RESPONSIBLE INVESTMENT GOVERNMENT PENSION FUND GLOBAL /2017 No. 04 RESPONSIBLE INVESTMENT GOVERNMENT PENSION FUND GLOBAL /2017 No. 04 Our mission is to safeguard and build financial wealth for future generations Main pillars SETTING STANDARDS We aim to contribute to the development of well-functioning markets and sustainable market outcomes. We recognise a set of key international principles and standards, and contribute to their further development. Our expectations of companies, positions on specific issu EXERCISING OWNERSHIP INVESTING SUSTAINABLY We aim to promote long-term value creation in the companies in which we invest. Voting is one of the most important tools we have for exercising our ownership rights. In our dialogue with companies, we raise governance and sustainability issues that we co Content 2017 1 2 INTRODUCTION SETTING STANDARDS 1.1 Foreword____________________________ 6 2.1 Standards __________________________ 16 1.2 Purpose_____________________________ 9 2.2 Expectations _______________________ 22 2.3 Research___________________________ 26 Responsible Investment 2017 3 4 EXERCISING OWNERSHIP INVESTING SUSTAINABLY 3.1 Voting______________________________ 28 4.1 Assessments________________________ 58 3.2 Dialogue____________________________ 38 4.2 Investments________________________ 70 3.3 Disclosure__________________________46 4.3 Divestments____________ Sustainable long-term growth As a fund for future generations, we have a very long investment horizon. We rely on sustainable business practices to create long-term return. With investments in 72 countries and across most sectors, we provide long-term capital for companies and economies to grow. We INTRODUCTION 1.1 7 The future value of the fund will depend on the value created by the businesses in which we invest. 8 At the end of 2017, the fund held a 0.9 percent stake with a market value of 66 billion kroner in Apple Inc. Introduction Responsible investment 2017 Government Pension Fund Global INTRODUCTION 1.2 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. We believe that long-term return is dependent on sustain We rely on sustainable economic growth across the globe to create a long-term return. 10 At Nestlés 150th Annual General Meeting the UN Sustainability Development Goals were leading the way. At the end of 2017, the fund held a 2.3 percent stake with a market value of 51 billion kroner in Nestlé. INTRODUCTION SETTING STANDARDS Standards provide consistency across markets and raise the bar for all companies. In Section 2 of the report, we explain how we participate in the development of international standards and use them, together with our own expectations and positions, to guide companies The long-term legitimacy of sectors and markets depends on operations and products that are ethically acceptable. 12 The funds portfolio consisted of about 11.2 percent equity shares in the technology sector as at end of 2017. Introduction Responsible investment 2017 Government Pension Fund Glo INTRODUCTION EXERCISING OWNERSHIP The fund owns a small stake in around 9,000 companies across the globe. In Section 3 of the report, we explain how we manage our responsibilities and exercise our rights as an owner. Our aim is to promote long-term value creation and fair distribution of benefits t We believe there are opportunities for investing in companies and technologies that enable more environmentally friendly economic activity. Amazon pledges to cover 15 massive warehouse rooftops with solar panels. At the end of 2017, the fund held a 0.8 percent stake with a market value of 37 billio INTRODUCTION INVESTING SUSTAINABLY Responsible investment is integrated into the management of the fund. In Section 4 of the report, we explain how governance and sustainability data can inform investment decisions. Our aim is to identify long-term opportunities and reduce our exposure to unaccepta Standards The fund is invested in around 9,000 companies across the globe. We benefit from internationally agreed standards that promote sound market practices and good governance of companies. Standards provide consistency across markets and raise the bar for all companies. Our aim is to contribut SETTING STANDARDS guidelines to the extent that they are applicable to their business. Companies themselves are to assess how this can best be achieved. The UN Global Compact sets out ten general principles derived from the Universal Declaration of Human Rights, the ILO Declaration on Fundamental P market listings. At the same time, we questioned the benefits of introducing unequal voting class structures on both exchanges. 