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IN DEGREE PROJECT INDUSTRIAL ENGINEERING AND MANAGEMENT,SECOND CYCLE, 30 CREDITS
, STOCKHOLM SWEDEN 2020
Sustainable InvestmentsSustainability reporting from the institutional investors’ point of view
SOFIA BLOMSTRÖM
SOFIE BOKFORS
KTH ROYAL INSTITUTE OF TECHNOLOGYSCHOOL OF INDUSTRIAL ENGINEERING AND MANAGEMENT
1
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Hållbara investeringar Hållbarhetsrapportering från institutionella
investerares perspektiv
av
Sofia Blomström Sofie Bokfors
Examensarbete TRITA-ITM-EX 2020:297
KTH Industriell teknik och management
Industriell ekonomi och organisation
SE-100 44 STOCKHOLM
3
Sustainable investments Sustainability reporting from the institutional
investors’ point of view
by
Sofia Blomström Sofie Bokfors
Master of Science Thesis TRITA-ITM-EX 2020:297
KTH Industrial Engineering and Management
Industrial Management
SE-100 44 STOCKHOLM
4
Examensarbete TRITA-ITM-EX 2020:297
Hållbara investeringar Hållbarhetsrapportering från institutionella
investerares perspektiv
Sofia Blomström
Sofie Bokfors
Godkänt
2020-06-09
Examinator
Niklas Arvidsson
Handledare
Ermal Hetemi
Uppdragsgivare
Storebrand ASA
Kontaktperson
Anna Jönsson
Sammanfattning I detta examensarbete undersöks vilken typ av ESG-information som institutionella investerare eftersöker när de ska genomföra och övervaka investeringsbeslut, samt hur möjligheterna ser ut för denna information att kunna presenteras i hållbarhetsrapporter. Som underlag genomförs tolv stycken semi-strukturerade intervjuer med svenska statliga institutionella fondinnehavare inom kategorin regioner och kommuner. Vidare genomfördes fem intervjuer med sex stycken anställda på ett stort Svenskt-Norskt fondbolag. Resultaten visar att den grundläggande efterfrågan av ESG information styrs av det innehåll som investerarens organisations finansiella policy kräver, exempelvis att fondbolaget signerat PRI eller följer ramverk såsom GRI. Vidare så eftersträvas hållbarhetsmotiveringar i kvalitativ form, exempelvis kring fondens hållbarhetsstrategi, företagsinkludering samt motiveringar kring fondens faktiska hållbarhetspåverkan i portföljbolagen. Utöver dessa efterfrågas även motivering av potentiella framtida företagsexkluderingar. Denna önskan är dock svår att tillgodose då denna potentiellt skulle kunna skapa osämja mellan fondbolag och portföljbolag. En sådan motivering skulle även kunna bidra till marknadsoroligheter för det aktuella bolaget, vilket kan försämra värdet på fondinnehavet. Slutligen efterfrågas även kvantitativ data, exempelvis koldioxidutsläpp för fondportföljen. Denna kan dock inte alltid tillgodoses i rapporten då nog lång tillbakagången klimatdata saknas. En nödvändighet för att hållbarhetsrapporterna ska nyttjas ordentligt av investerarna är vidare att data presenteras liknande mellan fonder, så att en jämförelse mellan fondalternativ underlättas. Investerarna poängterar slutligen att stor del av den ESG-information de eftersträvar bara är användbar om alla fonder rapporterar på liknande sätt, samt att ESG-informationen först blir riktigt användbar då en samstämmig definition av hållbarhet införs.
Nyckelord: Hållbarhetsrapportering, icke-finansiell rapportering, ESG, institutionella investerare, finanspolicy
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Master of Science Thesis TRITA-ITM-EX 2020:297
Sustainable investments Sustainability reporting from the institutional
investors’ point of view
Sofia Blomström
Sofie Bokfors
Approved
2020-06-09
Examiner
Niklas Arvidsson
Supervisor
Ermal Hetemi
Commissioner
Storebrand ASA
Contact person
Anna Jönsson
Abstract This thesis examines the type of Environmental, Social, and Governance (ESG) information that institutional investors seek when making and monitoring investment decisions, as well as the possibilities for this information to be presented in sustainability reports. As a basis, twelve semi-structured interviews were conducted with Swedish state institutional fund holders in the category regions and municipalities. Furthermore, five interviews were conducted with six employees at a large Swedish-Norwegian fund company. The results show that the basic demand for ESG information is governed by the content that the investor's organization's financial policy requires, for example, that the fund company has signed the UN Principles for Responsible Investments (PRI) or follows frameworks such as the Global Reporting Initiative (GRI). Furthermore, sustainability motivations are sought in qualitative form, for example about the fund's sustainability strategy, corporate inclusion and justifications about the fund's actual sustainability impact in the portfolio companies. In addition, motivations for potential future business exclusions is also desired. However, this wish is difficult to cater for as it could potentially create discontent between fund companies and portfolio companies. Such a justification could also contribute to market disorders for the company in question, which could degrade the value of the fund holding. Quantitative data are also requested, such as carbon dioxide emissions for the fund portfolio. However, this cannot always be met in the report as reported data from companies are missing. Furthermore, a necessity for the sustainability reports to be used properly by the investors is that data is presented similarly between funds, so that comparisons between funds are facilitated. Finally, investors point out that much of the ESG information they seek is only useful if all funds report in a similar format, and that the ESG information only becomes truly valuable after a unanimous definition of sustainability is introduced.
Keywords: Sustainability reporting, non-financial reporting, ESG, institutional investors, financial policy
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Table of Contents
1. Introduction ............................................................................................................... 11
1.1 Problem Background.............................................................................................................. 11
1.2 Purpose and Research Questions ........................................................................................... 14
1.3 Delimitations ......................................................................................................................... 14
1.4 Expected Contribution of the study ........................................................................................ 15
2. Preliminaries .................................................................................................................. 16
2.1 Institutional Investors ............................................................................................................ 16
2.2 The Sharpe Ratio ................................................................................................................... 17
2.3 Corporate Social Responsibility .............................................................................................. 17
2.4 Funds .................................................................................................................................... 18
3. Literature review............................................................................................................. 20
3.1 History of sustainability reporting .......................................................................................... 20
3.2 Inside-out or Outside-In? ....................................................................................................... 20
3.3 Agenda 2030 and the EU Taxonomy ....................................................................................... 21
3.4 Investments and ESG ............................................................................................................. 23
3.5 Institutional Investors ............................................................................................................ 23 3.5.1 Decision-making process ............................................................................................................................. 24 3.5.2 ESG-criteria ................................................................................................................................................. 25 3.5.3 Self-transcendent or Organizational Control? .............................................................................................. 25 3.5.4 Risk aversion ............................................................................................................................................... 26
3.6 Strategies for Sustainable investing ........................................................................................ 26 3.6.1 Exclusion strategy ........................................................................................................................................ 27 3.6.2 Engagement and Voting strategy ................................................................................................................. 27 3.6.3 Impact strategy ............................................................................................................................................ 28 3.6.4 Summary...................................................................................................................................................... 28
3.7 Sustainability reporting standards .......................................................................................... 28 3.7.1 Global Reporting Initiative .......................................................................................................................... 29 3.7.2 The United Nations Principles for Responsible Investment ......................................................................... 29 3.7.3 Sustainalytics ................................................................................................................................................ 29
3.8 Different types of Sustainability Reporting ............................................................................. 30 3.8.1 Fundamental issues ...................................................................................................................................... 30 3.8.2 Descriptives in the reports ........................................................................................................................... 30 3.8.3 Ambiguity of the term sustainability ............................................................................................................. 31
4. Research Design and Methodology ................................................................................ 32
4.1 Research setting .................................................................................................................... 32 4.1.1 Case description: Storebrand ASA and SPP Funds ...................................................................................... 32
4.2 Research design ..................................................................................................................... 34 4.2.1 Exploratory Research Design ....................................................................................................................... 34 4.2.2 Case Study ................................................................................................................................................... 35 4.2.3 Literature Review ......................................................................................................................................... 36
4.3 Data Collection Method ......................................................................................................... 36 4.3.1 Interviews .................................................................................................................................................... 36
4.4 Data Analysis Method ............................................................................................................ 38
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4.4.1 Method for main semi-structured interviews ................................................................................................ 39
5. Results............................................................................................................................ 40
5.1 Literature review results ........................................................................................................ 40
5.2 Interview Results ................................................................................................................... 42 5.2.1 Institutional Investors .................................................................................................................................. 42 5.2.2 Case Company Employees ........................................................................................................................... 51
6. Discussion and analysis .................................................................................................. 53
6.1 Institutional investors’ perspective......................................................................................... 53 6.1.1 Qualitative data ............................................................................................................................................ 53 6.1.2 Lack of a standard format for sustainability reports ..................................................................................... 54 6.1.3 Difference between type of institutional investor ......................................................................................... 55 6.1.4 Lack of organizational resources .................................................................................................................. 56 6.1.5 The perspective of fund companies ............................................................................................................. 57
6.2 Reliability, validity and generalizability .................................................................................. 58
6.3 Ethics .................................................................................................................................... 59
7. Conclusion ..................................................................................................................... 60
7.1 Answering the Research Questions ........................................................................................ 60
7.2 Implications ........................................................................................................................... 61
7.3 Future Research ..................................................................................................................... 61
References ......................................................................................................................... 62
Appendix ........................................................................................................................... 69
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List of figures Figure 1: Illustration of fund cash flow
Figure 2: EU TEG on Sustainable Finance
Figure 3: Sustainability reporting cycle
Figure 4: 2020 - A five point plan towards a more sustainable financial system
Figure 5: Storebrand Sustainability Map
Figure 6: Definition of sustainability
Figure 7: Definition of a sustainable investment
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List of tables Table 1: Summary of Responsible Investment Strategies
Table 2: List of institutional investor interviewees
Table 3: List of company interviewees
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Foreword We would like to take the opportunity to thank the people who have made this master thesis possible. First of all we would like to thank the CEO of SPP Funds, Åsa Wallenberg, for believing in us and for giving us the opportunity to write at the company. We would also like to thank our supervisor Anna Jönsson for taking us under her wings, teaching us about the company and putting us in contact with institutional investors and employees at Storebrand ASA. Furthermore, we would like to show our gratitude towards our supervisor at KTH Royal Institute of Technology, Ermal Hetemi, for all the feedback and guidance throughout this process. In addition, we would like to thank all the professors and peers in our seminar group for providing valuable insights and oppositions. Finally, we would like to show our deepest gratitude to all 20 interviewees for contributing to this research and for sharing their knowledge and experiences with us.
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1. Introduction
In this section, the introduction of the thesis is presented. Initially, the area of sustainable development and the
importance of sustainable financial resource allocation is briefly discussed. This is followed by an explicit problem
description and finalized with a purpose and the thesis two research questions. Finally, the expected contribution of the
thesis is presented.
1.1 Problem Background
The world is changing. There is evidence in a vast amount of research that the Earth’s temperature
is rising as a consequence of human activity (Fitzroy & Papyrakis, 2010). The environmental changes
and the severe damage that this trend could cause have gotten increased attention over the last
decade. The worrying trends have given impetus to a tectonic shift towards renewable energy
sources, electrification, and recyclable materials – a shift that requires projects that demand extensive
and expensive processes (Arutyunov et al., 2017). Sustainable development, a term defined as
“development that meets the needs of the present without compromising the ability for future
generations to meet their needs” (World Commission on Environment and Development, 1987), is
one of the movements that this shift has begotten.
