UPM-Biofore-Magazine-3-2016-EN

PERFORMANCE OF S&P 500 VS. S&P 500 ESG

companies in which NBIM invests. “As a large, long-term investor, we usually have good access to senior management and specialists in the companies that we invest in. We let the companies knowwhat we expect from them and encourage them to show openness in their public disclosure and communication.” Skaar is happy with the rising trend of disclosure of ‘non-financials ’ such as emission figures. “Comprehensive non-financial information is important to us, as it helps us understand the effects good governance and environmental and social issues may have on the risks and profits related to our investments. We therefore encourage companies to disclose this informationmore extensively.” Skaar believes things are moving in the right direction. An increasing number of companies recognize that corporate responsibility helps them put their values and goals into action andmeet stakeholder expectations. A good example of the growing interest in sustainability is the UN’s voluntary Global Compact initiative, whose member companies commit to responsible business practices in areas such as human rights, working conditions, the environment and anti- corruption. In the last 15 years, the number of companies participating in the Global Compact has grown from a couple of dozen to more than 8,000. UPM joined the Global Compact in 2003. In January, the UN invited UPM to join Global Compact LEAD, which consists of 50 of the most sustainably advanced companies across all geographical regions and industry sectors. UPM is the first forest industry company and also the first Finnish company ever to receive such an invitation.  UN Global Compact points the way

world’s biggest investors, is regarded as a frontrunner in responsible investment. NBIM controls the Norwegian Government Pension Fund, which is financially backed by Norwegian oil profits. At the end of August, the market value of the NBIM’s portfolio was approximately EUR 797 billion. “Responsible investment is an integrated part of our investment process. We are a long-term fund with investments inmore than 9,000 companies,” says Marthe Skaar , NBIM’s Manager of communications and external relations. Under its current mandate, the fund can invest 60% in equities, 35–40% in fixed-income securities and up to 5% in real estate globally outside Norway. “As a large investor, NBIMalso wants to contribute to the develop­ ment of international principles and industry standards related to corporate responsibility,” adds Skaar. Steering sustainability Climate change and children’s rights have been NBIM’s focus areas for the last decade. NBIMassesses corporate disclosures on these issues on an annual basis. “We see these areas as important pillars in well-run companies within a long-termhorizon,” Skaar points out. The third focus area is sustainable water management. In 2015, NBIM published a revised version of its NBIM Investor Expectations: Water Management guide. The purpose of the guide is to express howNBIMexpects companies to manage the challenges and opportunities related to water resources. UPMwas one of the companies consulted by NBIM for input and discussions during the drafting of the guide, as UPM ranks among the top performers in NBIM’s framework assessing water disclosure in corporate reporting.

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“We see climate change, children’s rights and sustainable water management as important pillars in well-run companies within a long-term horizon,” says Marthe Skaar.

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Sustainability pays off: Integrating financially material ESG information into investment decisions can lead to outperformance, as depicted in the above chart. Since 2009, the S&P 500 ESG index, which uses a weighting scheme based on an ESG Factor Score, has outperformed the S&P 500 in a back test.

THE GROWTH OF THE UN GLOBAL COMPACT Number of business participants 2000–2015.

“Responsibility targets should be as simple as possible, going all the way down to the level of individual employees. In energy saving initiatives, for example, clear numerical targets can be set for electricity and fuel consumption.” Smart risk management International studies confirm that an increasing number of investors are looking to invest in responsible companies with open reporting principles. These companies are considered a safer investment with greater promise of yielding steady, long-termprofits. Risk management is in fact the key motive for many responsible investors. Investors also believe that responsible companies keep up with the times and are able to successfully tap into ethically conscious market trends. A good example of this is new products and services that help fight climate change. Norges Bank Investment Management (NBIM), one of the

NBIM is one of UPM’s shareholders. According to Skaar, deforestation is one of the risk factors to which NBIM pays particular attention. “When we investigate possible investment choices, we focus on areas such as sustainable forestry practices and certification schemes related to paper production.” Active ownership In some cases, NBIMdecides to divest if a company’s long-term risks look too high. Last year, NBIMdivested its stake in 73 companies following an assessment of environmental and social risk factors. Skaar emphasizes, however, that active ownership is the most important way for NBIM to influence the companies in which it invests. This starts with voting and contributing statements at annual general meetings. Skaar reveals that NBIMparticipated inmore than 3,500 annual general meetings in 2015. She also emphasizes the importance of continuous dialogue with the

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