18 The second development had to do with the proposed creation of a new premium listing category for state-controlled companies on the London Stock Exchange. The proposal SETTING STANDARDS Sustainable development We have an interest in market outcomes that also support sustainable development. We favour the development of improved sustainability and corporate governance standards at the national and market level, and their alignment at an international level. In Sep 20 We sent submissions on post-trade in Capital Markets Union and Fair taxation and digital economy to the European Commission in 2017. Setting standards Responsible investment 2017 Government Pension Fund Global SETTING STANDARDS 2.1 SUBMISSIONS Recipient Topic Submitted Organisation for Economic Co-operation and Development (OECD) OECD Due Diligence Guidance for Responsible Business Task Force on Climate-Related Financial Disclosure Phase II recommendation report 9.2.2017 Singapore Exchange Limit Expectations We formulate expectations of companies, develop positions on specific issues, and publish guidelines for our voting. These public documents provide predictability in our long-term ownership and communicate our priorities to the wider market. 22 Good governance is a premise for sustain SETTING STANDARDS monitor and review company management. We analyse risks and opportunities to investments. In consequence, we depend on high-quality information from companies. Another important premise for our work is therefore appropriate company disclosure, in line with applicable reporting sta 24 The funds portfolio consisted of 24.5 percent equity shares in the financial sector as at end of 2017. The fund held a 1.7 percent stake with a market value of 11 billion kroner in BlackRock. Setting standards Responsible investment 2017 Government Pension Fund Global SETTING STANDARDS We value the input we received, and we see this as part of our ongoing engagement with stakeholders. We have communicated our expectations through international media, and we have sent the expectation document to the 500 largest companies in our portfolio. In December, we reiterat Research 26 We are constantly developing our understanding of good governance and sustainability, and how they relate to financial risks and returns. We initiate and support research projects, and collaborate with academic institutions to obtain high-quality analyses that may inform our investment SETTING STANDARDS Sustainability disclosure We are constantly seeking to advance our understanding of how companies could better measure their sustainability performance. In 2016, we established a research project with Harvard Business School to advance our understanding of the potential relevance Voting We voted at 11,084 shareholder meetings in 2017. Voting is one of the most important tools we have for exercising our ownership rights. Through our voting, we seek to strengthen governance, improve performance and promote sustainable practices. Our voting guidelines provide a principled basis EXERCISING 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 THE VOTING PROCESS IN NORGES BANK INVESTMENT MANAGEMENT 30 How we voted is published on www.nbim.no After meeting SHAREHOLDER MEETING Before meeting Send voting instructions to companies via custodian Analyse selected companies and consider for pre-disclosure Integrate investment team insight EXERCISING OWNERSHIP VOTING PROCESS We work continuously to improve our voting process. Given the high number of shareholder meetings, we are dependent on a reliable voting chain. Shareholder meetings We aim to vote at the shareholder meetings of all the companies in which we invest. Voting procedu VOTES IN 2017 We voted on 113,216 resolutions at 11,084 shareholder meetings in 2017. 98 percent of the resolutions were proposed by companies, and 2 percent by shareholders. 