However, there are several issues beyond the top-of-mind climate change that need to be
emphasized worldwide to ensure sustainable development on Earth. The highly impactful Agenda
2030 for sustainable development includes 17 multifarious goals that aim to highlight and target
issues that ought to be prioritized globally (Walker et al., 2019). These are referred to as the
Sustainable Development Goals (SDGs). The aim of the SDGs encompasses, for instance, the
achievement of gender equality, the assurance of safe cities, and enabling access to affordable,
reliable and sustainable energy for all (Walker et al., 2019). These objectives were finalized at the
COP21 Sustainable Innovation Forum held in Paris, France, in December 2015, when the state
signatories to the United Nations Framework Convention on Climate Change (UNFCCC) agreed
with the ambition to transition the world’s unsustainable trajectory into a sustainable path (Robbins,
2016). COP21 was attended by prominent financial leaders, royalties, presidents and political
authorities, and is thus regarded as a turning point for the development of a sustainable future.
Governments and regulators are key actors in reaching the SDGs (El-Jardali et al., 2018). However,
the role of the private sector should not be underestimated, given its vast amount of financial
resources and impact on the world. To reach the SDGs, businesses across the globe require a
fundamental rethink. Trillions of USD need to be invested in mobilizing and accelerating progress in
order to reach the SDGs (Walker et al., 2019). This mobilization has to, and is, partly driven by
funds investing in the private sector. Governments and regulations can go far, but without
incorporating the owners of the companies (i.e., investors), the impediments to change are difficult
to overcome. Luckily, the trend is that a growing number of investors are pursuing sustainable
investments (Lewellyn et al., 2017). BlackRock, one of the largest investment funds in the world
with assets exceeding 5.4 trillion USD, recently published a letter highlighting the issue. In the letter
“A fundamental reshaping of finance – climate risk is investment risk”, Blackrock states that the
organization’s goal is to push towards sustainable development (Fink, 2019). This Sustainable
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development requires a change in business activity and businesses’ way of generating profits. Long-
term sustainability cannot be achieved when companies have as sole aim to derive profit (regardless
of sustainability impact). Historically, this has largely been the case in the Western world, and in line
with these businesses’ reporting has mainly consisted of financial data. As the tide toward
sustainable development has gained strength, the focus of reporting has started to change. Non-
financial information has garnered increased importance and interest by all stakeholders. Financial
assets are now not only analyzed with the standardized profit spreadsheet, discounted cash flow
analysis and P/E-numbers, but also by its environmental, social and governmental impact,
commonly referred to as ESG-rating (Economic, Social and Governance) (Aybars et al., 2019). The
ESG-issues that received most attention and consideration from institutional investors during 2018
were tobacco, gun control, climate change, conflict risk, board issues and human rights (Hill, 2020).
The invigorated emphasis on ESG related topics shows that businesses and investors are
increasingly focused and aware of the impact of their internal and external company activities
(Camilleri, 2015). For this focus and awareness to yield benefits, it is essential to be able to quantify
and accurately communicate the positive interventions to various stakeholders as well as the public.
This is done via non-financial reporting, in this study referred to as sustainability reporting. While
non-financial reporting has existed for a long time, the gravity and importance of it is a relatively
nascent phenomenon. Thus, it comes with a spate of issues that could decrease the momentum of,
and potentially jeopardize, the movement towards sustainability among investors and companies.
There are three main issues with sustainability reporting. Firstly, stakeholders receive information in
inconsistent formats, varying reporting periods and lacking necessary content, which impedes
comparability. Secondly, although guidelines and frameworks are emerging, sources vary among
different countries and sectors, which results in different standards being applied (Belkhir et. al.,
2017). Thirdly, companies are on a larger scale requested to provide multi-scale information
regarding their environmental and social performance, which they do not always have the
capabilities to do. For stakeholders to be able to give sustainability the gravity and importance it
deserves, the underlying decision-making material needs to be up to par. It is difficult to base
decisions on inconsistent data, and the optimal allocation of resources towards sustainable
development is hard to achieve. Regardless of the obstacles as mentioned earlier, sustainability
reporting is essential. Besides, transparency, accountability, legitimacy, stakeholder, and political-
economic theories all motivate it (Herzig & Schaltegger, 2011).
Increased focus on non-financial reporting comes with the corollary that companies are no longer
able to pursue their activities in isolation from the social environment. Company stakeholders unite
in their increased engagement in the social and environmental undertakings of the company (Hassel
& Semenova, 2018). The stakeholders, however, differ in terms of their beliefs of what type of
information is required to ensure that a company is emphasizing its Corporate Social Responsibility
(CSR). CSR includes several corporate activities that have a specific focus on the welfare of
stakeholder groups, e.g., society and to preserve the natural environment (Sprinkle & Maines, 2010).
In other term, CSR illustrates an organization’s way of embracing a broader social responsibility that
goes beyond the profit criteria (Khojastehpour & Johns, 2014).
The informational requisites, however, depend on investor type. Private investors tend to focus on
ad-hoc and top-of-mind sustainability topics of their own accord while investors with policies
regulating their investment decisions, e.g., institutional investors, have forced requirements upon
them to be transparent and motivate their investment decisions to external parties (McCahery et. al.,
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2016). Regardless of the investor, there has been a rise in demand for non-financial information
from companies’ shareholders and other stakeholders e.g., governmental entities. There is a higher
pressure for companies to not only managing economic, environmental and social impacts of its
organizations but also to communicate and report this in a satisfying and easily comparable manner
to its various stakeholders. This information creation should be a description of the visionary means
of the company, such as its’ future sustainability goals and targets, as well as sustainability actions
pursued by the company. Furthermore, it should include current processes and measures in place in
order to reassure the shareholders about the company’s neutral or positive contribution to the
sustainable development of society. Companies’ that lack such an approach to reporting risk losing
out on a large subset of investors. This information flow from management to stakeholders needs to
be established from a continuous mutual understanding of dialogue and reporting in line with the
requirements of the critical stakeholders (Herzig & Schaltegger, 2011).
The evolution of non-financial reporting, such as sustainability reporting, is advancing briskly, and
reporting standards are continuously refined. Organizations are forced to be more transparent in
disclosing their actions and impact on a broad set of measures to the public. Sustainability reporting
has become an essential factor for large companies to maintain their competitive advantage, attract
capital and de-risk the operations (Herzig & Schaltegger, 2011).
The importance of sustainability reporting does not only apply to individual companies. Funds that
invest in a vast amount of different securities are also under demand from investors to report their
social impact. For this to be achieved, it is necessary that fund managers compile the reporting from
all companies included in the fund portfolio. On a fund level, the difficulties of incommensurate
sustainability reporting are compounded, as the impact of companies across different sectors and
geographies is to be compiled. As a consequence of this, unsurprisingly, funds’ sustainability
reporting is varied and often lacking in depth and comparability. Funds’ have difficulties with
providing an overview of their environmental, social and governance impact, as the data from their
investments are difficult to quantify and aggregate due to the lack of consistency. Companies in
different sectors report different key impact values. The aggregation of a fund’s total impact of
assets is, therefore, associated with large challenges. For example, indicators to measure
environmental impact have proved difficult due to lack of technology. Moreover, companies find it
hard to quantify the social criteria of ESG, which makes it very difficult to compare companies’
relative performance in those areas (Adams, 2019).
To conclude, it is difficult for funds to gather enough consistent data to summarize in their reports.
Reliable data is only available from a previous short period, which makes it challenging to identify
sustainability improvements over time of a specific fund (Ailman, 2017). As institutional investors
via various funds own approximately 80-90% of equities on many stock markets (see, e.g., Ullah &
Amali, 2010 and Lewellen, 2011) on a macro level, it is paramount that they get sustainability
reporting right to drive change and achieve the SDGs. On a micro level, institutional investors and
investment funds can gain a competitive edge through accurate and comparable sustainability
reporting, as the demand for this from various pockets of capital increases. Developing sustainability
reporting is, accordingly, on the top of the agenda for most funds. Given the nascence of the topic,
however, funds and investors are struggling, and there is a sense of the blind leading the blind.
Funds do not know what investors seek, companies do not know what funds seek, and investors do
not know what funds and companies can realistically report and achieve. The will and resolution to
change exist, but the framework is, to some extent, inadequate. It is thus imperative to develop the
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framework, to better allocate the massive amounts of institutional capital and drive it towards
reaching the 17 SDGs. To do this, funds need to know what institutional investors seek in funds’
sustainability reports. They need to know what ESG information is requested an how this effectively
can be presented in the reports. Furthermore, fund companies need information regarding how
institutional investors prioritize this information in their investment decision-making process –
which summarizes up to the aim of this study.
1.2 Purpose and Research Questions
This study aims to empirically investigate how large institutional investors in Sweden use
sustainability reports from funds when evaluating potential investment decisions. More specifically,
the aim is to assess how the investors experience the different ESG indicators included in the
reports today and thus try to identify how the reports provided by the funds today differ from the
expectations of the investors. We do not wish to form a uniform framework for sustainability
reports of funds to investors. Still, the goal is first to explore what is actually lacking in the current
report and thus indicate a direction for future studies within the field. The research questions that
we aim to answer in this study can be formulated as follows:
- What ESG information is important for institutional investors when making and monitoring investments?
- What ESG information is missing or needs to be changed in the current sustainability reports?
1.3 Delimitations
We chose to focus on institutional investors since they seemingly have come further than other
investors when it comes to integrating sustainability into their investment decisions (Ailman et. al.,
2017). Furthermore, we have chosen to delimitate us to Sweden and the different regions within the
country, since we are considering the study be a too broad investigation for a master thesis to
perform a multi-country analysis. The reason for this is since Sweden is one of the leaders in the
field of sustainability reporting. This demarcation is also conducted to facilitate the interview
process.
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1.4 Expected Contribution of the study
The majority of previously reported studies within the field of sustainability emerged during the
beginning of the 21st century when non-financial reporting emerged as a phenomenon. Earlier
studies have in large scale focused on different sustainable investing methods utilizing different
terms. For example, many prior studies used Sustainable and Responsible Investment (SRI) as an
investing concept, which focuses on environmental and social factors when investing. At the same
time, ESG emphasizes how economic, social and governance factors impact investment market
performances. Studies have previously elaborated on ESG in non-financial reporting (see, e.g.,
Ailman et al., 2017). Furthermore, there has also been Sweden-oriented studies investigating
sustainability reporting in various settings and with diverse motives (Hedberg & von Malmborg,
2003, Habek & Wolniak, 2013; Rimmel & Jonäll, K, 2013; Isaksson, 2019). To our best knowledge,
however, there has been no prior academic research focusing on institutional investors ESG
preferences in sustainability reports in the context of Sweden.
In the interplay of Agenda 2030, several initiatives have emerged in the field of non-reporting as
sustainability is gaining increased attention. Thus, many large investors have experienced an
increased pressure to deliver accurate impact data. However, as the demands increase at a faster rate
than the reporting techniques, and thus portfolio managers require an indicator on which
improvements should be prioritized, this study may have important implications for such a process.
As Sweden is in the forefront of sustainability reporting and ahead of many countries regarding
sustainability achievements, the present study could also serve as a guideline for countries which
have not yet developed their reporting process to the same level as in Sweden. Taking inspirations
from Swedish political institutions may at least provide foreign institutions with a starting point
from where to emanate their organizations’ sustainability reports from and thereby mitigate the risk
for a time consuming “trial-and-error” scenario.
In conclusion, the present study could be of interest to several different stakeholders. Predominantly
it may bring value to Swedish portfolio managers, who are expected to deliver more extensive and
detailed reports to large institutional investors. It may also be of benefit for foreign portfolio
managers, who can gain inspiration regarding selections in their evolving reports. Furthermore, if
this study proves to contain valuable directives that are feasible, the institutional investors will gain
benefit as well since their desired report-ingredients are, to a greater extent, implemented in the
reports.
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2. Preliminaries
In this section, key elements and details regarding the main actors of the study are presented to provide the reader with
basic knowledge to facilitate the comprehension of the thesis. The concept of CSR in business is described to
comprehend how sustainable businesses included in funds utilize CSR in their business models. Furthermore, the
basics about funds are described in order to give a reader without economic knowledge an initial insight.
