By Hamlin Lovell, NordicInvestor
FIM Asset Management Ltd. (which is part of S-Bank’s Wealth Management business) was one of the first Finnish managers to sign up for the UN PRI, in 2009, and co-founded Finland’s Sustainable Investment Forum. Eleven years later its ESG policies continue to expand, with particularly strong improvements seen in alternatives.
FIM has recently revamped its ESG policies after hiring new CIO, Mika Leskinen, who was formerly Head of ESG at OP Wealth Management and Chairman of The Board of FINSIF – Finland’s Sustainable Investment Forum. He is also a member of the responsible investing advisory group at The Church Pension Fund Finland (which Nordic Investor has also interviewed about ESG)
Says Päivi Riutta-Nykvist, Head of Portfolio Management at FIM: “ESG is at the core of each investment decision. This has changed drastically over the past five years. We do not think that ESG detracts from returns. If a company or an asset manager has good ESG policies, we view that as an alpha driver”.
ESG is integrated into FIM’s own equity and fixed income funds, and also applies to external managers. FIM’s internal ESG strategies include ESG integration, exclusion, engagement and voting, norm- based screening, and impact investing. Transparency and ESG reporting are also important part of ESG strategies. “Norm-based screening in based on internationally approved norms, such as the UN Global Compact and OECD guidelines for multinational enterprises. In terms of organisations, we are a founding member of FINSIF, Finland’s Sustainable Investment Forum. We are also signatories in multiple initiatives: Climate Action 100+, Mining & Tailings Safety, Tobacco-Free finance Pledge and CDP, Carbon Disclosure Project.” says Riutta-Nykvist.
We highlight a handful of the key points regarding ESG strategies below.
Negative screening excludes controversial weapons, tobacco, recreational cannabis, and coal mining and to some extent coal intensive energy production. Riutta-Nykvist clarifies: “When it comes to coal, only thermal coal is excluded. As there so far does not exist a viable alternative to the metallurgical use of coal in the industrial process of steel making from ore, we do not exclude it”.
Examples of companies excluded by various FIM funds (according to the firm’s 2018 Sustainability Report) include: Philip Morris International; Imperial Brands; Scandinavian Tobacco Group; Rolls Royce Holdings; Honeywell International; Raytheon; Larsen & Toubro and Coal India.
Engagement and voting
FIM attends many AGMs of Finnish companies and votes its proxies for some (but not all) funds, but does not tend to make a public noise about disagreements: “To start with, we almost always vote in favour of companies’ AGM proposals. If we find a point on the agenda that we disagree with, we contact the company with our concern directly and follow-up on the issue next year”, says Riutta-Nykvist.
FIM is currently engaging for example with Bayer and BHP and FIM reports on collaborative engagements, such as Climate Action 100+.
For external managers, FIM delegates the process to them and does not provide guidelines for their engagement or proxy voting, but does thoroughly review all of their ESG policies before making an investment.
FIM publishes a carbon footprint if at least half of investee companies in a fund are reporting carbon emissions. The criteria is based on the company weights. Currently coverage in European and US funds is over 95% and the emerging market fund has over 98% coverage. Still, there is room for improvement for a minority of funds.
FIM currently reports scope 1 and 2 emissions since this is the type of data provided by most companies.
FIM funds can have exposure to some of the largest carbon emitters, such as Reliance Industries, Lukoil OAO, Volkswagen and Bayer, as per the FIM’s 2018 Sustainability report. FIM is collaboratively engaging with Climate Action 100+ in relation to these companies’ emissions.
Impact Investing and Social Impact Bonds
In 2019, FIM acquired Epiqus, a pioneer in social impact bonds, which has since 2015 been creating, structuring and managing social impact bonds. For instance, Epiqus Työhyvinvointi I was the first social impact bond (SIB) in the Nordic countries, and is a qualifying social entrepreneurship fund under the EuSEF regulations.
Epiqus, part of FIM Pääomarahastot, now has four such bonds, where the sponsor is a government or municipality. “The model is that interest payments are based on social milestones being achieved: when the goals are achieved, a return is paid into the fund. Milestones across different SIB’s include working conditions in companies, immigrant integration and employment, social inclusion of children, and long duration unemployment”, says Riutta-Nykvist.
The returns will likely be very attractive compared with low yields on bonds, in light of evidence from the earliest SIBs: “the return target of 3-5% looks likely to be surpassed, and investors are happy with that aspect too”, she adds.
FIM no longer has a multi manager fund of funds product, but allocates discretionary mandates to external managers.
“All equity and fixed income external managers must be UN PRI signatories, and must have a comprehensive ESG policy. These requirements are not yet carved in stone for alternative managers, though all of them do currently have an ESG policy”, she adds.
That said, FIM does not rigidly enforce harmonised policies for external managers: “we would ideally want them to follow ESG policies similar to ours, but some degree of diversity is also good. For example, we do like to see our managers engaging actively through common initiatives, and appreciate diversity here as well.”, says Riutta-Nykvist
The general trend is one of improvement: “alternative managers were laggards in terms of ESG, and sometimes prone to ‘greenwashing’, but the past three years has seen a huge acceleration. Policies have gone from ticking boxes to doing ESG more seriously, with a huge jump ongoing in managers taking the matter to heart now that people realise it is important. It also applies to systematic managers”, she says.
“In private equity, we pay particular attention to how they use their powers in the companies they own. Illiquids and ESG is where investors can make the biggest difference – where money flows can really shape companies and projects”, she adds.
Long term the objective is for 100% ESG coverage across all internal and external investments, but there are still a few gaps to be filled. For instance, “ESG does not currently apply to Exchange Traded Funds (ETFs), but we are off to a good start and finding more and more good ESG options”.
Coronavirus pandemic crisis
When asked if FIM is engaging with companies in relation to how they are responding to COVID 19, she says: “That will be the beginning, middle and end of each conversation. I do not think we are yet capable of realizing the full extent of this human catastrophe and its economic consequences, and all the implications for the future”.