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Sampo Group’s Chief Investment Officer (CIO) and portfolio managers are responsible for managing investments according to If and Mandatum Life’s investment policies. The policies, which include a section on responsible investment, are updated annually and approved by the companies’ boards of directors. The restructuring of Sampo Group’s asset management operations in 2021 will lead to a greater focus on ESG, with a dedicated ESG team to support the development, analysis and reporting on responsible investments.
ESG issues (Environmental, Social and Governance) have an impact on the performance, risks, and value of all companies. Hence, taking these issues into consideration in the investment process is an important means to improve the risk-return ratio of investments and it is a critical success factor of investment activities.
Enough resources must be allocated to ESG research and reporting. Taking ESG issues into account is part of the work profile of every employee making investment decisions and analyzing investment opportunities. The portfolio managers ensure that they maintain their skills and stay informed on current developments in the ESG landscape.
ESG risks and opportunities evolve over time and investment opportunities may arise when companies’ ESG profiles improve. If the perception of a current or potential investment gets worse due to ESG risks, after thorough background work, analysis, and engagement with an investee company, a decision might be made not to make an investment or new investments in the company, and investments already in the portfolio might be sold.
At Sampo Group, responsible investing is defined as an approach to managing assets so that ESG issues are incorporated into investment analysis, decision-making, and reporting. Responsible investing also includes active ownership related to ESG issues. It aims to combine better risk management with improved portfolio returns, and to reflect investor values. It complements traditional financial analysis and, therefore, ESG issues are considered in parallel with other factors affecting the risk-return ratio of investments.
Environmental factors (E) cover e.g. climate change, deforestation, biodiversity, resource management, pollution, and waste management. Social factors (S) include e.g., human rights, labor rights, supply chain management, workplace health and safety, and the company’s relationship with different stakeholder groups. Governance (G) covers e.g., leadership, compensation, audits, internal controls, and shareholder rights.
Sampo Group is a signatory of the UN Principles for Responsible Investment (PRI). According to the PRI’s six principles, Group companies are committed to:
Sampo Group is also a signatory of the UN Global Compact. According to the ten principles of the Global Compact, the Group companies need to operate in ways that, at a minimum, meet fundamental responsibilities in the areas of human rights, labor, environment, and anti-corruption. These principles are also incorporated into investment processes.
In addition, Sampo Group is a supporter of the Climate Action 100+ investor initiative to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.
This section on ESG integration concerns direct listed equity investments and direct fixed income investments.
According to the PRI, ESG integration is the explicit and systematic inclusion of ESG issues into investment analysis and decision-making. At Sampo Group, ESG integration is carried out using an ESG traffic light model. The ESG traffic light model is based on ESG analysis and ESG risk ratings provided by an external service provider for each potential investment. If the service provider changes, the ESG traffic light model will be updated.
The service provider’s ESG risk rating measures the risk arising from ESG issues, including climate change, and how these risks can affect a company’s value.
The ESG risk rating is a two-dimensional materiality framework that measures both a company’s exposure to ESG risks and how well the company is managing these risks. The ESG risk rating focuses on identifying a company’s material ESG risks through several criteria and to evaluate potential ESG controversies based on information published by the company. The service provider’s analysis includes the identification of possible incidents and an evaluation of the company’s management of these incidents.
Based on the ESG risk ratings provided by the service provider, investment objects are categorized into internally defined risk categories. The risk categories are low risk, medium risk, high risk, and severe risk. The possible action to be taken by the portfolio manager depends on the investment’s risk category.
Companies, which are not covered by the service provider’s analysis and do not have an ESG risk rating, should be carefully analyzed for all risk factors, including risks arising from ESG criteria, which affect the risk-return ratio. The analysis is based on publicly available data. The companies which do not have an ESG risk rating are not included in the ESG traffic light model or the reporting based on it.
ESG traffic light model and risk categories
The ESG traffic light model and the corresponding reporting ensure continuous monitoring of risks arising from ESG issues. Sampo’s Investment Operations provides monthly reporting on the traffic light model to internal committees, enabling them to monitor and analyze the ESG risks and the allocation of investments into different ESG risk categories together with the portfolio managers. In addition, investments in companies which fall into the severe ESG risk category are reported to the committees.
The ESG traffic light model is also reported to Group companies’ boards of directors as part of regular board materials. In addition, investments in the severe risk category are reported to the boards of directors, if the share of severe risk investments included in the traffic light model exceeds the internally defined threshold.
This section on screening concerns direct listed equity investments and direct fixed income investments.
At Sampo Group, the emphasis of the ESG screening is on negative screening carried out using sectors, and on norms-based screening, which focuses on companies’ violations of international norms and standards.
Sensitive sectors screening
Certain industry sectors are considered to carry more ESG risk than others. Risks include, for example, reputational risks, climate risks, and regulatory risks.