2.1 Institutional Investors
The point of view for this study is from an institutional investor perspective, with assumptions
mainly originating from interviews with municipalities and regions in Sweden. What is essential to
take into account when drawing inferences from our results is that these organizations somewhat
differs from other large institutional investors, such as banks and insurance companies.
Swedish regions are built up as autonomous units with a geographical area of responsibility.
Municipalities are included in this area, defined as political organizations with directly selected
policymakers in accordance to the political regime chosen for the municipality. These types of
institutions generally have a finance department, where they might have one or two individuals
responsible for investing the institutional assets, such as pension funds, endowments and trust
funds, etc. The appropriate investment strategies are regulated by the institutional financial policy
determined by the political regime. The assets are often long-term assets meant to provide for future
pensions for employees, finance the region and municipality activities and ensure that financial cover
exists for unexpected events. The size of the assets ranges but is usually in dimension of 100s SEKm
up to several SEKbn. Thus, these financial department possesses a large responsibility to properly
allocate these assets in funds, currencies and interest funds that can provide stable returns, and the
aim is not necessarily to maximize profits.
Furthermore, sustainability is a widely discussed topic permeating Swedish governmental
institutions. Thus all regions and municipalities have requirements beyond risk and return, although
the scope varies, in their financial policy to take into account ESG factors in their investment
decisions. The evaluation process and monitoring of these factors are provided to the institutions in
different forms depending on fund company and preferences of the policymakers and the head of
finance with the sustainability reports being one provider of ESG information. The sustainability
reports are issued to all major stakeholders of funds either every 3rd, 6th or 12th month.
There are several reasons explaining why governmental institutions demand more within
sustainability. For example, governmental institutions demand more within sustainability since they
get examined and tend to have more external responsibility to include sustainability reporting in
their annual reports. Furthermore, regions and municipalities are managing their assets as public
documents, which also makes it possible for everyone to examine everything they do and invest in,
which further facilitates our process of getting access to data. A changing point towards more
sustainable investments for regions and municipalities in Sweden was in 2015, after COP21, when
Sveriges Radio P4 Västerbotten examined all investments in 117 municipalities and 15 regions and
published that investments in fossil fuels were made (Antonsson, 2015). Even though nearly all of
17
them had sustainability policies describing how they were limiting their climate impact, it became a
scandal that quickly made them relocate their assets. However, as mentioned above the level of
integrating sustainability in investment policies amongst the different regions and municipalities still
vary due to different political reasons and resource availability.
2.2 The Sharpe Ratio
The conjunction between return and risk has been one of the most large-scale investigated topics in
financial economics (Theodossiou & Savva, 2015). The Sharpe ratio was introduced in 1966 as a
means to measure the performance of mutual funds. The concept is proposed as a reward-to-
variability ratio. In simplified terms, the actual idea of the ratio is a description of the excess return
received for the extra volatility endured when holding a more risk-exposed asset. While it either
explicitly or implicitly is assumed that historical returns can generate at least some predictability for
future returns (Sharpe, 1994). While the Sharpe ratio contains properties that might help facilitate
the evaluation of historical risk-adjusted performance, it does not imply a lower-volatility fund for
investors seeking a measurement that indicates a justified risk-return ratio.
However, this conventional manner of assessing an investment opportunity is becoming less
computable. Risk is emerging in several aspects and from multiple unpredictable dimensions, partly
from traditional financial analysis aspects such as market conditions but also from new emerging
threats such as environmental changes. Nonetheless, conventional assessments of investment
opportunities are essential to bear in mind when identifying preferences of institutional investors
since the ratio between risk and return is still considered to be deeply rooted in the investment
valuation (Theodossiou & Savva, 2015).
2.3 Corporate Social Responsibility
Companies are putting increased focus on improving their CSR. To engage in CSR matters is
described as adjusting a company’s business model to enhance society and the environment instead
of harming them, yet still aligned with the original company course (Chen, 2020). The following
quotation can on society level illustrate the potential outcome of these interventions:
“CSR can contribute towards achieving the strategic goal of becoming, the most competitive and dynamic knowledge-
based economy (referring to the EU) in the world, capable of sustainable economic growth with more and better jobs
and greater social cohesion” (Eurofund, 2003).
Previously, CSR has been offered as a voluntary complement to otherwise traditionally strict
regulation by convincing corporations to both approaches internal and global matters. In this way,
CSR has helped to contribute to public sustainability goals. However, more is required to reach the
SDGs - mainly in terms of financial measures that could help facilitate businesses transition process
(EU, 2008). The conversion creates difficulties for industries with longstanding investment horizons.
These companies innovating sustainable solutions require funding to expand into successful projects
simultaneously as investors require motivation in terms of returns. Previously, a combination of
these two has been necessary for green technology to grow and fill out the gap in energy supply as
fossil fuels are being phased out (Arutyunov et al., 2017). However, there has been an increased
18
emphasis on other benefits derived from responsible investing, exceeding those of economic sorts,
such as social and governance advantages (Riedl & Smeets, 2017).
Concerning the information stated above, the issue of profitability difference between conventional
funds compared to sustainable investment funds has been questioned. Sustainable investments can
be defined according to the European Sustainable Investment Forum as “SRIs is a long-term oriented
investment approach that integrates ESG factors in the research, analysis, and selection process of securities within an
investment portfolio.” (Eurosif, 2018) Hence, sustainable investment processes are processes that aim to
engage in projects with activities generating benefits for the environment as well as providing
positive social and causal governance effects. Since sustainable projects often show long-term
positive effects rather than short-term, the investments generate similar patterns in profitability.
Thus, sustainable funds generally realize long-term profit rather than focusing on short-term returns
(van der Zwan et al., 2019).
The previous outlook was that costs for running a firm sustainable would supposedly decrease
profits and destroy shareholder value (Humphrey, 2012). However, this is averted by both earlier
and more recent research, showing that there is no significant evidence that sustainability funds
sacrifice financial performance when being compared to generic ones (Mervelsemper et al., 2013).
Besides, the above was further confirmed when comparing socially responsible funds to big
trendsetters such as S&P 500 (Bello, 2005). In more recent years, the attitude implying distrust
against sustainable investing seems to have diminished (Humphrey, 2012). Financial market
participants integrate increasing emphasis on the ESG-criteria in their investment decisions (Busch
et al., 2015). Furthermore, the Financial Times reported a double increase in capital invested in
sustainable funds during 2019 compared to 2018, corresponding to an amount of 120 billion euros
(Flood, 2020).
Accordingly, the general trend is that sustainable investing strategies are increasingly influencing
portfolio management among institutional investors (van der Zwan et al., 2019).
Impact studies have demonstrated that asset flows generated from funds can have large effects on
the environment. (Poudyal et al., 2018) There is also a general trend showing that investors care
more and more about sustainability than what might be perceived. Previous research shows that
sustainability performance is gaining increased attention when investors evaluate whether or not to
invest in a business. There is also, as mentioned above, an increased correlation between ESG
performance and perceived long-term value creation among investors, which explains the increased
attention the subject has received over the last decade (Unruh et al., 2016). Another explanation is
that there is an advanced understanding that, for organizations to thrive and survive, they must
commit to making decisions and pursuing actions that will serve society’s’ interest (Adams, 2019).
2.4 Funds
A fund is a collection of various securities forming a portfolio that can be co-owned by individuals,
groups, or organizations. A fund can include multiple types of interest-based securities or equity
securities, such as different ratios of stocks, currencies, obligations, and other securities. There exist
several different categories of funds, but the most common are mutual funds, hedge funds, pension
funds, and trust funds. The value of the units within a fund is determined by dividing the prevailing
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market value of the assets by the total number of co-owners, which equals the Net Asset Value
(NAV). If the value in the fund’s assets increases, the NAV will increase as well (Chen, 2020).
Mutual funds are open-ended investment funds. The fund has a supply of assets gathered from
different investors invested in all sorts of securities, such as money market instruments, bonds, and
stocks. Mutual funds create opportunities for individuals and small-scale organizations to invest in
the composition of a diverse portfolio that is being monitored by money managers with expertise
within the area (Hayes, 2020).
Pension funds are ensuring an income for people who retire, and its equity is raised by collecting a
percentage of individuals’ monthly salary. Due to its long-term purpose, pension funds are often
associated with less risk but thus also generate slower asset expansion. To lower the risks even
further, pension funds often perform a gradual relocation from the stock market to the fixed income
market (Whiteside, 2019).
Trust funds are usually created to build wealth for the coming generations. It is a certain kind of
legal entity that ensures assets for an organization, group, or person. A grantor establishes the trust
fund and, after that, donates real estate, stocks, cash, private businesses, bonds, or similar to the
fund. A trustee is responsible for the trust fund and then, later on, gives access to the beneficiary,
who then owns the assets and can manage them with the rules set by the grantor (Oshio, 2004).
Funds are often rated in regard to how they deliver returns in comparison to relevant fund indexes.
This creates incentives for fund managers to allocate fund assets towards well-performing
companies, since these managers are not rarely rewarded based on the financial performance of the
fund (Sandberg, 2008). The responsibility of how the fund’s assets are being invested and the
implementation of a strategy belongs to the fund manager. The investors must carefully consider the
investment strategy and values that the fund manager has before they invest in the fund. The return
rate of funds is mostly based on market forces. Therefore, it is highly essential for the fund manager
to be aware of tendencies and continuously investigate economic changes on both a micro- and
macro level, including global topics such as sustainability, to achieve successful investments (Chen,
2019).
Figure 1. Illustration of fund cash flow. The figure also shows the professional relationship between institutional investors and the portfolio manager.
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3. Literature review
In this section, we present the literature and theory that has relevance for the thesis. First, the introduction of the
history of sustainability reporting is presented. This part is followed by nascent phenomena and current happenings
within the field of sustainability reporting, as well as including background regarding institutional investors and their
investment decision-making criteria. Lastly, the strategies for sustainable investing is presented, along with the
problematization of the field.
3.1 History of sustainability reporting
This increased attention and concern regarding business sustainability performance has led to several
companies starting to actively manage and account for the emissions that are by-products of their
business activities by creating reports that summarize, e.g., CO2-impact (Adams, 2019). These
reports are, after that, collected and reviewed by evaluating investors. This can be done either
directly between the investor and company or through a multi-channel stakeholder activity where
funds and other investment institutions summarize their portfolio emissions before they transfer it
to their current or potential investors. The trend towards non-financial reporting, or sustainability
reporting, begun in the 1990s and has continued to develop during the 21st century. Sustainability
reporting can be described as corporate performance descriptive being reported with a basis in the
company’s emphasis on the integration of ESG issues in their business activities (Adams, 2019). In
other words, these reports do evaluate not only a business or organization’s financial performance
but also its performance regarding broader social and environmental perspectives. For example,
philanthropy and employee health, gender equality, ethics, and ethnic diversification is becoming
parameters to take into account to evaluate business accomplishments (Kolk, 2003). Besides, the
company reports can include an attempt to display the quantified carbon footprint that is caused by
the company tasks (Penz & Polsa, 2018).
3.2 Inside-out or Outside-In?
Higher demands are being put on organizations to display their corporate activities, mainly from a
sustainability point of view. As of today, a lot of the content provided in sustainability reports are
qualitative descriptions of value statements and future prospects, aiming at both external and
internal beneficiaries. Although useful, these documents lack both credibility and veracity. To
establish substantive corporate sustainability reports, credible information needs to be provided
both through quantitative measures of ESG impact, qualitative explanations of corporate activities
as well as sequent resulting progress in financial terms. Concludingly, an organization's sustainability
accounting process is highly linked to the reporting process, and the performance management
merging these two can be executed in two ways (Schaltegger et. al., 2006). The first approach is to
utilize an inside-out perspective. This perspective is characterized by a reporting procedure created as
an outcome of an organizational strategy. For this process, all relevant aspects of environmental,
social and governance factors are accounted for since these might affect the company performance.
