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Turning ESG impact into business opportunities
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Transcript of Turning ESG impact into business opportunities
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.