Responsible investment 2016

RESPONSIBLE INVESTMENT GOVERNMENT PENSION FUND GLOBAL /2016 No. 03

Responsible investment 2016 Government Pension Fund Global

Our mission is to safeguard and build financial wealth for future generations

Contents 2016 1 2 INTRODUCTION STANDARD SETTING 1.1 CEO of Norges Bank Investment Management ________________________ 4 1.2 Main pillars__________________________ 6 2.1 Principles and expectations _________ 14 1.3 Purpose____________________________ 11 2.3 Research and data__________________ 22

3 4 OWNERSHIP RISK MANAGEMENT 3.1 Voting______________________________ 32 6.1 Risk monitoring_____________________ 68 3.2 Interaction with companies_________ 42 6.2 Risk-based divestments____________ 76 3.3 Environmental investments_________ 58 6.3 Ethical exclusions___________________84

Yngve Slyngstad 4 Responsible investment 2016 Government Pension Fund Global Chief Executive Officer of Norges Bank Investment Management

INTRODUCTION 1.1 Standards for the long term Good corporate governance, sustainable business practices and well-functioning markets are in the funds long-term interest. Appropriate and consistent standards across sectors and markets are important in this regard. We are a long-term investor with a mi

6 Introduction Responsible investment 2016 Government Pension Fund Global

INTRODUCTION 1.2 Main pillars STANDARD SETTING OWNERSHIP We aim to contribute to the development of standards and practices that will serve the long- term interests of the fund. Our principles, expectations and positions build on internationally recognised standards. We make submissions and prioriti

v 8 Introduction Responsible investment 2016 Government Pension Fund Global

INTRODUCTION 9 7 2,392 Submissions Academic projects Companies assessed within focus areas 11,294 98 48 Shareholder meetings voted at Percent of shareholder meetings voted at Integrated voting as percentage value of equity portfolio 233 63.7 12.4 Board level meetings Environmental investments. Billi

10 Introduction Responsible investment 2016 Government Pension Fund Global

INTRODUCTION 1.3 Purpose Our mission is to safeguard and build financial wealth for future generations. We manage the fund responsibly in order to support the investment objective of the highest possible return with a moderate level of risk. Responsible investment is integrated into our investment s

RECOGNISED PRINCIPLES AND STANDARDS Norges Bank Investment Management recognises a set of key international principles and standards. We base our practice on these and participate in their further development. The principles and standards published by the OECD and the United Nations are voluntary, n

INTRODUCTION bodies, regulators, initiatives, companies, industry partners, academics and our stakeholders. We prioritise governance and sustainability topics in defined initiatives to advance disclosure, standards and practices over time. We support academic research to improve the theoretical and

Principles and expectations We have published a set of principles, expectations, guidelines and positions informing our responsible investment management. We develop these on an ongoing basis, and they form the basis for our priorities and activities. 14 The Executive Board has laid down principles

STANDARD SETTING effectively guide, monitor and review company management. We analyse risks and opportunities to investments. In this, we depend on high-quality information from companies. Another important premise for our work is therefore appropriate company Our expectations are disclosure on the

16 Standard setting Responsible investment 2016 Government Pension Fund Global

STANDARD SETTING 2.2 Standards and practices The development of principles and standards for market participants is important for the management of the fund. We engage in dialogue, make submissions and launch initiatives to promote good practices and well-functioning markets. As a market participant

the roles of chairperson and CEO, board members time commitments, and the boards accountability to shareholders. Market, industry or topical standards We also work with standards covering specific sectors, markets and topics. 18 Some standards are new or under development. Throughout 2016, we intera

STANDARD SETTING As part of our efforts to support the development of corporate governance practices in emerging markets, we have entered into a sponsorship contract to support the African Corporate Governance Network. 2016 was the first year of the three- year contract. The network was established

to address evolving issues. We reiterated our view that the board of directors has the overall responsibility for reporting, while suggesting that the commission could provide further guidance to companies on assessing material sector-specific risks. INDUSTRY INITIATIVES Our ambitions with the initi