Thus, strategically relevant indicators that might affect the business constitutes the fundamental
basis of the reports. In simplified terms, the company activities and profile compose the structure of
the report with corporate-relevant key performance indicators (KPI), i.e., tonnes CO2/SEKm
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revenue. Thus, the company may benchmark its current accomplishments towards its previous
achievements in the field of sustainability.
For the outside-in perspective, a different outlook is exercised. For this approach, the accountability
of a company’s’ sustainability achievements is driven by reporting formats and guidelines.
Organizational sustainability priorities are formed out of external requirements arrayed in reporting
guidelines, sustainability index and rankings as well as assessment schemes - all consulted to
recognize sustainability profiling and achievements. This external expectation forces companies to
publicly display their engagement in sustainability matters, thus driving corporates to improvement.
What can be concluded is that both the inside-out and outside-in perspective must be considered for
companies with ambitions towards improving their sustainability (Schaltegger et. al., 2006).
3.3 Agenda 2030 and the EU Taxonomy
The UNFCCC is the primary intergovernmental organization for targeting the issue of climate
change. As mentioned in the introduction, several SDGs are set up to be reached by 2030, focusing
on climate change issues, for example, affordable and clean energy for all, a shift towards sustainable
cities, and preservation of life below water. There is also a large focus on keeping the earth
temperature increase at a minimum, due to the potential large causal effects a too large climb on the
temperature scale would have on environmental and ecological settings. The goal that has been set is
to keep the increase in average earth temperature to preferred 1.5 degrees Celsius increase, or
absolute maximum 2 degrees Celsius increase, regarding pre-industrial temperature levels (United
Nations, 2015).
Applying principles, indicators, and other assessment tools in line with those of a circular economy
are increasingly recommended as a convenient solution to meet the goals to achieve sustainable
development (Saidani et al., 2019). This is not only tools designed to facilitate and manage
industrials, manufacturers, and other producers, but it is also tools meant to engage in a
reorientation for financial assets. This redistribution is intended to shift the capital flows towards
investments that will generate sustainable and inclusive growth (European Commission, 2018). In
2018, the development of an EU classification system for sustainable activities was created, also
referred to as the EU Taxonomy. Part of this taxonomy is an action plan on sustainable finance
established in July 2018. The EU Taxonomy, as it is described by the Technical Expert Group
(TEG) is as follows:
“The EU Taxonomy is a tool to help investors, companies, issuers, and project promoters navigate the transition to a
low-carbon, resilient, and resource-efficient economy”
(EU TEG on Sustainable Finance, 2020).
One purpose of the EU Taxonomy is to develop a framework to facilitate sustainable investments.
Within this framework, TEG is requested to develop recommendations for technical screening
criteria for those economic activities that have extensive beneficiation with regards to climate change
mitigation.
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The final agreement came in December 2019, where the European Parliament and the Council went
to a political agreement to proceed with the EU Taxonomy. On the 9th of March 2020, the TEG
published its concluding report on the EU Taxonomy, including updated screening criteria for
climate change mitigation and adaptation activities, as well as an updated methodology section to
support these criteria. For example, TEG has developed Excel tools to help users of the taxonomy
to easier survey their activities. Further development of the EU Taxonomy will take place in autumn
2020, while the initial investor- and company sustainability reports using the EU Taxonomy
framework are due at the start of the year 2022 (European Commission, 2020).
The taxonomy creates accomplishment thresholds, also referred to above as technical screening
criteria, for economic activities to help companies, issuers, and project promoters to get access to
green financing to improve their environmental performance. The criteria are supposed to
contribute to at least one of six environmental objectives: climate change mitigation, climate change
adaptation, sustainable and protection of water and marine resources, a transition to a circular
economy, pollution prevention control and protection and restoration of biodiversity and
ecosystems. Followingly, while one objective is focused upon, the other five should not be harmed.
Finally, the economic activities must meet the minimum safeguards of the Organization for
Economic Cooperation and Development (OECD) Guidelines on Multinational Enterprises and the
UN Guiding Principles on Business and Human Rights.
Figure 2. (EU TEG on Sustainable Finance, 2020).
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3.4 Investments and ESG
Sustainable investments are a widely discussed concept focusing on the link between ESG factors
and stock performance (Ammann et al., 2018). The perception is that investment today is based
upon more criteria than financial returns and investment decision are often more complex including
ethical and societal assessments (Statman, 2008). The concept of SRI takes into account the
potential causal effects of an investment in a company by screening the companies according to
their CSR. Such screening can be done but is not delimited to assessing how the company runs its
business with regards to ESG matters (Pokorna, 2017). SRI investing can be explained by factors
beyond sustainability, such as social signalling and social preferences amongst institutional investors
(Wallis & Klein, 2014). To invest sustainable is, therefore, not solely an action of profit-seeking
measures, but a multi-attribute function with benefits creating utility corresponding to those of
financial returns (Riedl & Smeets, 2017).
Eurosif defines three different types of assessment strategies to evaluate an investment, according to
ESG. First, there is a non-systematic deliverance of ESG related information made available to
analysts and portfolio managers. Second, there is a systematic consideration and, partly, the inclusion
of ESG research into financial evaluations and ratings of investment opportunities. Finally, the third
strategy turns recommendations into regulations, including mandatory investment constraints that
originate from extensive ESG analysis (Eurosif, 2014).
A lot of conventional managers are increasingly integrating responsible investing in their investment
procedures using one of the three strategies mentioned above, thus utilizing the benefits of analyzing
their investments per the ESG criteria. A large contribution has previously been that ESG helps to
manage risk as well as alerting red flags (van Duurenet al.., 2015). Recently, however, ESG criteria
are increasingly used to distinguish funds as either being sustainable investment prospects or being
unsustainable (Ammann et al., 2018).
3.5 Institutional Investors
There is evidence showing that institutional investors are increasingly emphasizing CSR related
matters in their investment decisions, and the format of corporate ownership structure increasingly
entails for investors to influence firm activities (Kim et al., 2018). As stated above, CSR activities are
associated with ameliorated competitive advantages for a firm. This is because CSR can be related
to, e.g., the increased reputation of the business (Herzig & Schaltegger, 2011). Reputation can be
described from various types of disciplines, and thus derive different meanings. Accountancy sees
reputation as an intangible asset, i.e., an asset that is a mere feeling or perception, and one that
should receive financial attention. From a sociology perspective, on the other hand, reputation is
perceived as an accumulated evaluation of firm performance and relative to norms and expectations
(Fombrun & van Riel, 1997). Concludingly, since institutional investors are often acting as major
stakeholders, the firm’s CSR level increases, leading to that the corporate ownership might have a
positive alteration of the firm’s performance (Alshammari, 2015).
Below, it is discussed what literature states about the incentives for institutional investors to involve
CSR matters in their investment decisions.
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3.5.1 Decision-making process
The task analysis when investors are screening new investment prospects is narrowed down to (1)
receiving proper information relevant for the decision-making and (2) evaluating this information
(Bouwman et al., 1987). For (2), institutional investors can be identified as having certain
preferences for corporate policies when it comes to screening investment prospects (Wang & Wie,
2019). Traditional crucial criteria for following through an investment is a reasonable weight
between risk and expected return, according to Sharpe (1994). However, the incorporation of ESG
factors in financial risk assessment is gaining increased attention across established investors (Ziolo
et al., 2020), and it can furthermore clearly be stated that institutional investors can act as a
significant stakeholder in regard to investments and societal impact (Tao et al., 2020).
3.5.1.1 Managing reputation and the social aspect
One main factor that motivates ESG investing among institutional investors is the implications that
the investment decision entails. Research proves that employing a political-cultural approach to
markets can increase emphasis on including ESG factors in investment decisions (Arjaliés, 2010).
Furthermore, the shift towards institutional investors increasingly engaging in CSR matters is
accompanied by the incorporation of social attributes in the investment criteria. It can be argued
that institutional investors are affected by two major drivers in their investment decisions; economic
incentives and social norms. Social norms can imply an altruistic valuation of the social benefits of
the investor aligning with the CSR activities of the investment object. Mutual funds that exclusively
market themselves as prioritizing CSR attributes in their portfolio are specifically considering this
since these funds market themselves as, e.g., avoiding controversial products or sectors, making
them an intriguing object for institutional investors valuing social indicators (Nofsinger, 2019).
Research also shows that institutional investors may avoid investing in objectives illustrating
environmental and social weaknesses merely to minimize their exposure to idiosyncratic event risks,
thus avoiding potential public scandals (Nofsinger, 2019). This implies that valuing social norms also
has a financial motive because sustainability efforts can enhance economic value, while scandals
have the potential to destroy it (Petersen & Vredenburg, 2009).
3.5.1.2 Politics and Financial Policy
The case of regions and municipalities is that their assets need to be preserved in order to ensure
long-term solidity and security for government institutions, hospitals, and other functions necessary
for the community to operate appropriately. A financial policy exists to regulate the process, i.e., to
ensure safe, controlled investments of governmental assets. The financial policy of the institutional
investors varies between different regions and municipalities. Still, the main parts included are
regulations regarding tolerated risk-levels, expected return-levels, and, until recently, fundamental
sustainability criteria necessary for the investment prospects. “Economic growth shall be sustainable, which
means that it is to be achieved without unacceptable effects on the environment, the climate, or people’s health”
(Regeringskansliet, 2011). Studies made on the investment decision process of institutional investors
show that they perceive high CSR not only as a competitive advantage of a firm but also as a
mechanism through which they can mitigate the risk of their investments (Alshammari, 2015).
Furthermore, many investors argue that ESG practices, including corporate diversity, prioritizing
25
human rights in production supply chains, and climate change, can also affect returns (Starks et al.,
2017). Finally, ESG information is a helpful tool when comparing and evaluating the standard of
management in portfolio companies, such as mutual funds (Ailman et al., 2017).
3.5.2 ESG-criteria
Studies show that institutional investors with a long-term investment horizon prioritize ESG-firms
to a larger extent than short-term investors (Starks et al. 2017). Extant literature suggests a positive
relationship between ESG attributes such as improved employee satisfaction, curbing of
environmental pollution and development of ethical producer-supplier standards, and increased firm
performance as well as reduced litigation risk - but in the long run. Shareholders with investment
expectations might prioritize differently - encouraging managers to augment short-term earnings
even though this might negatively affect long-term value (Starks et al., 2017). The view on ESG
projects might also emanate from an asymmetric information situation, where the investors do not
possess enough insight into the depth of ESG activities (Froot et al., 1992). Concludingly,
investment horizon is a crucial aspect to take into consideration when evaluating institutional
investors view of ESG (Eccles et al., 2018).
Firms implementing ESG strategies are often associated with cost in the short-term, and thus these
firms sacrifice these returns for a long-term profit (Starks et. al., 2017). This does, however, affect
the stakeholder's earnings. Thus, municipalities and regions that, in some aspects, require continuous
cash flow to finance their activities cannot solely place their assets in ESG projects, which are not
expected to provide any short-term returns. To spread risk and to receive continuous dividends,
these organizations are therefore implied to diversify their portfolio. This dispersion strategy for
investing varies between organizations but is often defined and limited by the financial policy
(Regeringskansliet, 2011).
