DNB ASSET MANAGEMENT

2014 annual report for responsible investments

2

2014 annual report for responsible investments

2014 turned out to be another strong year in most financial markets and also for DNB Asset Management. Our assets under management grew from 487 to 542 billion NOK. This was due both to rising markets and positive net inflows. The most striking feature of the year on the fi-nancial markets was how remarkably far interest rates fell. Leading central banks adopted zero interest rate policies and some governments could borrow over the next ten years for less than 1%. The oil price also fell significantly start-ing during the summer. All consumers and oil importing countries were winners, whereas the limited number of oil companies and oil exporting countries are losers. The debate around climate change and how in-vestors should act on the rising risks around fossil fuels was intensified in 2014. We are happy to be able to offer our clients DNB Global Hållbar, a fund with focus on sustainability. The fund does not invest in companies in oil, coal and gas explo-ration, oil services or in coalfired power plants and was launched in Sweden in April 2014 and in Norway in January 2015. In the light of rising global equity markets at the same time as avoid-ing the tumbling energy shares, the fund has al-ready been a very good investment for our cli-ents.

However, the drop in the oil price is a double edged sword for our planet. On one hand, many highly polluting oil projects such as shale oil and oil sands are halted because they are no longer profitable investments. On the other hand, cheaper gasoline increases driving and pushes back investments in renewable energy sources.

In 2014, DNB once again qualified for inclusion in the Dow Jones Sustainability Index, DJSI, as the only Nordic bank. The index measures financial, environmental and social performance. DNB has been qualified for the index that includes the top 10 % of every industry, for the last six years. DNB was also named one of the 100 most sustainable companies in the world by the Corporate Knights.1 DNB Asset Management will continue to work with the highest standards for responsible in-vestments in 2015. We will also look to add more sustainable products on offer to our clients. I believe DNB Asset Management has an exciting year ahead. Torkild Varran, CEO, DNB Asset Management

1 http://www.corporateknights.com/channels/leadership/2015-global-100-results/

Cover photo: Beautiful Norway

DNB Asset Management employs 220 people across 5 offices globally. 75 portfolio manag-ers run over 500 billion NOK in fixed income, equities, hedge funds and private equity strategies on behalf of institutional and retail clients. We are Norway’s largest asset man-agement company with some 480 000 mutual fund customers in Norway and 276 institu-tional clients in Norway and Sweden. As Nor-way’s largest bank, DNB wants to promote sustainable value creation by integrating ethi-cal, environmental and social aspects into all business operations.

3

Foto: Yaymicro

4

DNB’s work with responsible investments – guidelines and strategies

DNB wishes to operate in an ethically responsible and honest manner. We will facilitate and con-tribute towards sustainable development, because we know that you care!

Rune Bjerke, CEO, DNB Group

DNB has adopted high ethical standards for all investments, the DNB Ethical Investment Guide-lines. The guidelines signify that DNB Asset Man-agement will exercise special care with respect to transactions and acts which represent a risk of involvement in unethical conduct, infringement of human or labour rights, corruption or harm to the environment. We are certain that this respect for people and our planet is something that our clients find very important, and the ethical stand-ard therefore apply to all investments made by DNB Asset Management, not just to specific ethi-cal funds. Also, all externally managed funds that DNB offers to clients are screened for compliance with our guidelines. The investment considerations we make are based on international conventions and norms for environment, human rights, labour rights and corruption. DNB will not invest in companies that are involved in anti-personnel landmines, cluster weapons, nuclear weapons or the production of tobacco or pornography. DNB has also developed specific guidelines for government bonds. DNB has established a Committee for Ethical In-vestments that implements and monitors the ethical guidelines. If a company has been identi-fied to be involved in controversial weapons, tobacco or pornography, as mentioned above, all holdings will be sold and the company will be excluded as a possible investment. If companies are considered to violate other parts of the guide-lines, we primarily try to influence the companies

through active ownership engagement, but we also exclude companies on these grounds. In DNB Asset Management we have products for clients who want to raise the bar further on sus-tainability. We have a family of exclusionary funds, among others DNB Global Etisk and DNB Barnefond, that in addition to complying with the Ethical Investment Guidelines exclude companies that are involved in alcohol production, weapons or gambling. DNB Renewable Energy and DNB ECO Absolute Return invest in companies that can provide solutions to the challenges of climate change. The funds invest in companies involved in solar, water and wind power, but also in com-panies that promote more efficient use of the electricity that is produced, such as more efficient power transmission and electrical batteries. We also run fossil free funds with a clear sustainabil-ity focus, DNB Grönt Norden and DNB Sverige Hållbar. In 2014, our global fossil free sustainabil-ity fund DNB Global Hållbar was launched. DNB Asset Management puts considerable re-sources into ensuring that our responsible in-vestments are of high quality, and in 2014, three analysts in Oslo and Stockholm worked on sus-tainability issues. We also use the analytic capac-ity of two external service providers who screen and rank companies on sustainability issues on a daily basis. One of these providers also helps DNB encourage companies to improve their sustaina-bility performance.

