the Swedish stock exchange and the results will be presented in the beginning of 2012.

Sustainable value creation

As the largest asset manager in the Nordic

region we seek to encourage best practice

through active participation in international

initiatives.

Summing up

• Launch of unique RI fund, Emerging Stars and re-launch of Swedish Stars.

• Launch of external blog “Responsible Returns”. A blog about our work and global trends within the responsible investment fi eld, http://newsroom.nordea.com/en/responsi-ble-returns/.

• Recruitment has been made. The Responsible Investment and Governance team has been expanded with three new employees with long experience from portfolio management, ESG analysis and communication.

• We have successfully completed two engagement dialogues with companies violating international norms.

• We have conducted several fi eld visits and engage with companies where their business operations take place.

• Sasja Beslik was awarded the title of YoungGlobal Leader 2011 by the World Economic Forum. The title means that for fi ve years Sasja will serve as an ambassador of a global network aiming to infl uence interna-tional companies to increase their social responsibility.

The year ahead

We believe that companies’ ability to manage ESG opportunities and risks are powerful proxies and leading indicators for their overall management quality – or the lack thereof. We believe that companies’ ability to link management of ESG aspects of their business to their products and services is one of the key proxies for their future development.

During 2012 we will revisit one of the key founda-tions of our Responsible Investment and Govern-ance strategy; communication. We will increase our efforts related to communication about how we create responsible returns in Denmark and Norway, markets where we see increasing client interest in our products and solutions.

Aside from communication efforts we will continue the development of our “stars” family of products where we deliver state-of-the art ESG products. Solution-related development for 2012 will concern cooperation with our Private Banking division and creation of a new responsibility concept for their business activities. 2012 is all about value creation, in a responsible way.


Responsible Investment & Governance

Ylva Hannestad is Responsible Investment & Governance analyst at Nordea. Ms Hannestad holds a Master of Business Economics in Finance from Linköping University. Ms Hannestad is a former deputy board member of the Swedish Sustainable Investment Forum, SWESIF.

Sasja Beslik is Head of Responsible Investment & Governance at Nordea. Mr Beslik previously served as Head of Responsible Investments at Banco/ABN AMRO and as a consultant for the World Bank for several projects in Africa and Asia. Mr Beslik is also chairman of UNEP Finance Initiative’s Water Work Group.

Helena Hagberg is Director of Responsible Investment & Governance at Nordea. Ms Hagberg has previously worked with ESG research and corpo-rate engagements at SwedbankRobur and Banco/ABN AMRO. Ms Hagberg is former Chairman of the Swedish Sustainable Investment Forum, SWESIF, and is now deputy board member.

Thomas Ehlin is Director of Responsible Investment & Governance at Nordea. Mr Ehlin is a board member of the Swedish Securities Council (Aktiemarknadsnämnden) and has also served as a member and chairman of several nomination committees of listed companies.

Antti Savilaakso is Director of Responsible Investment & Governance at Nordea. Mr Savilaakso has previously worked with ESG analysis and corporate engagement at Responsible Research in Singapore, Dexia Asset Management in Brussels and ABN AMRO Asset Management in Amsterdam.

Jan Särlvik is Director of Responsible Investment & Governance at Nordea. Mr Särlvik has 15 years experience as portfolio manager and financial analyst at Nordea. Before joining Nordea Mr Särlvik worked as Treasurer at Fabege AB and Esselte AB.

Klaus Fridorf is Director of Responsible Investment & Governance at Nordea. Mr Fridorf joined Nordea Invest in 2008, as Head of Communication. Mr Fridorf has among other things worked in the Industrialization Fund for Developing Countries in the Danish Foreign Ministry working with Communication and International CSR policy.

New Strategy and Policy

Initiates engagement in new companies

Nordea launches first ethical funds

An ongoing process

Signs UNPRI and launch policy on Responsible Investment

Initiates engagements in new companies

Exclude com-panies involved in clustermunitions

2007 2008 2009 2010

Nordea has been working with gover-nance issues since the 1980´s

Establish in-house ESG method

Launch of unique RI funds

2011


2002

New Strategy and Policy


Nordea launches first ethical funds

An ongoing process

Signs UNPRI and launch policy on Responsible Investment

Initiates engagements in new companies

Exclude com-panies involved in clustermunitions

2007 2008 2009

Nordea has been working with gover-nance issues since the 1980´s

Establish in-house ESG method

2010

Launch of unique RI funds


20112002

Signs Carbon Disclosure Project

Nordea Responsible Investment & GovernanceAnnual Report 2011

Published by: Nordea Investment FundsPhoto: Håkan Flank, Pak Noto, Ewa Baumgartner, Klaus Fridorf, iStockphoto, Getty Images

Graphic design: Lina Johansson Sense DesignSources: Ethix SRI Advisors, Hermes Equity Ownership Services, UNCTAD report

March 2012

responsible investment & governance annual report 2011

Economy & Finance