Financial industry overview
In 2015, a net total of €9 billion was invested in investment funds. During 2015, total fund assets under management in Sweden increased from €27 billion to €353 billion, the highest year end figure ever recorded. The interest for index funds remained very strong. Despite an overall net outflow from equity funds, index funds recorded net inflows of over €2 billion in 2015. At the end of 2015, index funds accounted for over 13% of the total assets in equity funds.
Characteristics of the SRI market
Most of the Swedish financial institutions can be considered mature SRI players as a large number of asset owners and asset managers have been active in the Swedish SRI space for more than ten years. Almost all of the large institutional investors in Sweden have some form of policy for Sustainable, Responsible and/or Ethical Investing in place and they constitute the majority of the leaders in this industry.
Sweden’s commitment to the EU Roadmap 2050 sets the overarching goal of a society with zero GHG emissions by the year 2050. Related targets include reducing GHG emissions from a 1990 baseline by 40% by 2020 and having a completely fossil-free vehicle fleet by 2030.
Investments in environmental R&D have made Sweden an innovation leader for several clean energy technologies, including biofuels, smart grids and carbon capture and storage (CCS).
Despite the mature SRI market, SRI practices in Sweden are not governed by an explicit legal framework, but are driven bottom-up by front runners such as the national pension funds (AP funds), the Swedish Church and Folksam. All of the major banks have established SRI policies and procedures and provide the SRI market with a wide variety of SRI products and solutions, and a fast growing number of investors are following suit. A leading driver continues to be the pension fund initiative ‘Ethical Council’, which consists of the collaboration between four of the Swedish pension system funds (AP1, AP2, AP3 and AP4), aiming to make a difference by acting as ‘strategically accountable and committed owners who exert influence on companies worldwide to improve their efforts on environmental and social issues’. In 2015, the Ethical Council conducted dialogues with 178 portfolio companies worldwide concerning a total of 254 incidents, pertaining mainly to business ethics, human rights, labour rights, corruption and the environment. In most cases, the discussions have led to improvements and the dialogue was considered successful.
SRI Market and strategy overview
Over the past two years, Sweden has continued to witness a modest growth in SRI which signals a trend among all major investors and asset managers to apply a mix of SRI strategies to their portfolios. In fact, a common practice among Swedish institutional investors is to combine several strategies including Exclusions, Engagement and Voting as part of a holistic approach to integrating ESG factors into the investment policy, process and decision-making.
Sweden has been receptive to international initiatives such as the UN Global Compact and the UN-supported Principles for Responsible Investment (PRI), and it is common for investors in Sweden to sign up to both the PRI and the base investment guidelines on the principles of the UN Global Compact when assessing investment portfolios. As of 31 May 2016, there are 1525 signatories of the PRI globally, including 51 signatories from Sweden, split between asset owners, investment managers and professional services providers.
Swedish initiatives such as Sustainable Value Creation and Swesif’s ESG Profile have also been well received in the market and support increased transparency and disclosure within the business community and the fund management industry. The Sustainable Value Creation initiative is a collaboration between 17 of Sweden’s largest institutional investors and, since spring 2015, also the NASDAQ Stockholm which operates the Stockholm Stock Exchange. The cooperation was initiated in 2009 when investors and owners of Swedish companies saw a need to further highlight the importance of companies working systematically with sustainability issues. The Swesif’s ESG Profile (“Hållbarhetsprofilen”) was developed by Swesif together with its member companies. The ESG Profile is a standardised information leaflet describing the fund’s work on ethics and sustainability issues, and is a supplement to the financial fund fact sheets, developed in 2013 to help fund investors by giving them easier access to information. In May 2015, Swesif launched the ESG profile on the private market in Sweden. After one year, 38 fund companies have already joined and today more than 670 funds are reporting their sustainability efforts.
Some specific areas of development over the past two years have been in relation to Impact Investing, Green Bonds and Sustainability Themed. Notably, there is a growing interest in Green Bonds – or sustainable bonds, and in the last few years, the number of Green Bonds launched has increased greatly. The Swedish city of Gothenburg became the first Nordic city to enter the climate bonds space, closing a €54 million, 6-year green bond to fund public transport, water management, energy and waste management projects. The bond is part of a potential € 218 million green bond programme for such projects in Gothenburg.
As mentioned, the growing interest in Sustainability Themed investments tends to focus mainly on the environment and specifically on climate change. This strategy has grown by 16% since the last review and, as shown in the graph, the most popular categories are energy efficiency, renewable energy and water management. The Swedish Government is actively encouraging the Swedish investment community including the public pension funds, the banks and the fund industry to agree on a common standard for reporting their funds’ carbon footprints, while Sweden’s Minister of Financial Markets has spoken in favour of self-regulation as the best alternative.
Furthermore, the Swedish Investment Fund Association representing the Swedish fund industry has taken the first step towards creating additional transparency and comparability regarding the carbon footprint for funds’ holdings by producing a guide for coordinated reporting. At this stage, the reporting is still voluntary.
Exclusions remain the dominant strategy, preferred by asset managers and asset owners, with a total of €714 billion AuM and a growth of over 10%. Over 83% of respondents report on general exclusion policies and in terms of preferential categories, weapons remains the Exclusion selection most often applied by 37%.
Engagement and Voting also registers a significant increase of 27% with total AuM at €444 billion. Active corporate governance continues to be on the rise and is well on its way to becoming an alternative to Exclusions.
The SRI market in Sweden is predicted to continue to grow and develop in terms of assets under management using a diversity of SRI strategies, approaches and products.
With the state pension funds and other asset owners willing to increase their transparency on their strategies and, showing that SRI can be implemented without harming performance and with positive impacts on companies and markets, the likelihood of others following suit is high.
Furthermore, the growth of the market for Sustainable and Responsible Investment in Sweden is supported by the active participation of asset owners, investment managers, service providers, academia, and other stakeholders in debates, discussions and collaboration aiming at increasing knowledge and competence. Although there are no legal requirements on private institutional investors and asset managers in relation to SRI, the Swedish financial market shows a high degree of self-regulation. For instance, the ‘Ethical Marketing Committee for Funds (ENF), was set up as an independent committee whose task is to monitor that fund management companies follow the marketing rules in their information and marketing in order to prevent misleading marketing of investment funds.
In May 2016, the Swedish fund industry agreed on a method of reporting carbon footprint for the funds’ holdings. This initiative was taken to compensate the lack of coordination and supply of data around the carbon footprint of funds’ holdings. This is why the Swedish Investment Fund Association produced a guide for coordinated carbon footprint reporting in the spring of 2016.
Another initiative from the Swedish Investment Fund Association is an industry standard for reporting the fund management companies’ sustainability work. The sustainability review aims to increase transparency for savers and give an overview of how the fund management company works with sustainability issues along with concrete follow-ups on how this work has been done in practice during the previous year.
The sustainability review at fund management company level will be updated annually and is due to come into force as of 2016.
The contents of this country profile are based on research and analysis conducted by Swesif and Eurosif.