TURNING ESG IMPACT INTO BUSINESS OPPORTUNITIES1.6.2016 Dagens industri: ESG – Investing for the next generationTimo Ritakallio, President and CEO, Ilmarinen Mutual Pension Insurance Company @ritakti

AGENDA • Ilmarinen in brief• Responsible

investment • Incorporation of ESG

analysis• Case: Approach to

investment climate impacts

• Making the business case

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Ilmarinen in brief

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ILMARINEN TAKES CARE OF THE PENSION COVER OF CLOSE TO 900,000 FINNS

500,500 employees

38,400companies

61,900self-employed

persons

PENSION CONTRIBUTIONS

For pension payments to 323,000 pensioners

For investments in future pensions

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MARKET VALUE OF INVESTMENTS OVER EUR 35 BILLIONAsset allocation according to risk

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RETURN ON INVESTMENTS ON 4 PER CENT TRENDCumulative net return on investments 1997−2015

Ilmarinen’s real return cumulative real return cumulative real return

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Ilmarinen as an investor

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ILMARINEN’S INVESTMENT THESESTheses

The most important decision

• Strategic allocation is the main determinant of return and risk.

Investment horizon • Predictable long-term pension-liabilities and cash flows enable long-term investing.

Risk-taking • Investment risk is taken in order to secure sufficient returns and solvency in the long run.

• The sources of return change over time and we exploit these changes actively.

Market efficiency • We take advantage of occasional market inefficiencies in order to generate added value.

Risk management • Investment risks are diversified to optimize return distributions.

• Not all investment risks and adverse events are predictable.• Responsible investing is a way of reducing risk.

Resources and cost-effectiveness

• Returns are always assessed after total costs.• We outsource only functions where we ourselves cannot add

value in a cost-effective manner.

• Our strategic allocation aims at securing our long-term solvency

• Our allocation is dynamic and we are active in exploiting changes in the sources of return

• We act cost-effectively• We diversify investment-risk• We invest sustainably for the long

term

INVESTING SUCCESSFULLY

AT LEAST 1.3 TIMESTHE SOLVENCY OF OUR COMPETITORS

STRONG SOLVENCY

THEBEST

INVESTMENT-RETURN

RISK-CONTROL

INVESTMENT STRATEGY 2020

Fixed income and credit risk investments

Inv. & premium loans

Credit risk inv.28%Money mark. &

bonds

4%

4%

20%

Listed equities37%

Real investments

Real estate

Infrastructure18%

Agric. & foresty

14%

3%

1%

Absolute return investments

Abs. return funds

Abs. return strategies10%

3%

7%

Private equity investments

Private equity funds

Non-listed equities7%

5%

2%

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Sustainability as a part of the strategy

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SUSTAINABILITY AT ILMARINEN

RESPONSIBLE INVESTMENT

• Managing pension assets• Active ownership

• Sustainability as part of investment decisions

BEST CUSTOMER EXPERIENCE

• Managing pension cover• Services for extending careers

ETHICAL PRINCIPLES IN BUSINESS

• Compliance function to ensure compliance with regulations

• Key themes include data protection and sustainable customer work

TRANSPARENCY

• Open stakeholder dialogue• Consistent opinion-building

• Comprehensive sustainability reportingSOCIETY

• Statutory basic task and its cost-effective and high-quality

management

ATTRACTIVE EMPLOYER

• Energising workplace• Promoting diversity

• Fairness of remuneration and incentives

SUSTAINABILITY AT ILMARINEN

SUSTAINABILITY MEGATRENDS

CLIMATE CHANGE

• Implementation of the Paris

Climate Agreement and national

targets• Expectations of a reduction in

negative climate impacts from

business are growing

• Business opportunities for

companies offering solutions

TAX PAYMENT

• International tax regulations and the automatic exchange of information give governments better conditions for collecting corporate tax

• Companies are facing ever-greater public pressure to pay their taxes

DIVERSITY AND INCLUSION• EU directive requires reporting on diversity• Migration flows are making workplaces increasingly globalised• Careers are getting longer as the age of retirement rises• Young people in particular have different expectations of work

CYBER THREATS

• Cyber threats are increasing

• The importance of data security

and protection is growing

DEMAND FOR SUSTAINABILITY

• The demands of customers and legislation

are increasing the financial risks of

irresponsible operations

• NGOs have started to investigate mid-

sized companies and B2B companies, in

addition to consumer brands

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Responsible investment

WHAT IS SUSTAINABILITY IN INVESTMENT OPERATIONS?

