Our method for responsible investment
Responsible investment includes a number of methods at different stages of the investment process to integrate the ESG factors in portfolio management. For Fondita, these methods are:
- Negative screening as in exclusion/norm-based screening
- Positive screening as in enhanced theme-based screening
- Integration of ESG factors in the investment analysis
- Active ownership
- Advocate for sustainable development and responsible investment
Positive and negative screening
Through negative screening we exclude from our investment universe certain sectors that we have identified as unsustainable, either because of their climate impact or their broader societal impact. These are companies involved in fossil fuels, weapons, tobacco, cannabis, alcohol, commercial gambling, quick loans, adult entertainment, uranium and genetic engineering (red). Companies whose operations violate general standards do not belong in our investment funds either.
The purpose of positive screening for our theme funds is to look for companies whose operations enhance sustainability and benefit from various sustainable megatrends. At Fondita, we have identified three megatrends that we believe are sustainable and will prevail for years to come: climate-smart solutions, health and wellbeing, and digitalization and technological development. They all promote development that contributes to a more sustainable future combined with growing underlying markets.
Responsible investment decisions are made by taking ESG factors into account and integrating them into the overall analysis of a company. We use our internal company-specific analysis tools, ESG analyses from partners, as well as ESG tools and databases from MSCI and Morningstar.
When carrying out our ESG inquiries with our portfolio companies, we examine closely various parameters that affect environmental, social and governance aspects. We pay special attention to the following factors:
- Use of renewable energy
- CO2 emissions (scope 1 & 2)
- Carbon dioxide risk
- Energy consumption
- Water usage
- Waste management
- Gender equality and diversity
- Corporate culture
- Measures to prevent human rights violations
- Measures to combat corruption and bribery
- Board independence
- Remuneration policy
- The relationship between ESG factors and remuneration
- The company’s risk management
Before we make an investment decision, we strive to discuss with the company’s management to ensure that our view of the company and its strategy aligns with the management’s vision. We are also active owners during the investment period itself, closely monitoring the company’s operations and meeting with company representatives every year. During these meetings, we discuss issues that affect operational activities and the business environment. Whenever possible, we strive to encourage responsible and sustainable operations, as well as transparency in reporting.
These meetings also give us the opportunity to raise subjects that are important to us. From 2022 onwards, we will identify at least two important sustainability topics that we will consistently discuss with the companies’ management. In 2022, we will focus on 1) the company’s strategy for achieving carbon neutrality and 2) the company’s actions for achieving equality and diversity.
Stock selection plays an important role in our investment philosophy. All our funds are high conviction, concentrated funds, with approximately 30-40 holdings per fund. Extensive internal analysis work is carried out as a basis for investment decisions, especially for small cap funds. In addition, we value discussions with analysts covering our holdings. We also place immense importance on meeting with the portfolio company’s management to verify the implementation of strategy and future prospects.
Active ownership for us is best reflected through company meetings. If the situation requires, we can vote at general meetings or exercise influence via investor initiatives together with other investors.
As active and long-term owners, it’s natural for us to have a good dialogue with our portfolio companies. Whenever possible, we strive to encourage responsible and sustainable operations and transparency in reporting. Factors related to the environment, society and good administrative practices have a major impact on how we define opportunities and see risks. They can also affect the company’s valuation.
As part of our strategy for responsible investments, we always make a detailed ESG analysis of our new holdings and inquire about factors related to the environment, society and social responsibility, and good corporate governance.
In 2022, we will focus primarily on two sustainability matters in our company meetings. These are 1) the company’s strategy for accomplishing carbon neutrality and 2) the company’s actions for achieving equality and diversity.
Company meetings 2021
While the pandemic prevented the standard physical meetings in 2021, it actually generated more virtual meeting opportunities between investors and company management. Fondita’s portfolio managers participated in a total of 641 virtual meetings in 2021.
In these meetings, we discuss current issues that affect the company’s business, both from an operational point of view and concerning the business environment. We also discuss the company’s goals, strategy and the conditions for implementing the strategy successfully. Similarly, we look at the company’s competitors and competitive advantages, market position and pricing power.
ESG aspects play an increasingly prominent role in the meetings, which is very positive. The focus is often on companies’ environmental impact, but the importance of social responsibility and governance is constantly growing.
The discussions are often framed around the UN’s sustainability goals and the companies’ own corporate responsibility and sustainability strategy.
PRINCIPLES OF CORPORATE GOVERNANCE FOR FONDITA FUND MANAGEMENT COMPANY LTD.
This section describes principles regarding exercising voting rights in companies held by the funds managed by Fondita. Fondita’s board of directors review and approve the principles on an annual basis.
• CORPORATE GOVERNANCE
Fondita is obligated to ensure that the interests of the funds and fund unitholders are guaranteed in the best possible manner. This refers to the effort to increase the fund’s value in relation to the fund’s investment strategy and risk level. Even though the funds managed by Fondita always are minority owners, Fondita can, through corporate governance, affect the decisions made in the companies.
Corporate governance aims at a long-term increase in the value of the fund’s companies. Fondita assumes that the target companies comply with good corporate governance and investment principles. For example, by following the Finnish Securities Market Association’s code for corporate governance. Additionally, emphasis is placed on environmental and social responsibility.