Investments in these sectors, so-called sensitive sectors, are monitored closely and both direct and indirect involvement is reflected. Direct involvement refers to direct sales related to the line of business in question and indirect involvement refers to an indirect revenue stream, such as subcontracting, distribution, or services in the business line in question.
New investments in these sectors are made with prudence and consideration and, if a target company’s involvement exceeds internally defined thresholds, the investment can be made only with the permissions of the Group CIO. The portfolio manager prepares a brief analysis, which includes the suggested limit for the investment. If a limit increase is needed, a new CIO approval is required.
|Sector||Potential reasons for sensitivity||Direct (production/ sales)||Indirect (subcontracting/
0% (i.e. Group CIO’s approval is required if investments are made in a company whose business involves production or direct sales of adult entertainment)
|33% (i.e. Group CIO’s approval is required if investments are made in a company whose business is distribution of adult entertainment or offering of services related to adult entertainment production, gaining more than 33% of its revenues from these businesses)|
||0% (i.e. Group CIO’s approval is required if investments are made in a company whose business involves production or direct sales of tobacco products)||
33% (i.e. Group CIO’s approval is required if investments are made in a company whose business is distribution of tobacco products or offering of services related to tobacco products, gaining more than 33% of its revenues from these businesses)
0% (i.e. Group CIO’s approval is required if investments are made in a company whose business involves production of gambling services or direct sales of gambling services)
33% (i.e. Group CIO’s approval is required if investments are made in a company whose business is the distribution of gambling-related products or services gaining more than 33% of its revenues from these businesses)
0% (i.e. Group CIO’s approval is required if investments are made in a company whose business involves production or direct sales of defense materiel)
33% (i.e. Group CIO’s approval is required if investments are made in a company whose business is the distribution of defense materiel or services related to defense materiel, gaining more than 33% of its revenues from these businesses)
In the following sensitive sectors, all involvement is considered as direct involvement:
|Sector||Potential reasons for sensitivity||Direct (production/sales)|
0% (i.e. Group CIO’s approval is required if investments are made in a company whose business involves manufacturing, subcontracting, or distribution of controversial weapons, e.g. biological, chemical, nuclear, and cluster weapons. Involvement needs to be verified by a third party.)
0% (i.e. Group CIO’s approval is required if investments are made in a company whose business involves coal mining. Involvement needs to be verified by a third party.)
Fossil fuels screening
In addition to the above-mentioned sensitive sectors, screening is conducted for fossil fuels (e.g., coal, oil, and gas). Fossil fuels is a diverse and topical sector and, therefore, requires special focus. The fossil fuels screen enables Sampo Group to increase monitoring and reporting and manage risks deriving from fossil fuels. Such risks include, for example, reputational, regulatory, and environmental (including climate change) risks. The fossil fuels sector is also a crucial factor in the shift to a lower carbon economy.
New investments in the fossil fuels sector are made with prudence and consideration and portfolio exposures are monitored closely.
Reporting regarding the sensitive sectors and fossil fuels
Sampo’s Investment Operations provides monthly reporting to internal committees, enabling them to monitor and analyze, together with portfolio managers, investments into sensitive sectors and fossil fuels and the ESG risks arising from these sectors.
Investments in the sensitive sectors and fossil fuels are also reported to Group companies’ boards of directors as part of regular board materials.
A part of responsible investment is assessing companies’ impact on stakeholders and the extent to which a company causes, contributes or is linked to violations of international norms and standards. When new investments are considered, target companies’ possible violations against the international norms and standards laid down in international conventions, such as the UN Global Compact, the OECD Guidelines for Multinational Enterprises, the ILO Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy, and the Guiding Principles on Business and Human Rights: Implementing the United Nations 'Protect, Respect and Remedy' Framework, should be taken into account.
If an investee company is not compliant with these norms and standards, new investments should be avoided. However, if the company has already taken corrective actions regarding the violations, permission to invest may be obtained from Sampo Group’s CIO. In this case, the portfolio manager shall write a brief analysis, which includes an evaluation of the risks arising from the target company’s norms violation, description of the corrective actions taken, and the reason why the portfolio manager thinks the investment should be made despite the violation. In addition, depending on the severity, nature and scope of the violation, the actions can also consist of a direct dialogue with the management of the target company or measures of pooled engagement (see section 5 Active ownership). The summary shall also include the suggested limit for the investment. If a limit increase is needed, a new CIO approval is required.
Reporting regarding the norms-based screening
Sampo’s Investment Operations monitors holdings for possible failures to respect established norms and standards laid down in international conventions. The holdings in companies which are not compliant with international conventions are reported monthly to internal committees. The committees analyze the ESG risks rising from the norms violations together with the portfolio managers.
Investments in companies violating international norms and standards are also reported to Group companies’ boards of directors as part of regular board materials.