5

Active ownership engagement in DNB To ensure compliance with the Ethical Invest-ment Guidelines, DNB Asset Management acts as an active owner and regularly engages in con-structive dialogue with the companies we invest in. The objective is to influence companies to change their practices to the better. The cause for engagement is often specific concerns related to environmental or social issues or business eth-ics, but could also be a need to improve compa-nies’ general performance or processes within sustainability. Active ownership engagement is also one of the bearing principles in the UN-backed Principles for Responsible Investment, which DNB Asset Man-agement has committed to by signing the princi-ples already in 2006. Which companies DNB Asset Management chooses to engage is discussed in the Committee for Ethical Investments. Engagements are decid-ed by the severity of the suspected breach, our ownership status in the company and the likeli-hood that our engagement will have a positive impact on the situation. We also work with proactive engagement to im-prove sustainability work in our investee compa-nies. These dialogues can revolve around a specif-ic issue or to raise the general level of awareness around sustainability issues. We sometimes ap-

proach several companies within a specific indus-try to discuss an industry specific topic. During 2014 we worked mainly with two such industry specific engagements; sustainable palm oil and oil and gas fracking (best practice). In both of these industry specific engagements we have worked with investor groups in the UN PRI. The objective of running industry specific en-gagements has been to increase knowledge in-ternally in DNB about the environmental and social challenges for companies in this line of business, to get a better basis for our investment decisions and influence companies operating in these industries in a more sustainable direction. Qualitative dialogues with companies are very resource and time demanding, but in our experi-ence this type of engagement is effective and will continue to be a priority for DNB. In 2014, DNB’s sustainability analysts held 30 company meetings with the primary aim to dis-cuss different sustainability issues (see table be-low). Through an external engagement service provider, GES Investment Services, DNB has been in dialogue with 110 companies concerning sus-pected breaches of international convetions or otherwise ethically doubtful actions. These dia-logues follows a structured process with clear goals on outcome.

6

Voting DNB publishes its voting at companies’ annual general meetings in cases of large public interest or of special interest to the fund unit holders. Voting records are published on dnb.no2

.

In 2014, we voted on 67 AGMs or extraordinary shareholders meetings of which 65 was in Nor-way and two in Sweden. On 12 AGMs we voted against management on at least one item. We also served on the board nomination committee in a Swedish company.

Screening of externally managed funds

In 2014, DNB screened more than 100 externally managed funds in order to secure that all funds we offer to clients are compliant with the DNB Ethical Investment Guidelines. We were also en-gaged in dialogue with several fund management companies to discuss their practices within re-sponsible investments.

2 www.dnb.no/privat/sparing-og-investering/fond/slik-forvalter-vi.html.

Direct company dialogue in 2014

In 2014, we met with 25 companies on 30 occasions. 22 of these meetings were with Nordic companies and 8 with global companies.3

Excluded companies in 2014

Companies that are in breach DNB’s Ethical In-vestment Guidelines and show no willingness to change their practices, can be excluded from our investment universe. As of 31 December 2014, DNB had excluded 63 companies that were as-sessed to be in breach of our guidelines. 4

Breach of criterion Number of companies

Anti-personnel landmines 1

Cluster weapons 6

Nuclear weapons 11

Environment 12

Labour rights 1

Human rights 8

Pornography 2

Tobacco 22

Total 63

3 Table externally verified by PWC as part of DNB’s Corporate Social Responsibility report 2014. https://www.dnb.no/portalfront/nedlast/no/om-oss/samfunnsansvar/2014/samfunnsansvarsrapport-2014.pdf 4 Table externally verified by PWC as part of DNB’s Corporate Social Responsibility report 2014. https://www.dnb.no/portalfront/nedlast/no/om-oss/samfunnsansvar/2014/samfunnsansvarsrapport-2014.pdf

Country

Voted

#companies

Voted against

management

Norway 65 11

Sweden 2 1

Sector

Company

meetings Issues raised

Energy 4 Emissions, human rights, corruption

Materials 9 Land grabbing, children's & human rights, corruption

Industrials 5 General sustainability, human rights

Consumer 2 Sustainable palm oil production

Services 4 General sustainability, responsible gambling

Telecom 4 Taxes, corruption

Health care 1 General sustainability

Finance 1 General sustainability and anti-corruption

7

DNB engaging companies in sustainable palm oil For the last two years, DNB Asset Management has been running an industry specific engagement to im-prove sustainability in the palm oil industry. Demand for palm oil is strong, driven by its high yields and relatively low cost compared to other vegetable oils. Meanwhile, the palm oil industry poses serious environmental and social challenges with mass defor-estation in Malaysia and Indonesia at alarming levels. The clearing of high conservation value forest for the creation of palm oil plantation is strongly linked to increased carbon in the atmosphere, loss of watersheds and biodiversity and social injustice in circumstances where the rights of indigenous peoples are neither recognized nor enforced. This again may threaten long-term returns for investors and for DNB it is im-portant to ensure that the companies in which it invests understands the risks in this area and that they can demonstrate a commitment to sustainable palm oil.