If any of the fund’s target companies’ corporate governance and management is insufficient, Fondita tries to affect the company and their management to change their operations. In such cases, cooperation with other shareholders may also occur. Fondita may also conclude that it is better for the shareholders to withdraw the holding than to affect the company’s proceedings.
• FOLLOW-UP OF IMPORTANT EVENTS IN THE COMPANY
The portfolio managers continuously monitor the circumstances affecting the fund companies, such as news and stock announcements as well as corporate events such as dividends, subscription rights, share issues, mergers and shareholders’ meetings.
• ANNUAL GENERAL MEETING
Fondita strives to attend the companies’ annual general meetings where the interests of the fund unitholders require protection. If necessary, Fondita may also vote by proxy through an agent. Fondita is obligated to use the voting rights according to the purpose and strategy of the company in question. Each fund votes individually at the annual general meeting.
At the general meetings, Fondita puts particular importance on matters related to the interest of the fund unitholders. For example, matters regarding:
- the companies’ capital structure
- reward systems
- appointment and composition of the board
- transparent impact opportunities and appointment processes
PREVENTION OF CONFLICTS OF INTEREST
If the interests in the funds managed by Fondita differ, the voting rights should always be used for the benefit of each individual fund.
Fondita’s aim is to continuously develop our responsible investment work. Portfolio managers are in their daily work responsible for integrating sustainability aspects in investment decisions and monitoring regulatory requirements and related news flow.
The development of responsible investment is an ongoing process. Changing regulatory and reporting requirements require attention and up-to-date information. At the same time, the global focus on sustainability and responsibility has grown enormously, which we believe needs an increasingly broad range of expertise to support investment decisions. Companies may also be facing sustainability risks that demand more comprehensive reviews.
For this reason, Fondita established an ESG Committee at the end of 2021. The committee held its first meeting on the 20th of January 2022. The committee’s purpose is to meet on a regular basis to further strengthen Fondita’s responsible investment aim, ensure that the required level of regulatory reporting is maintained, anticipate sustainability trends and changes and, where necessary, discuss norm breaches or other company-specific ESG issues. The committee reports on its activities to the Board of Fondita.
The committee includes representatives from portfolio management and sales, our ESG analyst, and an external expert member. The role of the committee’s external member is to act as a support in discussions and an informal advisor.
It is vital for Fondita to gain high-level expertise from outside our company, so we invited Hanna Silvola (PhD) to work with us. Hanna has extensive knowledge of responsible investments. She currently works as an Associate Professor in Accounting and teaches responsible investing at Hanken School of Economics and in executive education programmes. Her research areas include measuring, reporting, verifying, and interpreting corporate sustainability information as part of financial information and decision-making. She has lectured at the London School of Economics and has visited Stanford University.
“Financial markets are in a green transition towards a carbon-neutral society. Cooperation between universities and the financial sector is important, as responsible investing and related regulatory requirements are evolving at a tremendous pace. As an external expert member of Fondita’s ESG Committee, I can bring insights from the world of science to responsible investing”, says Hanna Silvola.
ESG Committee members in 2022
Marcus Björkstén – Portfolio Manager
Janna Haahtela – Portfolio Manager
Isabelle Ramsay – ESG analyst
Hanna Silvola – Expert Member
Fredrik von Knorring – Sales Director
Cooperation and investor initiatives
The strength of responsible investing is realized when a broad group of investors collectively pursue important issues concerning the environment, social responsibility and corporate governance. It is essential for us to have an active role, both as owners and as advocates for sustainability in society in general.
This is why Fondita is actively involved in cooperation with other organizations in contributing to sustainable development. Since 2010, we have committed ourselves to the UN’s principles for responsible investment in our investment activities, and we report annually to the UN Principles for Responsible Investment (PRI) organization.
As signatories to the UN PRI, we commit ourselves to:
- Integrating ESG issues into our investment processes and our decision-making.vara aktiva ägare och inkludera ESG-frågor som en del av vår ägarstyrning
- Being active owners and including ESG issues as part of our corporate governance.
- Striving for appropriate reporting on ESG issues from the companies we invest in.
- Working to promote acceptance and implementation of these principles in the investment industry.
- Promoting responsible investment with other investors.
- Reporting on our activities and progress regarding the application of the principles.
Fondita is also a member of Finland’s Sustainable Investment Forum (Finsif) and Sweden’s Sustainable Investment Forum (Swesif). The purpose of these associations is to promote responsible investment and act as a platform for networking and knowledge exchange.
We have also signed the UN Global Compact initiative. By becoming a member, companies and organizations commit to actively work with sustainability issues and annually report their efforts to the UN. The work is grounded on the Global Compact’s ten basic principles, which are based on internationally accepted conventions on human rights, labour rights, the environment and anti-corruption.
Companies that have joined the Global Compact undertake to adopt, support and implement these core values related to human rights, working principles, the environment and anti-corruption in their area of interest. Companies and organizations involved in the initiative will comply with international obligations regarding working conditions, human rights, the environment and the fight against corruption in all countries, regardless of the country in which they operate. This provides companies with a framework for accountability.
As we do not accept norm-breakers in our investment activities, we also want to commit to following the same principles and values in our own operations.
In 2021, the Net Zero Asset Manager’s Initiative was also signed. This obligates us to achieve net zero emissions in our funds by 2050. More information about the Net Zero Asset Management initiative can be found on https://www.netzeroassetmanagers.org/