STANDARD SETTING Environment and mining data initiative In 2014, we launched a mining data initiative to expand and improve non-financial data on this sector in a consolidated database. Columbia University continued to work on building this database in 2016. Such information is not readily available

Research and data We promote research to increase knowledge and understanding of relationships between environmental, social and governance issues on the one hand, and financial risks and returns on the other. Improved data availability and disclosure practices are long-term priorities for us. 22 No

STANDARD SETTING 2.3 RESEARCH PROJECTS Project Topic Aim Institution Corporate influence and governance Corporate governance Analyse various aspects of the allocation of corporate power between shareholders and management Boston College Climate risks and financial markets (completed in 2016) Climate

24 The call for proposals on the financial economics of climate change under the NFI Research Programme ended in June 2016. The call asked for projects to explore the potential impact of climate change on financial markets and asset prices, and any implications for asset management and portfolio cho

STANDARD SETTING the robustness of the product offering. Academic institutions and other third-party organisations such as NGOs and the media also provide relevant information. We encourage stakeholders to provide We encourage non-financial information stakeholders to they believe may be of relevanc

26 Standard setting Responsible investment 2016 Government Pension Fund Global

STANDARD SETTING 2.3 CHILDRENS RIGHTS The long-term legitimacy of sectors and markets is dependent on operations and products that are ethically acceptable. We expect companies to respect childrens rights in line with the United Nations Guiding Principles and incorporate childrens rights in strategi

28 Standard setting Responsible investment 2016 Government Pension Fund Global

STANDARD SETTING 2.3 WATER MANAGEMENT How companies manage water risks and capitalise on opportunities may drive long-term returns for us as a shareholder. Externalities from unsustainable water use may in themselves present a risk to the portfolios long-term value. We expect companies to incorporat

30 Standard setting Responsible investment 2016 Government Pension Fund Global

STANDARD SETTING 2.3 CLIMATE CHANGE Climate outcomes may affect company and portfolio returns over time. Climate change may also give rise to business opportunities. We expect companies to plan for relevant climate scenarios and incorporate potential climate risks in strategic planning, risk managem

Voting We voted at 11,294 shareholder meetings during 2016. Voting is one of the most important tools at our disposal for exercising ownership rights. We have established voting guidelines that provide a principled basis for our voting decisions. Norges Bank Investment Management exercises its votin

OWNERSHIP 3.1 VOTING PRINCIPLES G20/OECD Principle Norges Bank Investment Management voting guidelines Institutional investors, stock markets and other intermediaries Vote in a principled and consistent manner to maximise the long-term profitability of the companies we are invested in - Vote in a pr

THE VOTING PROCESS AT NORGES BANK INVESTMENT MANAGEMENT Pre-meeting Receive notice of upcoming shareholder meetings and supporting documents from companies via custodian network All meeting-related information uploaded to web-based system accessible to Norges Bank Investment Management Initial votin

OWNERSHIP THE VOTING PROCESS We aim to vote at shareholder meetings at all the companies we invest in. The fund holds shares in around 9,000 companies, so we cannot physically attend shareholder meetings at all these companies. In line with the G20/ OECD Principles of Corporate Governance, most comp

Publication of voting intentions We continued our initiative to publish carefully selected voting intentions and rationales prior to annual or extraordinary shareholder meetings in 2016. The objective of such pre- meeting disclosure is to further increase the transparency of our voting decisions and

OUR VOTING DECISIONS We voted on 112,210 resolutions at 11,294 shareholder meetings in 2016. 98 percent of the resolutions were proposed by the companies, and two percent by shareholders. We voted at 98 percent of shareholder meetings in 2016. The main reason for the fund being unable to vote at mee

6, shareholder concerns 10 a Weak board election process 25 016, Vto, 26/01/2016, updated underlying data Independence of key board committees 19 38 Changes to governance or contractual framework 17 Separation of CEO and chairperson roles 19 ata Overcommitment of board members 8 Chart 7 Drivers of a

OWNERSHIP 3.1 Oppdatert: Voting decisions at 521 companies were made o, 16/01/2016, in collaboration with portfolio managers in dated accounted for 2016. These companies derlying approximately 48 percent of data the equity portfolios market value. Over the past four years, the number of companies vo