Image and source: View of palm oil plantation in Cigudeg, Bogor. Wikimedia Commons

This is the backdrop for DNB joining the Sustainable Palm Oil Investor Working Group (IWG) two years ago. The IWG is a grouping of investment organisations who are members of the UN-supported Principles for Responsible Investments (PRI), and who support the development of a sustainable palm oil industry through the work of the Roundtable on Sustainable Palm Oil. As a member of the group, DNB has been active in engaging companies in the palm oil value chain to en-courage adherence to practices that are consistent with the development of a sustainable palm oil industry. Among the efforts in 2014 are meetings and consequent dialogue with a Scandinavian producer of vegeta-ble oils and fats. As a growing number of palm oil growers and traders make commitments to no deforestation, no devel-opment on peat and no exploitation of people and local communities, these commitments now seem to spill over into other commodities which experience similar issues to palm oil, such as soy. This is a positive development which is promising as well as a tribute to the efforts of the IWG and other stakeholders work-ing for a sustainable palm oil industry.

8

DNB Global Hållbar and carbon footprinting In 2014, the threat of climate change once again found itself in the spotlight of the international agenda and debate. During spring, IPCC released a series of reports summarizing the current scien-tific results. The message should be clear to eve-ryone; we have to act now or face catastrophic consequences. A new green economy and ener-gy system is needed and we have to decrease the use of oil, coal and gas by 40-70% the next 30 years. To achieve this, investment flows have to be redirected from the fossil industry towards more energy efficient use and renewable energy sources. A number of successful grass root campaigns has contributed in getting around 200 institutional investors globally to make committments to re-duce their holdings in the oil, coal and gas indus-try. Large investors have during the year an-nounced different strategies to reduce their risk towards climate change. For Nordic retail investors and smaller institu-tions, alternatives to reduce climate risk and in-vest in low carbon funds have been few. At least if you do not want to take on high financial risk and volatility investing in specific sector funds.

At DNB we want to give our clients the oppor-tunity to invest in climate friendly funds without adding a lot of sector specific risk. This is why we in April 2014 launched DNB Global Hållbar - a fossil free fund investing in equities in all sectors and all regions. The financial risk in the fund is only slightly higher than for a regular DNB global equity fund with the important add-on that your contribution to climate change is dramatically reduced. The fund does not only try to address climate change, but also other sustainability challenges: poverty, resource shortages, pollution, obesity etc. We believe that companies that can best adapt to a more sustainable world will also be best equipped to be profitable, both in the short and the long term. With the backdrop of the fall in the oil price dur-ing the second half of 2014, performance for the oil & gas free fund fund has been higher than for regular DNB Global equity funds. The fund was launched in Norway in January 2015.

Carbon footprinting In order to understand cli-mate change related risks, we quantify and measure the carbon footprint of our in-vestments in the fund. This is also a way to be transparent about climate risk to clients and to show how much CO2-emissions their investment in the fund indirectly will fi-nance. We measure the direct emis-sions and energy use from the companies we invest

in and relate this to the shares’ weight in the fund. An investment in DNB Global Hållbar would save you 70% of the emissions compared to saving in an index fund (MSCI AC World), as of 2014-12-31. Roughly speaking, investing 100 000 NOK in DNB Global Hållbar instead of a global index fund will every year save you the equivalent CO2-emissions of a roundtrip from Oslo to Bangkok. (Based on data

from www.climatecare.org/dagens)

9

1. We will incorporate ESG issues into investment analysis and decision-making processes.

2. We will be active owners and incorporate ESG issues into our ownership policies and practices.

3. We will seek appropriate disclosure on ESG issues by the entities in which we invest.

4. We will promote acceptance and implementation of the Principles within the investment industry.

5. We will work together to enhance our effectiveness in implementing the Principles.

6. We will each report on our activities and progress towards implementing the Principles.

The DNB team of responsible investment analysts

Josefine Ekros Pär Löfving Kristin Voll

Sustainable Value Creation In 2008, some of the largest institutional investors in Sweden launched the Sustainable Value Creation Initiative (Hållbart värdeskapande). Since its launch SVC has carried out three surveys targeting the 100 largest companies on the Swedish stock exchange. The companies have been asked questions on their performance within human rights, la-bour rights, environment and corruption. The latest survey conducted in 2013 focused on the integration of sustainability issues in organisations and the main drivers and obstacles. The survey was followed up with a seminar with in September 2014, where among others Marie Ehrling, Chairman of the Board in TeliaSonera addressed Telia’s work against corruption. http://www.hallbartvardeskapande.se/new/

Principles for the Responsible Investment (PRI) Initiative

The United Nations-supported Principles for Responsible Investment (PRI) Initiative is an international network of investors working together to put the six Principles for Responsi-ble Investment into practice. Its goal is to understand the implications of sustainability for investors and support signatories to incorporate these issues into their investment deci-sion making and ownership practices. DNB signed the principles as early as in 2006, the same year as the principles were launched.

Photo: yaymicro.no

DNB Asset Management ASA

P.O. Box 1600 Sentrum

Tel: 03000

Tel from abroad: +47 915 03000

www.dnb.no