3.5.3 Self-transcendent or Organizational Control?
Previous research identified that investment decision-makers can fluctuate significantly when valuing
environmentally friendly investment options. In a professional context, these individuals may
illustrate larger ambitions towards prioritizing sustainability than they do privately (Nilsson & Biel,
2008). As for institutional investors, their motives to be socially responsible is partly formed by their
self-transcendent values to be environmentally friendly. Institutional investors are in fact, compared
to private investors and investment institutions, believed to be influenced to some extent by their
own sustainability beliefs when considering investment opportunities. These investors are also
greatly influenced by the belief that ESG investment opportunities is supplied by lower financial
risk. Institutional investors are also controlled by their internal regulations to allocate resources to
risk-minimizing and return-maximizing objects. This is due to the fact that they possess both a
financial and non-financial fiduciary duty towards their organization. Investments made in the
organization name must coincide with organizational beliefs and values. Furthermore, investment
decisions must be motivated towards management which entails decreased opportunity for
individual institutional investors to act on their own accord (Jansson & Biel, 2011).
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3.5.4 Risk aversion
Multiple sources of risks are a fact of any investment. These risks can correlate with each other or be
seperated. Even though the risks might be statistically independent, bearing one risk diminishes the
likelihood that investors wish to bear additional risks (Kimball, 1993). Previous studies have shown
that more elaborated ESG descriptions is positively related to increased risk aversion. In other
words, investors that wishes to mitigate risk to a higher extent prefer to be presented with a larger
amount of ESG information. It has also been demonstrated that an investment behavior which
might implicate higher risk largely reduces the likelihood for the investment to be performed. Even
though an investment behaviour has the prospect of generating large benefits with only slight
increased risk, the prospect of the investment being performed heavily decreases (Przychodzen et
al., 2016).
Risk attitudes depends on several factors e.g., psychological, gender, and age (Shulman & Cauffman,
2014). Individuals are thus more or less sensitive to risk depending on factors such as behavior of
people in the same social- or professional group. There is also differences in risk aversion depending
on country, where European countries are considered to be more risk averse than e.g., the US
(Weber et al., 2002). Furthermore, there is evidence of a herding behavior amongst institutional
investors when implementing SRI strategies. The herding behavior implicates that investors prefer
to choose the sustainable alternatives that other investors have already chosen. By choosing what
others choose, the behavior is perceived to be defendable (Guyatt, 2006).
3.6 Strategies for Sustainable investing
Following the integration of ESG components in screening, asset managers also increasingly
consider ESG factors into the conventional financial analysis and investment decision process
(Scholtens, 2014). This is one of several different investment strategies for companies pursuing an
CSR integrated portfolio. All strategies include some sort of screening process when the company is
being evaluated through a sustainability lens.
Investing in businesses that reach up to or excels the criteria of the contemporaneous denomination
of sustainability is one strategy emanating from a positive screening process (Kolstad, 2015).
However, due to the lack of a solid ambit of how sustainability should be defined, there is no
guarantee that these investments are considered benign infinitely (Moore et al., 2017). For a fund
wishing to invest sustainably, there are several other strategies with specific purposes valuable to
consider. Examples of these are the facilitation of business ESG projects, also called engagement
investing in conversion companies. Furthermore, there is an exclusion-strategy of companies not
considered to reach up to the current sustainability requirements. Finally, investors can also choose
to impact invest. Investors then seek to invest in companies that creates solutions aiming to facilitate
sustainable development, purported as solution companies. All these three are discussed at the end of
this section. Furthermore, funds can choose to assign parts of the portfolio to address these issues,
or they can act as thematic investment funds, which are focusing on single or multiple sustainability
issues. These funds are solely devoting their assets, for example, clean-tech, renewable energy,
lifestyle- or healthy ageing, etc. (Scholtens, 2014).
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Following the thematic investment strategy is the approach referred to as a Best-in-class investment
selection, where the investor follows approaches loading to the best-performing investment prospects
in a specific field following ESG criteria is included in the portfolio. The minimum requirement
levels for investing in a particular investment candidate is varying between funds, but an example of
an ESG fund criteria is to limitate its investment universe to screening only the top 30 percent
regarding sustainability rating for a group of companies in a particular industry. Finally, funds can
also decide to emanate their draft from a norm-based screening. This is an approach that integrates the
investment objectives context and its compliance with international guidelines. In other words,
objectives are assessed only if they reach standards established by international sustainability
policymakers such as OECD, UN, etc., (Scholtens, 2014).
3.6.1 Exclusion strategy
Investigation of the impact of investments suggests that for a long-term investment horizon,
institutional investors choose an exclusion-strategy when investing (Cox, 2004). The exclusion
process is the result of a negative screening process, where companies that do not reach the social-
or environmental criteria of the investment universe are ostracized (Kolstad, 2015). Funds that
desire to invest more socially responsible for contributing to a better society often use exclusion as a
method. This entails that funds exclude investments in companies whose main organizational
activities pertain to areas such as tobacco, pornography, alcohol, gambling and weapons (Scholtens,
2014). In recent years, divestment of objectives containing significant fossil fuel exposure is being
added to the exclusion list (Trinks et al. 2018). While the fossil fuel criterium has gained
insignificance, it is still a nascent trend, and not as entrenched and deeply rooted as the criteria of
alcohol etc., mentioned above. Social responsibility was the main focus of the exclusion method
early on, but there is now a trend towards including environmental responsibility as well (Camilleri,
2017). In the timeframe of the years 1990-1998, it was shown that mutual funds that excluded to
invest in companies that obtain more than two percent of their sales from military weapons, alcohol,
tobacco and gambling services or products performed better and achieved greater returns than
conventional mutual funds. This proved that the method of excluding companies that are not
considered ethical also has financial benefits (Statman, 2000).
3.6.2 Engagement and Voting strategy
In recent years, there has been a shift in responsible investing towards exercising engagement
strategies, where investors engage in companies in the process of a sustainability transition (Kolstad,
2015). The strategy explicitly aims to influence the habits of business management or to augment
organizational disclosure (Scholtens, 2014). The engagement strategy entails funds investing in
companies that are not currently considered sustainable but with ambitions for change. Either the
fund can invest in whole companies undergoing sustainability transitions, or invest in specific
projects that are contributing to the companies’ transition towards becoming a more sustainable
organization. Engagement strategies can also include investing in prospects lacking sustainability
ambitions but where the fund itself gains a company share large enough to allow themself to
introduce ESG factors. Owning a large number of shares in business enables the fund to approach
company management and addressing perceived issues in its practices, with a successful engagement
transforming irresponsible activities to responsible ones (Kolstad, 2015).
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3.6.3 Impact strategy
Solution companies are providing technology and innovations to contribute to a more promising
world for future generations, and it is believed that an increasing scale of companies will build their
business models on their offering of solutions to solve the world’s environmental problems (Hart,
2015). Technological- and managerial innovations are creating substitutes for many nonrenewable
sources, such as optical fiber replacing the copper wire, preventing pollution, such as issuing global
standards for environmental management systems and enable development of cleaner technology
(Hart, 2015). Emerging companies within related areas require fundings to be able to develop the
aimed solutions. Issues are surfaced questioning short-term profitability for objectives with long-
term investment horizons, such as the electrification industry (Levihn et al., 2011). Investments in
solution companies are, therefore, in more extraordinary occurrence, a strategy of shareholders
pursuing a long-term investment horizon (Starks et al., 2017).
3.6.4 Summary
Best-in-class Strategy This strategy emanates from choosing the best performing asset on the
market in terms of ESG criteria. I.e., in a defined investment universe, the investment prospects with highest ESG score are weighted against each other.
Engagement and Voting Strategy A strategy entailing that the owners take a position in the company board, or acquire enough shares to influence voting processes of the company board. The goal with this strategy is to influence the behavior of the company.
ESG Integration Strategy Asset managers include ESG risks and opportunities into the financial analysis process. This focuses on how the ESG issues may impact company financials, and risks and opportunities are explicitly used in e.g., modelling cash flows financials (i.e., have an impact on the estimated numbers).
Exclusion Strategy Certain types of investments prospects are excluded from the investment selection process. This can be certain sectors, companies, or countries. Criteria may include e.g., alcohol, tobacco, and weapon exposure.
Impact Investing Strategy A strategy with the aim to invest in companies and funds that have the intention to create a better world, e.g., by generating social and environmental benefits with their organizational activities. The investments are commonly project-specific.
Norms-based Screening Strategy Potential investments are screened to evaluate their compliance with international ESG norms and standards. This includes e.g., the Principles of Responsible Investment framework as it is defined by the United Nations (UN).
Sustainability-themed Strategy Investments are made in specific themed investment opportunities related to sustainability, e.g., thematic funds, which focuses on a specific (or several) areas related to ESG, such as a circular economy or resource efficiency.
Table 1. Summary of Responsible Investment Strategies.
3.7 Sustainability reporting standards
Lack of standardized corporate data makes it hard to compare between different funds. There are,
however, several incentives to try to standardize ESG corporate data but as of today there is no
standardized approach (Ailman et al., 2017). However, there are some available guidelines for fund
managers to follow.
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3.7.1 Global Reporting Initiative
Among all sustainability reporting initiatives, the Global Reporting Initiative (GRI) is the most
established and widely used format worldwide. The GRI has been referred to as a global reference
and sometimes even acting as a regulatory framework for non-financial reports (del Mar Alonso-
Almeida et. al., 2013). GRI reporting is considered to be useful when trying to establish an enhanced
company image or legitimate behaviors (del Mar Alonso-Almeida et. al., 2013), as well as improving
transparency and establishing a relevant indication of corporate sustainability performance (Belkhir
et. al., 2017). Initially, the GRI reporting framework emerged as a result of requests demanding more
broadly applicable and trustworthy set of information standards for corporates globally (del Mar
Alonso-Almeida et. al., 2013). As described by Marimon et. al., (2012) “... its objective is to provide
information guidelines to present a clearer vision of the human and ecological impacts of an enterprise. In addition, one
of GRI’s main functions is to enable shareholders and other stakeholders to make well-informed decisions regarding
investments and the purchasing of goods and services (..)”. However, as of today, GRI does not manage to
capture every pertinent aspect of sustainability development measure. It is, however, under
continuous revision and yearly adaptations according to the stakeholder and market demands are
made in order to strengthen further its applicability for building trust and transparency amongst
reporting-conductors (del Mar Alonso-Almeida et. al., 2013).
3.7.2 The United Nations Principles for Responsible Investment
The UN Principles for Responsible Investments (PRI) represents the largest worldwide reporting
project targeting sustainable investments, also identified as the most used tool to incorporate ESG in
investment activities. The tool was developed in order to facilitate for investors to report on their
activities. The purpose with the principles is for investors to receive continuous critique, to be able
to benchmark performance against industry competitors, to establish stronger internal ties and to
build ESG capacity (UN PRI, 2020). It is also considered to improve stakeholder value of the fund
and signatories are especially appreciated amongst institutional investors (Majoch et. al., 2016). Thus,
PRI can be considered as a quality seal, associated with increased capital fund flows to funds even
though signatories do not necessarily increase their ESG performance when applying the principles
(Kim & Yoon, 2020). Concludingly, in practice, PRI implies increased corporate legitimacy and
normative values as associated with additional benefits (Majoch et. al., 2016).
3.7.3 Sustainalytics
Sustainalytics represents a leading researcher firm in the field of corporate governance and ESG,
providing research, ratings and analytics data to support investors worldwide trying to elucidate the
implementation of responsible investment methods (Morrow & Vezér, 2020). Thus, along with
MSCI, Sustainalytics illustrate the world’s largest data providers containing environmental ratings.
These data suppliers do not, however, measure actual environmental impact. Instead, they function
as a signalling tool, integrating multiple indicators of how well corporates are handling
environmental associated risks and opportunities (Serafeim et. al., 2020). The data itself consists of
raw data points that covers a variety of ESG themes, including current management structure,
controversial event indicator (e.g., if a company is observed for being involved in corruption) along
with indicators providing data regarding the historical corporate situation (Sustainalytics, 2020).
Mutual fund companies and other large investors utilize Sustainalytics to collect data which
30
describes their different assets of individual ESG impact, e.g., CO2 emissions, which are all
subsequently summarized to represent total fund impact (A. Jönsson, Interview, February 3, 2020).