Table 2 40 Votes against board recommendations among the funds top 50 holdings Resolutions voted against Company Portfolio rank Apple Inc 3 US 1 Proxy access Alphabet Inc 4 US 8 Board independence, overcommited board members, remuneration, equal treatment of shareholders and shareholder rights Roche

OWNERSHIP VOTING IN THE TOP 50 HOLDINGS In 2016, there were 25 companies in the top 50 holdings where we had reason to vote against the boards recommended resolutions. These were mainly director-related. At 14 of the 25 companies, the re-election of a combined chairperson and CEO was the cause of an

Interaction with companies As a large, long-term investor, we engage in dialogue with companies. Our holding size gives us access to board members, senior management and a range of specialists at the companies we invest in. 42 In 2016, we held 3,790 meetings with 1,589 companies. Investor meetings w

OWNERSHIP STEWARDSHIP Stewardship is a term increasingly used in the context of responsible investment. We define stewardship as the role and responsibility of an investor to oversee and safeguard the long-term value of the equity holdings in a portfolio. Top 50 holdings In contrast to other engagem

44 Chairmanship and governance of financial institutions We continued with our programme of engagements with the chairpersons of financial institutions in 2016. In 2015, we met with 12 chairpersons of European banks and maintained these dialogues in 2016. In 2016, we extended the programme to includ

OWNERSHIP 3.2 Table 4 Priority topics for company dialogue in 2016 Number of companies Share of equity portfolio. Percent 35 1.59 8 1.11 Brazil 15 0.16 Board independence standards Japan 121 2.39 Change of control rights Switzerland 7 0.14 Controlled companies Europe 5 0.7 Corruption risk Global

SELECTED COMPANY DIALOGUES Board nomination and election processes Shareholder rights 46 Transparency Sustainability Stewardship Event-driven Company Purpose Blackrock Inc Shareholder right to propose board candidates 2014 Sky Plc Secure a majority independent board 2016 Industrivärden AB Individual

OWNERSHIP BOARD NOMINATION AND ELECTION PROCESSES We believe a clear division of corporate roles and responsibilities, where management makes operational business decisions and answers to the board on the companys risk management and long-term strategy, best serves shareholders in publicly listed co

INDIVIDUAL DIRECTOR ELECTIONS IN SWEDEN Norges Bank Investment Management Swedish market 2014 Jan 2014: Served on two nomination committees in Sweden (Volvo AB and SCA AB) 2015 Feb-Apr 2015: Discussion with leading Swedish companies on their board nomination process 48 Jun 2015: Published a position

Individual vote count in Sweden Sweden is among the few remaining developed markets where director elections were commonly bundled for shareholders voting by proxy. Only by attending in person does a shareholder have the opportunity to call for an individual vote count. In 2015, we raised this topic

MANDATORY OFFER EXEMPTIONS IN SWITZERLAND 50 Company Sector Provision Schindler Holding AG Industrials Opt-out DKSH Holding AG Industrials Opt-up 49 Partners Group AG Financials Opt-out SFS AG Industrials Opt-out Helvetia Holding AG Financials Opt-up 40 OC Oerlikon Corp AG Industrials Opt-out Sika A

OWNERSHIP SHAREHOLDER RIGHTS The funds return is dependent upon the long- term value creation of the companies in the portfolio, and each shareholder receiving a reasonable and proportionate share. We engage with companies to secure rights of equal treatment among We engage with shareholders. During

Executive remuneration Transparency of executive remuneration plans and the clarity of board rationales on pay levels was a focus for company dialogue in 2016. The board is responsible for, and best placed to set, executive remuneration. The board should develop a remuneration structure that fits th

OWNERSHIP Communicating our expectations to companies As part of our efforts to make companies aware of our expectations, we wrote to the chairpersons of our 500 largest company investments, informing them of our expectations in the areas of water management, climate change strategy, childrens right

Eni SpA and Royal Dutch Shell Plc The fund has invested 8.8 billion kroner in the equity of Eni SpA and 46.2 billion kroner in the equity of Royal Dutch Shell Plc. The goal for our formal dialogue with the two companies is a reduction in the number and volume of oil spills and immediate effective re