32 We voted in line with the boards recommendation on 94 percent of these resolutions. Of the resolutions where we voted ag EXERCISING OWNERSHIP 3.1 Updated: NSC 12/01/2018 setting of long-term strategy. We therefore pay particular attention to resolutions concerning the chairperson and the composition of the board. We also attach great importance to the election of independent board members with relevant industry exp 34 We held 408 company meetings with companies in the industrials sector in 2017. Exercising ownership Responsible investment 2017 Government Pension Fund Global EXERCISING OWNERSHIP Table 2 3.1 Votes against board recommendations among the funds top 50 holdings Company Portfolio rank Country Resolutions voted against Subject of resolution(s) Apple Inc. 1 US 1 Proxy Access Alphabet Inc. 4 US 7 Overcommitted board member, remuneration, equal SHAREHOLDER RESOLUTIONS Resolutions submitted by shareholders accounted for 2 percent of all resolutions voted on in 2017. Corporate governance topics accounted for approximately 94 percent of these resolutions, and sustainability topics for around 6 percent. 36 Governance resolutions Shareholders EXERCISING OWNERSHIP board chairperson has been consistently low in the US at around 30 percent and resolutions are rarely adopted. Our starting point is that shareholders have delegated most decision-making authority to the board. For this delegation to function effectively, boards need to demonst Dialogue As a 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. In our dialogue with companies, the starting point is good governance and board accountability. 38 In 2017, we held 3,252 meeting EXERCISING OWNERSHIP In 2017, the dialogue with our top 50 holdings covered issues such as industry expertise on the board, directors time commitments, board succession planning and strategy. environmental, social and governance matters in their regular meetings with shareholders. We raised enviro SELECTED COMPANY DIALOGUES Category Dialogue topic Company Purpose Environment Climate change Bank of Nova Scotia Adoption of TCFD recommendations 2017 Citigroup Inc Adoption of TCFD recommendations 2017 ExxonMobil Corp Climate change strategy 2017 Bunge Ltd Deforestation and supply EXERCISING OWNERSHIP reached out to a group of banks reiterating our human rights expectations in relation to the financing of the Dakota Access Pipeline Project. We highlighted the role of ongoing human rights due diligence in this regard. Board nomination and election We believe a clear division CEO REMUNERATION Norges Bank Investment Management priority Shareholder say on pay in law or code 2002 UK Corporate Governance Principles: Aligning management interests with long-term shareholder value creation 2003 2004 EU recommendation 2005 Netherlands, Sweden, Norway, Denmark and Australia EXERCISING OWNERSHIP CEO remuneration Executive remuneration plans are subject to shareholder approval in most advanced markets. We noticed during the year that remuneration became the number one topic that companies raised with us in the course of our regular dialogue. We discussed remuneration, b DIALOGUE ON ETHICAL CRITERIA The Ethical Guidelines state that before making a decision on observation and exclusion, Norges Bank should consider whether other measures, including the exercise of ownership rights, may be better suited to reduce the risk of continued norm violations, or whether such EXERCISING OWNERSHIP both in terms of preventive action, spill numbers and remediation efforts, and we will continue to monitor developments. AngloGold Ashanti Ltd We expect the Obuasi mine, including tailings and facilities and water processing, to be operated in accordance with generally accepted Disclosure We work with companies, investors and other stakeholders to advance standards, increase the information available to investors, and promote good practices. This is particularly relevant where many companies in one industry face the same challenges. 46 We prioritise initiatives in our th EXERCISING OWNERSHIP CHILDRENS RIGHTS Children are the basis for future prosperity and at the same time the most vulnerable members of society. We have assessed selected companies exposed to We have assessed child labour risks since selected companies 2008. The companies in question have activities 48 Exercising ownership Responsible investment 2017 Government Pension Fund Global EXERCISING OWNERSHIP The network will facilitate dialogue, exchange experience of childrens rights efforts, and work to increase awareness and acceptance of childrens rights. The companies will discuss how best to integrate respect and support for these rights into their policies and practices and 50 Exercising ownership Responsible investment 2017 Government Pension Fund Global EXERCISING OWNERSHIP 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 have assessed companies expos 52 Exercising ownership Responsible investment 2017 Government Pension Fund Global EXERCISING OWNERSHIP CLIMATE CHANGE Climate outcomes may affect company and portfolio returns over time. Climate change may also give rise to business opportunities. We have assessed selected companies exposed to climate risk since 2010. 