3.8 Different types of Sustainability Reporting
There are limited standardized sustainability corporate data, and there is no best practice on how to
report, which means that fund managers face a challenge to report sustainability at the fund level (A.
Jönsson, Interview, February 3, 2020).
3.8.1 Fundamental issues
There are currently several ways to measure investment portfolio sustainability and, thus, many
reporting frameworks for explaining ESG factors in business. The common purpose is similar
between these reports - to disclose information relevant for investors to use as basis materials when
making investment decisions. However, the design of the material included varies on several levels,
and different fund companies use different data providers, which makes it hard for investors to
compare across funds. Furthermore, the time-horizon of existing data is often insufficient to
establish credible estimations of ESG factors (A. Jönsson, interview, February 3, 2020). To
understand why a sustainability report is designed the way it is, one needs to know the purpose of
the report. For a fund manager, this might be to aggregate the quantity of CO2 saved by investing a
certain amount into the fund. At the same time, a corporate energy firm needs to divulge an
extensive summary of its energy and climate data (Jia, 2020). Concludingly, emerging data is
essential, but to successfully integrate it as a factor considered by institutional investors during their
investment decision-making processes, the ESG data needs to be summarized into a standardized,
comparable format (Ailman et al., 2017).
3.8.2 Descriptives in the reports
There are also different types of semi-standardized descriptives, indexes, and ratings to include and
use in sustainability reports, which allows for some sort of comparison measure.
Some of the more traditional indexes have, however, been transformed and redesigned into more
modern equity indexes with the purpose to mirror the risk and reward profiles of the conventional
index as well as highlighting and favouring companies with positive ESG attributes. For investors
looking to evaluate green energy, there are several benchmarks from which to proceed with their
analysis varying from the S&P Global Clean Energy Index to NASDAQ Clean Edge Green Energy
Index. Another example is the MSCI ACWI Sustainable Impact Index, which requires maintaining
minimum ESG standards and generating at least 50 percent of its revenue from a sustainable impact
category such as energy efficiency, pollution prevention, or nutritious products, among others (Hill,
2020).
A commonly used rating is the Morningstar Sustainability rating, which was launched in March 2016
with the purpose to create easier access to sustainability information (Ammann et al., 2018). The
Morningstar Sustainability rating illustrates how sustainable a mutual fund, index, or other managed
product is with one to five globes, where one represents the lowest score and five the best score.The
rating is a historical holdings-based calculation using the Sustainalytics ESG Risk Rating
(Morningstar, 2020). The Morningstar-rating emanates from using companies' ESG rating and
31
comparing it to similar businesses within the same industry. The score itself is a reflection of how
companies are handling ESG objectives based on financial performance, preparedness, as well as
disclosure (Ziolo et al., 2020).
3.8.3 Ambiguity of the term sustainability
Sustainability assurance is the endeavoured outcome of all sustainability reports and ratings
mentioned above - a guarantee and a confirmation that a business is sustainable. However, findings
indicate that even though sustainability assurance is exerted, through, e.g., the mentioned
benchmarks, it fails to deliver on its sought after purpose. This is mainly because there is
inconsistency amongst the methods and KPIs used to illustrate sustainability performance, which
results in default in the credibility of the reports. Furthermore, sustainability reports tend to yield
only limited information regarding sustainability performance and are often limited to internal
crowds (Lewellyn et al., 2017).
The term sustainability is, however, fugacious and continuously in movement. Over the years, the
denomination has become ampler, resulting in it being more parable to the concept of CSR, even
though these two are not synonymous (Choi & Gray, 2008). Thus, the implication of the term
sustainability is strongly dependent on the setting where it is applied, for example, if it is used in a
social, economic, or ecological perspective. Sustainability can be defined broadly or steeply, but the
definition must explicitly specify the context in which it is presented. For example, different types of
societies may view sustainability differently. A company may be described as being sustainable today.
Still, with the continuous development of new regulations to incentivize companies to go green for
the society to reach the SDGs, the company might not be defined sustainable tomorrow. A more
clear and specified definition and understanding of the concept of sustainability would facilitate the
understanding of global sustainable development processes and assist in choosing appropriate
indicators when establishing sustainability policy making frameworks (Moore et al., 2017).
Figure 3. Sustainability reporting cycle.
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4. Research Design and Methodology
This chapter aims to provide details regarding which methodology is used for the construction of the thesis, covering
research setting and design, literature review, data collection and data analysis.
4.1 Research setting
4.1.1 Case description: Storebrand ASA and SPP Funds
This thesis is conducting interviews at the financial services company Storebrand ASA. Storebrand
was founded in the year 1767 in Denmark but is now running as a Norwegian company with a basis
in Oslo. Several investors own Storebrand with the largest owner possesses three percent of the
company. Recently the Swedish investment company EQT bought two and a half percent of
Storebrands shares, and therefore they are now included in the board. Storebrand ASA has a couple
of subsidiaries within different businesses, with the central part being insurance. The subsidiaries in
Storebrand are Storebrand Life Insurance, SPP Insurance, Storebrand Health Insurance, Storebrand
Bank and SPP Pension and Insurance, and Storebrand Asset Management, with the last being the
focus for this study (A. Jönsson, interview, February 3, 2020). The purpose with Storebrand Asset
Management is to manage and invest the capital that is being effectively collected from the insurance
premium to achieve a high return rate of the money. Storebrand Asset Management consist of
approximately 200 employees that manage the assets in four different businesses: Storebrand
Luxemburg, SPP Real Estate (Storebrand International Private Equity, Cubera, and Storebrand
Property), SKAGEN Funds, and SPP Funds. The thesis will mainly focus on the subsidiary SPP
Funds, which are profiling themselves as a company that combines profitability and sustainability in
its fund offering. The subsidiary is in for front of sustainability in the fund industry in Sweden (A.
Jönsson, Interview, February 3, 2020). Therefore, SPP Funds wants to facilitate investors to
recognize and compare sustainability between fund companies.
It is fairly common for insurance companies to outsource the investments, although Storebrand has
its subsidiary for this matter. The importance of insurance is to be aware of that the company has
long-term value creation liabilities to its stakeholders. Thus, assets need to be managed so that risk is
maintained at a safe level. When Storebrand realized that they are performing well with managing
and investing the assets, they created products in the form of funds that are invested in by
customers outside the business as well as civil individuals. Funds are diversified portfolios, including
different ratios of stocks, currencies, obligations, and other securities. Funds, including a larger
amount of stocks, tend to generate higher risks but generally also infers higher returns, and the
opposite. Therefore, depending on the purpose of the investor, there is vast importance in choosing
a fund which suits the investors objective. This applies whether it concerns higher returns correlated
to larger risks, or lower risk associated with long-term value creation but lower short-term profits (A.
Jönsson, interview, February 3, 2020). 850 SEKbn is currently being invested by Storebrand ASA
with the internal customers Storebrand and SPP, representing 63 percent of that capital (A. Jönsson,
Interview, February 3, 2020).
33
The rules and requirements of how fund companies handle communication with their clients have
been tightened. The communication needs to be reported and documented, and therefore, the legal
department of Storebrand Asset Management has been expanded to ensure that the rules and
requirements are being fulfilled. One of the main methods for fund managers today to exchange
information with clients is through communication, such as emails or phone calls. Furthermore, the
requirements are strict regarding how fund companies are classifying clients based on experience and
competence. The matter is affecting the management in all fund companies in the Nordics. The use
of regulatory means restrains fund companies from pursuing unethical activity. In order to avoid
such activities, the outlook for the next years is that the rules will be tightened even further, and
Storebrand will, therefore, continue to expand their legal department. These regulatory forces
indicate the importance of improved and solid reporting, of all kinds, to reduce the communication
between fund managers and clients and instead provide what is needed in reports (A. Jönsson,
Interview, February 3, 2020).
Storebrand has a specific department that is responsible for institutional clients, which is divided
into two different teams. One of the teams deals with institutional clients such as foundations,
municipalities, companies, and insurance companies, among some, and that department is in focus
for this study. Institutional investors prioritize integrating sustainability in their investment decisions
to a larger extent than other investors. They are also influential co-investors since they invest large
capital in the funds. Thus, their opinion is highly valued (A. Jönsson, Interview, February 3, 2020).
Figure 4. 2020 - A five point plan towards a more sustainable financial system (Storebrand Sustainability team, 2020).
There exist certain rules within the fund regulating which types of investments that are allowed, e.g.,
defined by maximum levels of risks or minimum levels of sustainability. Fund managers are also
responsible for making sure that all clients receive their monthly reports of the funds financial
development. These types of reports are, naturally, easier to conduct for smaller companies with
fewer funds, while it is a more complex process for larger companies. Storebrand is currently trying
to improve their reports drastically from a sustainability perspective and has an ambitious aim of
becoming a role model of sustainability reporting during the upcoming years (A. Jönsson, Interview,
February 3, 2020).
34
Figure 5. Storebrand Sustainability Map (Storebrand ESG-team, 2020).
Storebrand has 250 years of development and sustainability. The company was very early with
embracing sustainability and are profiling themselves as being a sustainable organization. A
sustainability team was established in the year 1995, and in 2005 a sustainability standard was set
with a joint platform that regards the trustee’s assets. The main focus at Storebrand from 1995 up
until five years ago was exclusion. Some factors considered harmful to our society and thus unethical
to invest in were, for example, weapons, alcohol, pornography, gambling and tobacco. Storebrand
also started to exclude fossil fuels from their funds already during the years of 2014-2015.
Furthermore, part of their investment strategy is to actively try to allocate companies that can prove
valid working methods with sustainability integrated throughout the whole organization. This
concept, also called social impact investing, started in 2015 and launched funds such as the Global
Solutions Fund, Green Bond Fund, and Plus Fund Family, which created a starting point for
earmarking assets to certain green projects or sustainability areas (A. Jönsson, interview, February 3,
2020).
Sustainability reporting is an integral part of the SRI-process, as it is supposed to represent the basis
for whether a company is operating sustainable or not. This reporting is, however, varied between
different companies and industries, and it is hard to get an overlook over what the definition of a
sustainable company stands for (A. Jönsson, interview, February 3, 2020).
4.2 Research design
This thesis investigates the area of sustainability reporting and especially the possibilities that exist
within the field of sustainability reporting from funds towards large Swedish institutional investors.
For this subject, we have chosen to conduct our thesis with an exploratory research design.
Furthermore, we have chosen to apply the methodology of a case study to execute the analysis.
4.2.1 Exploratory Research Design
Exploratory research design is appropriate since we are aiming to gather insight in the topic of
sustainability reporting and gain knowledge of the current reporting process. Furthermore, the
exploratory research design is suitable since this thesis aims to investigate new dimensions of a
35
problem (Saunders et al., 2019). In this case, it is the gap between the wishes of institutional
investors and the deliverables from the funds regarding what ESG information that is included in
sustainability reports (Blomkvist & Hallin, 2015). This choice is motivated by the need to explore
the field, to build theory, and to investigate the current literature regarding what institutional
investors demand from sustainability reporting and compare it to empirical evidence from the
interviews (Eisenhardt & Graebner, 2007). Additionally, an exploratory research design is the most
suitable approach since the term sustainability is continually changing. Reasons for this fluctuation
originate in emerging regulatory demands, e.g., the EU Taxonomy, changing the industry, thus also
impacting the content of the sustainability reports (Brown, 2006).
The thesis is of deductive nature since we are carrying out qualitative interviews that aim to bring
depth into our findings in the literature and the subject that we are investigating (Blomkvist &
Hallin, 2015). Furthermore, it is reasonable to believe that empirics not covered in the literature will
be brought up during the interviews. The thesis can thus also be considered as having an inductive
research manner. Overall, our study can, therefore, be contemplated as both inductive and deductive
in nature (Blomkvist & Hallin, 2015).