OWNERSHIP 3.2 We expect the Obuasi mine to be operated in accordance with generally accepted environmental standards once the tailings storage facility, water processing and other infrastructure have been modernised. Furthermore, AngloGold Ashanti Ltd must tackle the legacy of historical pollution s

CORPORATE GOVERNANCE ADVISORY BOARD Norges Bank Investment Management established a Corporate Governance Advisory Board in 2013 to strengthen our long-term ownership work. In 2016, the advisory board focused on the role of the board, executive remuneration, tax transparency, and selected company eng

OWNERSHIP 3.2 THE ADVISORY BOARDS ACTIVITIES IN 2016 Theme Activities of the Corporate Governance Advisory Board Ownership policies Revision of internal policies and procedures in relation to our corporate governance agenda Academic research Advice on prioritisation for academic collaborations Posit

Environmental investments We make additional allocations to environmental technologies through our environment-related mandates. 63.7 billion kroner were invested in such mandates at the end of 2016. 58 Environment-related mandates have been part of our investment strategy since 2009. The mandates a

OWNERSHIP 3.3 ENVIRONMENTAL UNIVERSE CATEGORIES, GROUPS AND DEFINITIONS INTERNAL DEFINITIONS Categories Groups Definitions Companies that provide solutions to climate change and pollution Low-emission energy and alternative fuels Providers of energy, infrastructure and energy Clean energy and effic

60 Ownership Responsible investment 2016 Government Pension Fund Global

OWNERSHIP LOW-EMISSION ENERGY AND ALTERNATIVE FUELS The power generation and transport sectors are major contributors to greenhouse gas emissions. Technological advances in these areas can significantly reduce global greenhouse gas emissions. Companies today are increasingly developing capacity for

62 Ownership Responsible investment 2016 Government Pension Fund Global

OWNERSHIP CLEAN ENERGY AND EFFICIENCY TECHNOLOGY Investments in solutions to climate change have traditionally been made mainly in energy production and concentrated on clean and renewable energy. Opportunities on the demand side have recently begun to attract more attention. The transport sector is

64 Ownership Responsible investment 2016 Government Pension Fund Global

OWNERSHIP NATURAL RESOURCE MANAGEMENT Efficient utilisation of natural resources is important for water management, waste management, recycling, agriculture and forestry. Meeting the worlds need for high quality water in an efficient manner is a global challenge. The infrastructure to achieve this r

66 Ownership Responsible investment 2016 Government Pension Fund Global

OWNERSHIP 3.3 We make additional allocations to environmental technologies through our environment-related mandates. 63.7 billion kroner were invested in such mandates at the end of 2016 67

Risk monitoring Norges Bank Investment Management aims to achieve the highest possible return on the funds investments with a moderate level of risk. We assess environmental, social and governance risks across the fund. These risk assessments and related monitoring are integrated into the funds over

RISK MANAGEMENT COMPANY ANALYSES Our ongoing risk monitoring also includes producing reports and briefs at the company level. We produced 64 company assessments looking at environmental, social and governance issues in 2016. We divide these assessments into three categories. Material ownership repor

We analyse greenhouse gas emissions from companies in the funds portfolio 70 Risk management Responsible investment 2016 Government Pension Fund Global

RISK MANAGEMENT both within and among markets. Responses indicate that, overall, managers are most sophisticated when it comes to understanding the importance of corporate governance- related issues and incorporating such considerations in their investment management activities. Practices related to

up-to-date information on those companies that have made this available. When comparing the carbon footprints of companies operating in the same sector, we have always looked at both direct and indirect CO 2 emissions. When analysing the business models of individual companies, we may also include a

RISK MANAGEMENT Method Calculation methodologies for greenhouse gases vary. We use estimated greenhouse gas emissions for each individual company in the equity portfolio based on reported numbers of tonnes of CO 2 equivalents. To draw comparisons between companies and sectors, it is appropriate to v

