ESG-focused pension funds approach problem companies in different ways. Some opt for positive screening, excluding all but the top percentile from their portfolio. Others exclude specific industries due to conviction, often based on environmental or other concerns.
Norway’s KLP, the country’s largest pension provider, is a passive index investor and attempts to engage with firms from nearly all sectors, only mandating a blanket ban on industries in line with the UN Global Compact and firms based around the OECD’s guidelines on corruption.
“Our approach is very much in line with the Norwegian Government Pension Fund Global,” Jeanett Bergan, head of responsible investment at KLP says. The provider divests in line with the sovereign fund’s rules, but also monitors business ethics, excluding companies due to concerns over fraud.
“Enron would be a good example of a company that would be excluded,” she adds. “Unfortunately, in such cases it’s in the portfolio until it’s known, so it is an attempt to capture these companies in advance.” The UK supermarket group Tesco, which recently saw a criminal investigation launched into accounting regularities spanning several years, has also been flagged up as a result of the provider’s focus on accounting.
Bergan stresses that exclusion is always a last resort tactic, meaning that companies are unlikely to be barred from the portfolio on ethical grounds unless there is proof of criminality.
But divestment is frowned upon by some funds that prefer to engage, either publicly or privately, above all else. This is illustrated by the approach taken by the UK’s National Employment Savings Trust (NEST), which opted against exclusion prior to launch in 2010, in the face of considerable scrutiny over its future role as one of the largest UK asset owners. The fund still considers good stewardship as a cornerstone of its investment approach, with CIO Mark Fawcett in the past blaming lax engagement for the billions in fines levied at banks.
Bergan remains adamant that retaining the ability to divest is vital. “Exclusion is a very powerful and important tool – even more powerful and important when you have it in conjunction with active ownership, because it really puts the pressure on during the engagement with companies.”
As part of its most recent exclusion, KLP barred two-dozen fossil fuel producers, but plans to engage with the sector at large to ensure it moves in a more climate-friendly direction. It also excluded several companies over their procurement of cotton from Uzbekistan – because of the country’s track record on child and forced labour.
Bergan says the provider dislikes exclusion, and ensures that the process and reasons for removing a company from the investment universe are abundantly clear. She adds that she tells companies that KLP often has a hope that firms will be readmitted to the investment universe.
KLP continues to monitor all of the currently 99 excluded companies, with sporadic engagement with the firms affected. “We continue the dialogue,” she says, naming two firms that are on a blacklist, but which are able to communicate to KLP whether and how they are addressing the concerns that led to the exclusion. “It’s a good dialogue, and [companies] are concerned about the issues. They really do like to meet us, which is why it’s so nice when you can reinvest in companies.”
Bergan has been working on issues of engagement for 15 years, first at Storebrand and then working on corporate social responsibility at KPMG. She has been at KLP since 2007, and says she enjoys being able to prove that the engagement efforts have paid off. “Sometimes we wish we had achieved more; the reason for exclusion is no longer there.”
One example of a company where the re-admission is warranted is internet giant Yahoo, allowed back in December after nearly a decade. The US firm was banned when it handed information to the Chinese authorities that led to the imprisonment of a local journalist.
Bergan says the firm is not yet perfect, but that the time had come to lift the ban. Similarly, KLP re-admitted Japanese car manufacturer Toyota last year. Bridgestone Corporation was re-admitted in 2013 after concerns over child labour in Liberia were addressed.
WalMart remains excluded, and Bergan notes that she has, over the course of her engagement career, never successfully arranged a meeting with the US retailer, although she has not attempted to meet with the company recently.
She admits a minority shareholder such as KLP will not always be successful. “You cannot expect that you will change multinational companies from another country or culture.”