4.2.2 Case Study
The case selected for this empirical study is SPP Funds, which is a large mutual fund based in
Sweden (SPP, 2020). We have chosen SPP Funds organization due to its being on the front edge of
sustainable funds in Sweden and thus an organization with both internal interest in the field as well
as deep inter-organizational influences. The reason for using a case study is that the approach is
considered most suitable as tools in the early, censorious phases of emerging management theory
when relationships between critical variables are investigated. Furthermore, a case study is
appropriate since we are conducting an internal as well as an external analysis. Both analyses are
conducted in close interaction. The inner one is executed focusing on report content deciders, i.e.
management at SPP Funds, and the external one is focusing on the institutional investors, who are
the end-users of the reports (Gibbert et al., 2008).
We have specifically chosen to perform a qualitative, single case study (Rowley, 2002). The reason
for this is that we want to achieve internal consistency and also to be able to gain deeper insight into
the empirical nature of the decision-making processes (Gioia et al., 2013). We are aware of the fact
that our single case study might delimit the ability to generalize findings to other settings (Yin, 2012).
However, we do not perceive this as an obstruction, but rather an opportunity to gain deeper insight
into the complexity of our specific case and provide contextual knowledge that can, if desired, be
introduced to surroundings similar to those of other funds (Miles & Huberman, 1994)
The case study is performed via conducting interviews with employees of Storebrand ASA who are
involved in the attributes and processes of sustainability reporting. Furthermore, we are interviewing
some of the institutional investors who invest in different funds of SPP Funds and other fund
companies, to evaluate their view of the non-financial reports they receive today. The argument for
choosing to perform interviews is to gain deeper insight and understanding of attitudes towards
sustainability reports. These interviews were conducted until we reached the point of theoretical
saturation, i.e. when there were no new discoveries (Walker, 2012).
36
4.2.3 Literature Review
For this thesis, a literature review is carried out to establish if (and in this case, what) frameworks
and guidelines exist within the area of sustainability reporting. The review cover both previous views
of sustainability reporting and briefly how the concept has developed over time. The literature is
searched for in Google Scholar. Furthermore, the literature review aims to investigate how
institutional investors prioritize when analyzing investments, i.e. how they view sustainability, CSR
and ESG attributes. Finally, the thesis seeks to dig deeper into sustainable investment strategies and
how these are illustrated in the reporting process from a literature perspective, as well as providing
information of what limitations exists within the current reporting framework.
4.3 Data Collection Method
4.3.1 Interviews
4.3.1.1 Pilot interviews
We use two preliminary pilot interviews with members of the targeted institutional investor
interview group to investigate how the interview questions are interpreted and if this focus is in line
with what we expect to gain from the main interviews (Rowley, 2012). Furthermore, pilot interviews
allow us to explore the institutional investors’ perspective, thus gaining knowledge from the target
group of the thesis and taking into consideration the interviewee’s point of view when evaluating
how relevant our approach is (Gioia et al., 2013). These pilot interviews help us to pay extraordinary
attention to our initial interview protocol and to ensure that our questions associate well with the
subject of sustainability reporting and that the questions do not contain misleading elements, such as
“Wouldn’t you say that..?” (Gioia et al., 2013). The pilot interview questions are displayed in the
Appendix.
4.3.1.2 Main semi-structured interviews
Our methodology for the master theses is to use a qualitative method in the form of semi-structured
interviews. This is a method where qualitative data is collected through a predetermined strategy but
with open-ended formulated questions, opening up the possibility for a less restrained interview-
structure (Ayres, 2008). We are doing semi-structured interviews since it gives us guidelines for the
interviews. At the same time, we still have the opportunity to ask further questions and discuss if
something we find essential comes up during the interview. Semi-structured interviews are not very
formal in structure, which in this case could be positive since we obtain a more real-time and
retrospective account by individuals dealing daily with the subject of the interviews and thus
possesses a genuine theoretical interest (Gioia et al., 2013). Semi-structured interviews open up for
natural conversations, which can lead to more findings. Thus, semi-structured interviews are one of
the most commonly used qualitative methods (Longhurst, 2003).
The interviewee contact details were provided to us by our supervisor at Storebrand ASA, Anna
Jönsson. This applies to both the institutional investors interviews and the interviews with the
employees at Storebrand. Regarding the institutional investors, they all have holdings in SPP.
37
After analysis of the pilot interviews, motivated in the Appendix, we decided to ask four
introductory interview questions followed by thirteen main semi-structured interview questions,
displayed in Appendix.
4.3.1.3 Interviews with institutional investors
Interviewee Date Time Duration: 30 minutes
Organization Title Capital Amount
Capital type
1 24/3 10 AM Region Analyst 12 SEKbn Two liquidity portfolios (1 short, 1 long) + 1 endowment/trust fund portfolio
2 24/3 11 AM Municipality Financial Economist (Debt & Asset management)
150-200 + 50 SEKm
150-200 SEKm in pension funds + 50 SEKm in endowment/trust fund portfolio
3 24/3 1 PM Region Finance Risk Manager
600 SEKm Endowment/trust fund portfolios
4 25/3 10 AM Region Finance Chief (CIO)
5.3 SEKbn Pension fund
5 30/3 2 PM Municipality Analyst 4 SEKbn Endowment/trust fund portfolio + Pension funds
6 3/4 1 PM Municipality Finance Strategist
1.5 SEKbn Long-term placement (pension funds and other liquidities for a time-horizon of 5 years or more)
7 3/4 3 PM Public management, Municipality
Finance chief (CIO)
9 SEKbn 4 portfolios: Long-term asset management (7 SEKbn) Pension fund portfolio Portfolio for group liquidity Minor bond portfolio
8 7/4 1.30 PM Region Finance chief (CIO)
13 SEKbn Long-term placements
9 8/4 4 PM Municipality Finance Controller
40 + 200 SEKm
Endowment/trust fund portfolio
10 15/4 10 AM Municipality Finance Chief (CIO)
1 SEKbn (800 + 200 SEKm)
Pension funds, excess liquidity (200 SEKm, short term) Small endowment/trust fund portfolio (50 SEKm)
11 17/4 1 PM Municipality Finance Chief (CIO)
1.8 SEKbn derivate portfolio, 0.25 SEKbn investments
Interest derivatives (6bn), excess liquidity Excess liquidity, interest derivatives (6bn)
12 17/4 2 PM Municipality Financial Economist
2.9 SEKbn Assets are being invested to meet future needs (no specific aim)
Table 2. List of institutional investor interviewees.
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4.3.1.4 Interviews with Storebrand ASA
Table 3. List of company interviewees.
4.4 Data Analysis Method
In broad terms, analyzing interview data includes the phases of data reduction, data reorganization,
and data representation (Roulston, 2013).
Initially, the interviews were transcribed to enable an easier overview since the interviews contained
substantive content with much regulatory acquis relevant to the following analysis (Kowal &
O’Connell, 2014). We decided to include different types of utterances, such as “eh” and “uhm,”
since it can’t be assumed that words spoken are transparent. A long “eh” might imply uncertainness,
reluctance, or disagreement, which might be relevant to include in the final analysis. Words can be
described as shadowed and smoky, reflected by the speaker’s previous experiences, perceptions,
beliefs, and opinions. Thus, the approach to designing and conducting the interviews vary, and there
is no interview analysis method considered to be vastly superior to the rest (Roulston, 2013). There
Interviewee Date Time Duration: 60 minutes
Title Subject of the interview
Anna Jönsson 3/2 10 AM Hartered Financial Analyst and Director for institutional investors at Storebrand Asset Management
Storebrand operation, the sustainability history of Storebrand and SPP Funds, the subsidiaries, the strategy of the company, how funds work, the importance of institutional investors and why their opinion highly matter, the portfolio managers’ role and, SRI
Robert Vicsai 16/4 2 PM Sustainability Specialist at Storebrand ESG, EU Taxonomy and how it will impact sustainability reporting and the reports. To understand how the sustainability team operates, risk minimization, secrecy, sustainability analysis, institutional investors and sustainability issues, and delimitations in asset management.
Åsa Wallenberg
22/4 11.AM CEO of SPP Funds Vision, challenges, goals, sustainability strategy, EU Taxonomy, sustainability reporting, impact, ESG, institutional investors and how SPP Funds has worked with sustainability over the past five years.
Laura Jaugelyte & Jonas Ueland
23/4 2 PM Product Owner and Business Developer at Storebrand Asset Management
GUI:t Storebrand Connect (where all customers log in to see monthly reports and follow their portfolio in real-time), technical aspects of reporting, and challenges with creating uniformed reporting.
Anna Östman 6/5 9.30 AM Marketing Director at SPP Funds How sustainability reports from SPP Funds are created and produced, regulations, what needs to be reported in order to fulfill demands from the sustainability profile. Methodology for the development of the fund’s carbon footprint.
39
is further no general approach to judge the quality of the actual interpretation and analysis process
itself (Freeman et al., 2007).
All qualitative research involves some extent of interpretation of texts, or in other words, qualitative
inquiry consists of some level of hermeneutics. In this study, we used utterances and hermeneutics
during interviews by asking follow-up questions if any sign of hesitance or uncertainty appeared.
E.g., if the interviewee answered with a long pause as a sign of doubtfulness, we would ask questions
that would evolve around their previous answers. In this way, we tried to ensure that their honest,
full opinion were spoken. Hermeneutics is defined as the understanding of the understanding itself,
or the perceived rendering of a setting (Wernet, 2014). The level of influence that hermeneutics can
have on qualitative inquiries fluctuates in impact. Still, the concept has a basis in biases created from
the interview participants experiences, the conceptualization of the holistic in the research process,
and the level of re-conceptualization of the analysis as a cross-culture interchange (Freeman, 2008).
We examined all the questions and analyzed how they were perceived and if they showed relevance
concerning our research questions. During the analysis, we applied a simplified version of the Gioia-
method, where we focused on the questions of the semi-structured interviews considered relevant to
answer our research questions, and thus the aim was to capture the critical elements of the interview
(Gioia et al., 2013; Langley et al., 1995).
Our initial aim was to interview around 15 institutional investors and to develop around eight open-
ended semi-structured interview questions. We believed that 15 interviews would help us reach
saturation within the chosen qualitative method. This amount was later modified to 12 main
interviews since a definite trend could be identified, thus confirming that a saturation point was
reached. Regarding questions, the amount was extended after the pilot interviews to 13 questions.
We felt that the additional questions were necessary in order to gain deeper understanding regarding
the interviewees decision-making process, and their organizational context.
4.4.1 Method for main semi-structured interviews
The coding approach was later modified for analysis of our main interviews, where we applied a
thorough 1st and 2nd order analysis also in line with the Gioia-method. In the first order, we
analyzed similarities and differences amongst a larger number of categories that emerged from the
interviews with relevance to our findings in the literature and our research questions. This process
narrowed the number of categories down, leading us into a 2nd order analysis where we tried to see
if the different themes revealed concepts or trends that could help us to describe the phenomena
sought after to observe (Gioia et al., 2013). Following this process, this helped us create 2nd order
aggregated dimensions, and we considered that we reached theoretical saturation after interview
number 12 (Glaser & Strauss, 1967). Finally, we concluded that we had basis enough to construct a
data analysis, which is presented in the results where we illustrate how we advanced from raw data
to commonly discussed themes and terms (Gioia et al., 2013). In parallel to this process, background
information and discussions during the interviews, which could be considered irrelevant concerning
our research questions were excluded from the analysis.
40
5. Results
In this section the empirical results of the study are presented. The section commences with results from the literature
review and proceeds with the results from the interviews.