Table 9 Scope 1 and 2 emissions by sector Equity portfolio Share of portfolio market value. Percent 1 Tonnes CO 2 equivalents Tonnes CO 2 equivalents 5.6 11,110,229 14,331,282 Consumer goods 13.7 2,434,135 2,518,811 Consumer services 10.3 1,699,342 1,554,147 Financials 23.3 1,172,200 1,494,658 Healt

RISK MANAGEMENT 4.1 Table 11 Scope 1 and 2 emissions in the fixed-income corporate portfolio and reference index as at 31.12.2016 Tonnes CO 2 equivalents Average emissions intensity weighted by market value of fund holdings. Tonnes CO 2 equivalents per million dollars in sales revenue Fixed-income

Risk-based divestments We have divested from a number of companies in recent years. The divestments follow from assessments that include the consideration of environmental, social and governance related risk factors. In 2016, we divested from 23 companies. 76 Our approach to integrating environmenta

RISK MANAGEMENT regulatory environment as well as incorporating additional data sources. Sector assessments and company analysis resulted in risk-based divestment from 23 companies in 2016. We also put companies that meet some, but not all, of the criteria for risk-based divestment under additional

Deforestation is an issue with significant social and environmental consequences 78 Risk management Responsible investment 2016 Government Pension Fund Global

RISK MANAGEMENT DEFORESTATION Deforestation is an issue with significant environmental and social consequences. Forests provide a number of ecosystem services such as maintaining biodiversity, storing carbon and producing oxygen. In some regions, deforestation is among the main sources of greenhouse

RISK-BASED DIVESTMENTS IN 2016 Category Theme Criteria Greenhouse gas emissions Oil sands production Footprint: Oil sands operations Number of companies divested 3 Relevant business mix and/or proven reserves allocated to oil sands production Coal-fired power generation Relevant business mix allocat

RISK MANAGEMENT disruptions, loss of market access or capital expenditure risks. It may also change the competitive landscape or market demand. significant social and governance issues such as health and safety, human capital and corruption in our risk monitoring and risk- based divestment work. In

82 Risk management Responsible investment 2016 Government Pension Fund Global

RISK MANAGEMENT Garments and toys In 2015, we performed an initial assessment of companies operating in the clothing and accessories, footwear and toys sectors. Poor management of working conditions and health and safety in these sectors has attracted considerable attention in recent years. When ana

Ethical exclusions Norges Bank excluded 64 companies in 2016 and put 12 coal and other companies under observation. Two exclusion decisions were revoked. 84 The Ministry of Finance has issued specific Guidelines for Observation and Exclusion from the Government Pension Fund Global. The criteria for

RISK MANAGEMENT The Guidelines for Observation and Exclusion from the Government Pension Fund Global specifically address the issue of green bonds. They state that recommendations and decisions on the exclusion of companies based on the coal criterion shall not include a companys green bonds where s

OPERATIONALISATION OF THE COAL CRITERION IN 2016 During the year, we have collected data and performed analysis in order to identify companies covered by the coal criterion. On this basis, we have made exclusion recommendations to the Executive Board of Norges Bank. The two thresholds for the criter

RISK MANAGEMENT mix of fuel sources used in energy production. If 30 percent or more of a companys aggregate energy production measured in energy units is based on coal, we consider it covered by the criterion. The selection criteria described above may mean that the way a company chooses to organis

88 Risk management Responsible investment 2016 Government Pension Fund Global

RISK MANAGEMENT 4.3 RESPONSIBLE INVESTMENT IN THE MANAGEMENT MANDATE CHAPTER 1. General provisions Section 1-3. The management objective (1) The Bank shall seek to achieve the highest possible return after costs measured in the investment portfolios currency basket, see section 4-2, first paragraph,

ISSN 2387-6131 Design: Brandlab Photos: Norges Bank Investment Management/ Hans Fredrik Asbjørnsen, Shutterstock, Getty images, Plainpicture, Helge Sauber/Plainpicture/NTB scanpix, Wikipedia Paper: Galerie Art Silk 300 g / Matt 150 g Production: 07 Media AS Print run: 600

NORGES BANK INVESTMENT MANAGEMENT Bankplassen 2, P.O. Box 1179 Sentrum, NO-0107 Oslo, Norway T: +47 24 07 30 00, www.nbim.no