Responsibility is integral to a good investment
Thomas H. Kjærgaard, head of Responsible Investment at Danske Bank, talks about responsible investments in Danske Invest's funds.
What is required for you to characterise a company as a responsible investment?
A company should as a minimum comply with the international guidelines on good business conduct as defined by the UN. These cover areas such as working conditions and environmental standards. There are also a number of sectors that we simply cannot characterise as responsible – for example companies that produce cluster bombs.
In our opinion, responsible investing also includes the company spending its investors’ money responsibly, in the sense that it always considers what is in the owners’ – in other words, the shareholders – best interest. That could include the company paying dividends instead of spending a surplus on new investments that might not be profitable, or the company not paying disproportionately high salaries to its management.
How do you ensure that companies follow responsible business practices?
Before Danske Invest even considers investing in a company it has to comply with a series of UN principles known as the UN Global Compact. This comprises ten guiding principles in the areas of human and labour rights, the environment and anti-corruption. Thousands of companies worldwide have signed up to these principles and we also get help from independent consultants to determine whether or not companies comply.
The UN principles constitute our basic license to invest, but then we dig deeper down to the specific sector or industry level and assess individual companies relative to the relevant standards for that industry or sector.
Over the past year we have extended this strategy using a so-called ESG analysis. ESG stands for Environmental, Social and Corporate Governance, with each company getting a score that reflects its ranking in relation to responsible business conduct. This allows our portfolio advisors to assess how companies handle environmental and social issues – including the working conditions of the company’s employees – and how the company is managed in terms of taking the best possible care of its investors’ money.
What do you do if a company takes a negative turn with respect to responsibility?
Individual company scores are regularly updated with the help of an external consultancy, the Dutch firm Sustainalytics, who we have been working with since 2014. If a company slips from a high score to a lower score that will alert the portfolio advisor to a change in the company’s corporate responsibility, and the advisor then has to decide if this will have consequences for the investment. If we are essentially keen to invest in a company, we will often begin a dialogue with the company and can exert an influence via our voting rights at company AGMs.
Our approach to investing responsibly has gone from mainly being a screening and exclusion process to being an active process of monitoring and talking with companies.
You could say some companies are at the high end of the responsible investments scale and some are lower. Now, instead of simply excluding the companies we may rank at the lower end of the UN’s guidelines, we often initiate a dialogue with the company and try to influence them to move in a more responsible direction.
Companies listen when large investors with significant shareholdings voice their concerns, and Danske Invest is often a large investor in Nordic companies and also smaller European companies.
If we are unable to exert influence on an issue that clashes with our code of responsibility via dialogue or by voting, we then have to consider whether investing in the company makes sense.
What does it mean for investors that equity investments are responsible?
We work on the thesis that conducting business in accordance with certain standards of responsibility reduces the risk on the investment. In other words, a company has a much greater risk of running into problems – and hence risking a major fall in its share price – if it does not comply with responsibility guidelines.
Consider, for example, an oil company that does not take proper safety precautions. Not only will it be more exposed to bad publicity, but also more prone to accidents that can damage the company’s business and hence its share price. Oil company BP, for example, has suffered tremendously since its major oil spill in the Gulf of Mexico in 2010.
Likewise, a mining company that fails to implement sufficient safety procedures and precautions is more likely to experience accidents, such as miners getting trapped, while a company that does not respect human or labour rights runs a greater risk of bad publicity, etc. that can damage a company’s reputation and the desire of customers and partners to engage with the company.
Companies that have a sense of responsibility to their investors will ultimately provide better returns, in our view. When a company constantly strives to serve the interests of its investors, it generally spends its money more rationally. Always having its investors’ best interests in mind means, for example, less risk of a company spending money irrationally on unnecessary or unprofitable investments.
Has responsible investing changed over time?
Previously, the talk was mostly of ethical investments, which was a more subjective approach to investing in areas such as tobacco, the gambling industry, pornography or weapons. Social responsibility is a more recent term that has won acceptance over the past twenty years and focuses on human rights, the environment, anticorruption and labour rights. Many places – including Danske Invest – now simply speak of ‘responsible investments’ – a broader concept that also includes the responsibility of companies to their investors.
How have you experienced the demand for responsible investments?
Most ordinary customers are satisfied when investments comply with the requirements of the UN Global Compact. But for many institutional investors, such as investment funds, stakeholder organisations, pension funds and local authorities, the requirements around responsibility have become more complex and sophisticated – which in turn has placed increasing demands on us to provide more detailed and explicit reports for customers.
How has the demand for responsible investments changed?
Just ten years ago, the demand for responsible investments was very much NGO-led, with grassroots organisations working to increase the focus on human rights, the environment, anti-corruption and so on. Our experience now is much more of the customers themselves making these demands, as many institutional customers are very aware that making investments not in line with their image can result in reputational damage through negative media coverage.
What the UN requires of businesses
The UN has defined ten principles that a company should comply with for its business conduct to be considered responsible – the so-called UN Global Compact.
Businesses should …
support and respect the protection of internationally proclaimed human rights; and
make sure that they are not complicit in human rights abuses.
Businesses should …
uphold the freedom of association and the effective recognition of the right to collective bargaining;
the elimination of all forms of forced and compulsory labour;
the effective abolition of child labour; and
the elimination of discrimination in respect of employment and occupation.
Businesses should …
support a precautionary approach to environmental challenges;
undertake initiatives to promote greater environmental responsibility; and
encourage the development and diffusion of environmentally friendly technologies.
Businesses should …
work against corruption in all its forms, including extortion and bribery.