A company’s involvement in above-mentioned sectors or a company’s breach of the above-mentioned international norms and standards are determined primarily based on the service provider’s analysis combined with an internal analysis. If necessary, other data sources can be used.
The sector-based research is based on the service provider’s analysis on a company’s involvement in a specific sector. The norms-based research relies on media and non-governmental organizations (NGOs) reports as well as the service provider’s own research. A norms violation is always verified by an independent third party.
This section on active ownership concerns direct listed equity investments and direct fixed income investments, when applicable.
As an active owner, Sampo Group strives to ensure that its investee companies take the sustainability aspects of their operations into account to an even greater extent as part of profitable business. The key issues on which Sampo Group engages with companies include, for example, international standards it expects companies to comply with (see section 4.2. Norms-based screening) and governance and compliance related matters. In addition, climate change is an important theme, as Sampo Group is a supporter of the Climate Action 100+ investor initiative. Sampo Group expects the investee companies to report on their climate impacts openly and comprehensively.
In general, Sampo Group only engages with companies it has invested in and can decide not to engage with a company, for example, to avoid conflicts of interest. Additional criteria to consider before engaging can be e.g. materiality of the ESG issue, size of the investment, actions already taken by the investee company, and geographical location.
The most natural way to influence a company’s operating methods is to engage in a direct dialogue with the company’s executive management using e.g. in-person and virtual meetings, roadshows and visits to operations. Portfolio managers should do this regularly with representatives of target companies or companies which Sampo Group has invested in. Internal staff engagement is used both in a proactive and reactive manner.
Voting at annual general meetings (AGM) is also a tool for shareholders to express their views and can be used in conjunction with other engagement activities. Portfolio managers are in charge of voting at companies’ AGMs. The portfolio managers keep records of the AGMs they have attended and the votes they have cast at the meetings. Sampo Group votes by proxy and in person by attending AGMs or a combination of both depending primarily on the geographical location of the investee company. Voting decisions are made by the CIO together with the portfolio managers.
Sampo Group engages through pooled engagement with other investors if it is believed that it can be an effective means of achieving a desired change in the investment company. Pooled engagement is used mainly in a reactive manner to address issues that may have already occurred.
Engagement processes may take years depending on the severity of the case. Engagement progress and outcomes are monitored internally and through the service provider as long as the engagement is ongoing. In unsuccessful engagements the escalation strategy depends on the size and type of investment. If the investee company is unresponsive to engagement activities, the investment may be sold or the exposure reduced.
Description of the methodology
Every engagement action is assessed on a case-by-case basis, and the external service provider’s pooled engagement service is used to implement the action. Through pooled engagement, Sampo Group can voice concerns with companies that fail to respect established norms and companies that face credible allegations as identified by the service provider’s team of analysts, and request transparency regarding risk mitigation. Methods of engagement include i.e. letters, emails, and meetings. The service provider provides quarterly reporting on all engagement activities and access to continuous monitoring of on-going engagements.
At Sampo Group, the pooled engagement process is coordinated on group-level by Sampo plc’s portfolio managers in cooperation with Sampo’s Investment Operations. Attention to possible conflicts of interest shall be paid when conducting active ownership activities. The aim should be to exercise the engagement processes in line with the best interest of the customers and other stakeholders of the Group. To avoid conflicts of interest, internal approval and mapping processes shall be conducted before all pooled engagement actions.
Reporting regarding the pooled engagement
Engagements conducted through pooled engagement are monitored and reported to internal committees at least annually. Moreover, the progress of on-going engagements and the outcome of past engagements are monitored and reported to the committees at least annually.
Engagements are also reported to Group companies’ boards of directors as part of regular board materials.
Fixed income engagement
Active ownership in the fixed income asset class is pursued through the same channels as in direct listed equity engagement, i.e. through portfolio managers’ dialogue with the company and participation in roadshows and investor meetings, and the service provider’s pool engagement activities (see sections 5.1 and 5.3).
Sampo Group is a signatory of the PRI and Global Compact and a supporter of the Climate Action 100+. For this reason, the Group also encourages its external fund managers to support these initiatives and adopt responsible investment policies.
During the due diligence process when selecting new external fund managers, the portfolio manager should establish relevant ESG aspects and the fund manager’s commitment to responsible investing. Examples of discussion topics include if the fund manager is a PRI signatory and/or UN Global Compact signatory, responsible investment policies and processes, extent of ESG reporting, and ESG risks and opportunities.
As part of the commitment to the UN Principles for Responsible Investment, Sampo Group has committed to reporting annually on the responsible investment practices that have been taken into use and on how the implementation of the UN Principles for Responsible Investment has been promoted.
The carbon footprint of investments is measured and reported annually in the Sampo Group Corporate Responsibility Report.
More information in Sampo Group’s Corporate Responsibility report, p. 118.