• Pension assets must be invested in a profitable and secure manner

• In addition to financial viewpoints we also take into consideration companies’ sustainability, or ESG*

• For us, responsible investment is a part of managing investment risks

• In our view, sustainability affects companies’ financing costs

15 *Environmental, social, governance issues

ACTIVE OWNER

• We bring up sustainability issues in meetings with the top management of companies

• We also engage with companies outside of Finland, particularly together with other Nordic investors

• We participate actively in general meetings and board nomination processes

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RESPONSIBLE REAL ESTATE INVESTOR• We invest in real estate

responsibly and in the long term:– We utilise environmentally friendly

and recyclable materials in construction

– We require, at the very least, LEED Gold environmental certification in our construction projects

– Buildings need to be healthy and safe for their users

– We are mindful of our responsibility in terms of maintaining cultural heritage

• We co-operate with tenants e.g. in order to combat the shadow economy

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Incorporation of ESG analysis

ESG ANALYSIS AND RATINGS• Sustainability is an integral part

of our investment decisions, it is not a separate function– Ilmarinen’s sustainability ratings

play a crucial part in investment decisions (coverage over 3000 companies!)

– Supported by IT systems: Portfolio managers follow sustainability ratings in their screens alongside financial data

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• ESG analysis integrated into investment decisions • Sustainability ratings combine several sources

and types of analysis, incl. external analysis and internal decisions

INCORPORATION OF ESG INTO INVESTMENT DECISIONS

Norms Risks Megatrends

Reactive Proactive

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• We require our investment targets to go beyond the law and also adhere to international norms – Requirement includes UN Global Compact and underlying

norms such as ILO labour rights, Rio declaration on environment etc.

– We actively engage with companies in relation to norm violations

VIOLATIONS OF INTERNATIONAL NORMS

Norms Risks Megatrends

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• We make a comprehensive assessment of company-related sustainability risks before investment decision making– We look both at risk exposure and management systems– Companies need to pass a certain threshold to become an

investment target of ours We study borderline companies in more detail

MANAGEMENT OFSUSTAINABILITY RISKS

Norms Risks Megatrends

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• In our global stock selection, we try to find companies that benefit from future megatrends, and are therefore able to grow higher than the market– As our investments are guided by fiduciary duty, these

investments need to also make a strong business case– Current themes e.g. water and resource scarcity,

urbanization– After Paris agreement new business opportunities from

climate change – also good investment targets in the long run?

BUSINESS OPPORTUNITIES FROM MEGATRENDS

Norms Risks Megatrends

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Case: Approach to investment climate

impacts

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CLIMATE ANALYSIS TOOLS

Carbon footprinting

Green/brown exposure

Climate ratings

Investments

• Annual carbon footprinting of direct holdings

• In 2016, we include equities, bonds and constructions of new buildings• Exposure of companies to renewable and fossil fuel based energy as well as fossil reserves

• We will formalize certain thresholds in 2016

• Climate risks and opportunities are integrated in our security selection through company sustainability ratings

• We are looking to further enhance our understanding on investee’s strategic choices and future exposure to climate risks

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CLIMATE STRATEGIES• Engagement: We act as an active

owner to improve climate reporting and risk management of companies– E.g. through CDP, as part of

international investor collaboration and shareholder resolutions in annual general meetings

• Divestment: We renounce ownership in specific companies with high climate-related financial risks– In 2015 we divested from 3

companies

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Key conclusions

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MAKING THE BUSINESS CASE• We have made use of ESG

analysis systematic through company ratings – this is key to our risk management

• Global megatrends create opportunities – higher than market growth and attractive investment case

• Companies should communicate their megatrend-related businesses in an understandable way for investors

FOR A BETTER LIFE.