3.3 Good results for climate change disclosure. Examples fr Climate and deforestation It is estimated that 10-15 percent of global greenhouse gas emissions are due to land degradation resulting from deforestation, with 80 percent of deforestation attributable to land use change driven mainly by four agricultural commodities cattle products, palm oil, timber EXERCISING OWNERSHIP 3.3 Updated: 22/01/18 - WHM HUMAN RIGHTS The long-term legitimacy of sectors and markets depends on operations and products that are ethically acceptable. It is broadly accepted that companies have a responsibility to respect human rights, including in supply chains and other 56 Business and human rights performance The UN Guiding Principles on Business and Human Rights set out companies responsibility to respect human rights. We support the ongoing development of good practices. However, in terms of measurement and quantifiable performance, the data on social performan EXERCISING OWNERSHIP 3.3 Updated: 25/01/2018 TAX AND TRANSPARENCY We believe prudent and transparent corporate tax strategies are a key corporate responsibility. Some multinational enterprises have begun to make public their tax policies. Complex or opaque ownership and organisational structures Assessments An important task in our responsible investment management is to get companies to move from words to numbers so that we can measure and evaluate their efforts, and better understand both risks and opportunities to our investments. 58 Monitoring environmental, social and governance issu INVESTING SUSTAINABLY Disclosure platforms In our own work, we look for sustainability information that is relevant to value and performance across topics, sectors and markets. CDP is a disclosure platform for company reporting of climate, water and deforestation information. We are a long-term spo The Task Force recommendations, if broadly adopted, will result in a homogenous, appropriate and consistent reporting regime across jurisdictions or standards, and, as relevant, sectors and asset classes. We published our first expectations of companies on climate disclosure in 2009, and we were ple INVESTING SUSTAINABLY We are developing an in-house model for analysing the potential impacts of mainstream climate scenarios on individual companies and on the portfolio as a whole. Specifically, we model future cash flows and greenhouse gas emissions on a company level and incorporate estimates o 62 Investing sustainably Responsible investment 2017 Government Pension Fund Global INVESTING SUSTAINABLY In 2016, we looked at various methods available to measure the carbon footprint of our corporate bond portfolio. There is still some way to go before a consistent and relevant method for calculating the carbon footprint of fixed-income portfolios is available. Despite challeng Table 5 Scope 1 and 2 emissions by sector Equity portfolio Reference index FTSE All Cap Tonnes CO2 equivalents Tonnes CO2 equivalents Tonnes CO2 equivalents 25,074,080 23,681,250 2,925,356,440 Consumer goods 5,765,582 4,673,948 474,844,895 Consumer services 8,252,835 6,079,735 830,9 INVESTING SUSTAINABLY Table 7 Scope 1 and 2 emissions by market capitalization, weighted by market value of fund holdings.1 Equity portfolio, reference index and FTSE All Cap Equity portfolio Reference index FTSE All Cap Tonnes CO2 equivalents per million dollars invested Tonnes CO2 equivalent 66 In 2017, we assessed 135 companies in the oil and gas sector on green house gas emissions, fossil fuel reserves and regulatory risk. Investing sustainably Responsible investment 2017 Government Pension Fund Global INVESTING SUSTAINABLY SUSTAINABILITY ASSESSMENTS We use our databases on sustainability data to conduct ongoing monitoring of companies in the portfolio. This includes monitoring environmental, social and governance risks of countries, sectors and companies in which the fund is invested. We also mo SECTOR ANALYSIS Sectors Number of companies assessed Toys 38 Environmental, social and governance topics Health and safety, labour rights, product safety, toxic chemicals, packaging. Oil and Gas 68 135 Greenhouse gas emissions, fossil fuel reserves, regulatory risk Steel 78 Greenhouse gas INVESTING SUSTAINABLY years. In 2017, we conducted sector analyses covering 686 companies. As a result of these country and sector analyses, we may decide not to invest in some sectors in certain countries. We do this to reduce the funds exposure to unacceptable risk. Company analysis We divide com Investments We believe there are opportunities for investing in companies and technologies that enable more environmentally friendly economic activity. These investments are likely to have positive externalities that will benefit society, such as more efficient resource use, less pollution and lower INVESTING SUSTAINABLY We have built up in-depth, internal expertise in environmental technologies in recent years. A major part of our work involves defining the environmental investment universe. Through analysis of companies activities, we identify providers of goods and services of an environmen 72 Investing sustainably Responsible investment 2017 Government Pension Fund Global INVESTING SUSTAINABLY 4.2 ENVIRONMENTAL UNIVERSE 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 efficiency technolog 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 the produc INVESTING SUSTAINABLY Table 11 Top ten equity holdings in the low-emission energy and alternative fuel segment in the funds environmental portfolio Millions of kroner Share of portfolio Percent Basic materials 3,465 5.1 Spain Utilities 2,876 4.2 NextEra Energy Inc US Utilities 2,799 4 76 NATURAL RESOURCE MANAGEMENT Efficient utilisation of natural resources is important for water management, waste management, recycling, agriculture and forestry. Meeting the worlds need for highquality water in an efficient manner is a global challenge. The infrastructure to achieve this requires INVESTING SUSTAINABLY Table 13 4.2 Top ten equity holdings in the natural resource management segment in the funds environmental portfolio Millions of kroner Share of portfolio Percent Industrials 1,839 2.7 UK Industrials 1,608 2.4 Xylem Inc/NY US Industrials 1,390 2.1 Steel Dynamic Divestments There are companies where we choose not to be an owner. This includes companies whose operations could impose large indirect costs on society. By not investing in those companies, we reduce our exposure to unacceptable risk. 78 The fund has two mechanisms for removing exposure to compa INVESTING SUSTAINABLY efforts have been considered but not seen as sufficient. While we do not provide a list of divested companies, we nevertheless aim to be transparent about the criteria underpinning our decisions and provide annual holding lists of all companies in which we invest. Deforestatio RISK-BASED DIVESTMENTS IN 2017 Category Theme Criteria Deforestation Palm oil production Owns/operates plantations in Malaysia and Indonesia Number of companies divested Relevant percentage of business mix allocated to palm oil production RSPO certification status and plans Soy production 3 INVESTING SUSTAINABLY 4.3 DIVESTMENTS IN PREVIOUS YEARS 2017 2016 2015 2014 and earlier Greenhouse gas emissions 0 4 42 22 Deforestation 4 4 7 43 Water 1 0 9 35 Social and governance 1 15 15 14 Total 6 23 73 114 Category 81 82 Investing sustainably Responsible investment 2017 Government Pension Fund Global INVESTING SUSTAINABLY Water Water is an input in a number of production processes in many sectors. Companies may rely on water in their direct operations or through their supply chains, while others produce emissions or waste that may pollute water and impact local communities. Water stress and pro The Executive Board may also consider the breadth of the companys operations and governance, including whether the company is doing what can reasonably be expected to reduce the risk of future norm violations within a reasonable period. Before the Executive Board decides on a company exclusion, the INVESTING SUSTAINABLY We will then assess the companys future product and fuel mix transition and, for power producers, the share of renewables in company power generation, before companies are recommended for exclusion or observation. The Guidelines for Observation and Exclusion specifically addre 86 Investing sustainably Responsible investment 2017 Government Pension Fund Global INVESTING SUSTAINABLY 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 pa ISSN 2387-6131 Design: Scandinavian Design Group Photos: Hans Fredrik Asbjørnsen, Offset, Kentaroo Tryman/Maskot/NTB scanpix, Alamy, Nestlé, Novartis, Veolia, Shutterstock. Paper: Galerie Art Silk 300 g / Matt 150 g Production: 07 Media AS Print run: 500 NORGES BANK INVESTMENT MANAGEMENT Bankplassen 2, P.O. Box 1179 Sentrum, NO-0107 Oslo, Norway T: +47 24 07 30 00, www.nbim.no