5.1 Literature review results
There is a general increase that ESG investing strategies are increasingly incorporated in portfolio
management of institutional investors, with the consequence of increased emphasis being put on
companies to report its sustainability. The increased focus on company CSR effectuates that the
existing reporting standards are continuously being polished. Engaging in CSR matters have
previously been described as adjusting a company’s business model to prioritize more social and
environmental issues. Followingly, as sustainability is becoming a broader term, including factors
beyond societal and environmental criteria, CSR is increasingly integrated within it. Additionally,
increased ESG performance is considered to correlate with long-term value creation and thus yet
another explanation of the increased emphasis on corporate sustainability achievements. Since the
term sustainability is increasingly associated CSR, and ESG criterias are increasingly used to
distinguish investment opportunities as either sustainable or unsustainable, all these three are
correlated. Still, for the achievements in any of these three areas to be acknowledged, information
must be presented in a perspicuous way.
One way to transfer sustainability information from, e.g., fund companies to the investors is to
provide it in the format of sustainability reports. To elaborate on what is stated above, sustainability
reporting is essential due to several reasons. One, it provides accountability and legitimacy for the
one who is reporting. Furthermore, it is a crucial factor for large companies to maintain competitive
advantage as well as minimize the risk factor of corporate operations. For fund companies, which
consists of various companies, interest funds, currencies, etc., it is also of vital importance to be able
to merge all asset sustainability information to gain a fund overview.
Institutional investors, who invest in, e.g., funds, are required to be transparent and motivate their
investment decisions from a sustainability perspective. This also applies as a prerequisite for
municipalities and regions, since they report back sustainability information to politics. All their
investment decisions are presented as public documents, and the assets are often state funds, which
implies that these investors have more external responsibility to include sustainability in their
investment motivations.
Institutional investors are considered to be driven by both economic factors and social norms when
evaluating a new investment opportunity. The social norm criteria are considered being related to
the social benefits aligning with CSR engagement of the investment objective. Institutional investors
value high CSR, through which they can mitigate the risk of their investments. High CSR is also
perceived to correlate strongly to competitive advantage, and thus investing in CSR strong objectives
can be assumed to correlate the economic motive. Valuing social norms can also be associated with
financial aspects when considering public scandals since these can cause severe reputation damages,
with economic deprivations as a consequence.
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Mutual funds can align themselves with the social norm criteria of institutional investors and fulfil
the inquiries by marketing themselves as having high ESG scores, which in turn can provide the
fund with a competitive advantage. There are several ways to display ambitions in the field of ESG,
and followingly a vast amount of different ESG information desired by institutional investors when
evaluating investment opportunities. Firstly, there are several different sustainable investing
strategies that portfolio managers can engage in e.g., positive screening, exclusion or engagement
and voting. Secondly, institutional investors value portfolio managers to be signatories of, e.g., PRI
or utilizers of GRI, which both can be perceived as quality seals of the investment objective. Thirdly
and concludingly, provision of ESG descriptives accompanied by index benchmarks and fund
ratings, such as Morningstar, is essential for institutional investors to evaluate and compare the
sustainability of investment prospects.
However, to achieve useful ESG, descriptives is perceived as a great challenge by portfolio
managers. As of today, companies find it hard to quantify, e.g., the social criteria of ESG, thus
aggravating comparison of relative performance in those areas. Furthermore, reliable data is only
available from a short previous time period. To establish a credible estimation of relevant ESG
performance, most portfolio managers require previous information from a multi-year time-horizon.
Thus, this entails difficulties when trying to identify sustainability improvements over time.
Followingly, there are no best practices of how to report sustainability. Simultaneously, for
institutional investors to successfully integrate ESG as a factor in their investment decision-making
process, it is required for data to be presented in standardized formats.
As of today, research shows that even though sustainability assurance is provided, e.g., through
benchmarks such as indexes or ratings, it fails to fully deliver affirmation of portfolio sustainability,
The inconsistency, i.e. lack standardization, regarding methods and KPIs used to describe
sustainability performance results in a lack of credibility of the reports. Furthermore, the term
sustainability is fluctuating. The definition of sustainability is highly dependent on the setting in
which it is presented, i.e. individuals may perceive it differently from one another. Furthermore, the
lack of a uniform sustainability definition along with differentiated investment strategies amongst
portfolio managers makes it hard to gain an easy overview of portfolio sustainability.
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5.2 Interview Results
5.2.1 Institutional Investors
Under each question there is a table showing how frequent the subject is discussed by the
interviewees. The purpose of this is to illustrate what areas that are of most importance, i.e., how
many times a certain opinion appears compared to another. In this way, an observer can identify
which subjects to put most emphasis on. The tables constitute the final step of the coding process.
Describe the process when you are evaluating a new fund investment opportunity?
Category
Response rate
Financial policy
10/12
Return/revenue
7/12
Morningstar/frameworks/external screening
4/12
Exclusion Strategy
4/12
Market analysis and index
4/12
Sustainability focus
4/12
Risk diversification
3/12
Sustainability, risk and return
3/12
Suggestions from fund managers
3/12
Fund lifetime
2/12
International declarations
1/12
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Some argue that sustainability, risk and return are all associated with each other and that it is an
equal priority between the three since sustainability factors can also be considered as risk factors.
Apart from including sustainability risks, risk diversification in the investors’ portfolio can be made
by analysing the fund-lifetime, where investors require a minimum fund existence of two-three
years. Market analysis and index are also being used to evaluate and compare the funds and
examine how to best complement the current portfolio. Some interviewees search for index funds
associated with low fees that follows the market development. This is due to the fact that investor
consider it important with an index-near investment strategy for long-term investment horizons.
Index investing’s facilitates the financial analysis for following year since future holdings are easier to
approximate.
All municipalities and regions in Sweden have an individual financial policy. Most of our
interviewees emanate from these policies when they are evaluating a new fund investment
opportunity. It is a requirement that the policies must be fulfilled. The policy often includes a
placement policy which accounts for environmental issues, ethics, working conditions etc. This
exclusion strategy forbids the investor to invest in certain companies. This includes companies that
practice in the fields of tobacco, weapons, alcohol, pornography, gambling games and, until recently,
fossil fuels. Furthermore, the financial policy facilitates for the finance department to index invest
and assess risk as well as expected revenue. It is politicians that decide how much assets are allowed
to be placed in Swedish, global funds, emerging markets, or, e.g., interest funds and are, therefore,
the ones that are authorizing the financial policies. The financial policy narrows down the selection
of funds regarding sustainability, risk, and revenue. Financial advisors after that, choose which funds
to invest in. The starting point of deciding whether a fund is sustainable or not is, therefore, the
policy. Yearly follow-ups are made to ensure that the investments are in line with the financial
policy.
More than half of the interviewees consider good return/revenue as a basis in investment
decisions. It is essential to find opportunities that match the minimum requirements for both risks
and return. Some argue that sustainability, risk, and return are all associated with each other and that
it is an equal priority of the three since sustainability factors can also be considered as risk factors.
The sustainability focus of fund companies and fund managers is gaining increased importance
during the evaluation of investment opportunities. If two funds are homogenous in every aspect
apart from sustainability, then the fund manager with a more developed sustainability approach
permeating the fund is prioritized. Some interviewees are following guidelines to enhance
investments that focus on responsible activities. Morningstar/frameworks/external screening
are, in some cases, used to ensure the level of sustainability, alongside ensuring that the fund is
following international declarations such as the UN PRI.
44
What is sustainability according to you?
The definition of sustainability varies among the institutional investors, shown in the figure above.
How do you describe a sustainable investment?
Same goes for the definition of a sustainable investment.
45
Category
Response rate
Engagement and Voting strategy
5/12
ESG
4/12
Exclusion Strategy
3/12
Impact strategy
3/12
Financial sustainability
3/12
International declarations
2/12
Positive Screening Strategy
2/12
Sustainability definition
1/12
Almost half of the interviewees described a sustainable investment process per the engagement
and voting strategy, investing in conversion companies (i.e. companies intended to commit to
sustainability changes). Two of the interviewees convey that the ideal situation is when companies
already exhibit performing sustainable activities (although they must not necessarily be CO2 neutral).
These are then selected as a result of a positive screening process. Some argue that exclusion
strategy equals sustainable investments, but with the downside that this strategy aggravates
investments in conversion companies. Others argue that sustainable investing is best performed
through impact strategies, i.e. in solutions companies designing innovations for decreasing the
worlds CO2 emissions and propose that such sustainable investments will enhance improvements to
achieve a long-term utilization of resources.
Institutional investors also argue that ESG factors describes sustainable investments that create
long-term functionality without harming others or the earth resources. A sustainable investment was
also described as one that has signed and is following international declarations and pursuing its
targets. This includes UN declarations, environmental goals that aim to reach the SDGs.
Concludingly, one of the interviewees, argues that it is impossible to describe a sustainable
investment since the sustainability definition is not determined. As of today, many investors view
the term differently, and these definitions do not always align with the definition of the funds.
What are you currently using to decide if a fund is sustainable? How do you choose between
investing in two different sustainable funds?
Category
Response rate
Screening (internal and/or external)
12/12
Reassurance from fund managers
10/12
Returns and the market
3/12
Analyses of the fund
3/12
Surveys
2/12
46
All interviewees are currently using screening (internal and/or external)- processes to ensure
fund sustainability, although the screening process varies among the respondents. Some investors
evaluate a fund holding almost solely based on how fund managers are conducting their exclusion
strategy, i.e. explicitly excluding fossil fuels. At the same time, some utilize Morningstar Direct rating
to ESG-screen companies. Some funds use CO2-screening, both within the portfolio and when
evaluating new investment opportunities. A few of the respondents are also performing a screening
to identify thematic and sustainability trajectory of funds.
What can be concluded is that most interviewees highly prioritize funds achieving an actual
sustainability impact, i.e. resulting in improved corporate equality or decreased CO2 effects. Almost
all of the investors use reassurance from fund managers to decide if the fund is sustainable. This
information is obtained through continuous dialogues, meetings and interviews. From an
institutional investors’ perspective, it is of great importance that the fund managers are available to
motivate their choice of strategies, policies and priorities, etc., ensuring that the manager’s ambitions
are in line with the investor’s sustainability point of view. Interviewees argue that if two funds are
equal in every way apart from sustainability, the fund manager with a more developed sustainability
approach is prioritized. Word-of-mouth also matters since governmental institutions are closely
linked. Surveys are, in some cases, a part of the screening process. In these cases, the investors send
out yearly polls to fund managers as a complement to sustainability reports or continuous dialogue.
The questions vary, but the interviewees especially seek information explaining how funds are
following up their investments from a sustainability perspective if fund managers have participated
in any recent sustainability event, fund ambitions etc.
Analyses of the fund are to some extent, being done without performing a screening. The method
for this is to review the information that is received from funds and to evaluate the fund investment
strategies and placement guidelines. Returns and the market are also being analyzed by continuous
market coverage. This process strives to evaluate funds’ historical returns and comparing these to
other funds profiling themselves with similar sustainability alignment. Furthermore, the respondents
value word-of-mouth, i.e. which funds other investors choose to invest in.
What kind of information do you require in order to ensure that a fund is sustainable?
Category
Response rate
Fund reassurance
10/12
Exclusion Strategy
7/12
PRI
4/12
Screening
4/12
Financial policy
3/12
Almost all of the interviewees require fund reassurance to ensure that a fund is sustainable.
Dialogue with the fund manager is crucial before entering a fund to ensure that the investment
aligns with the requirements of the financial policy, as well as the investor's requirements and
wishes regarding sustainability. Furthermore, motivations of investment strategies regarding how
47
and why companies are included in the fund, what has actually been the effects of the funds’
sustainability work and the companies’ sustainability progress within the fund are highly sought
after. To have the fund company as signatories of PRI is a requirement for some investors since the
PRI is considered as a quality seal for funds ambitions regarding sustainability.
Apart from dialogue and PRI, there is other information provided from screening-processes
required by regions and municipalities, i.e. CO2-screening that relates to tonnes of CO2 regarding
company revenue (SEKm). Furthermore, some of the interviewees expect funds to contain a high
sustainability index rating even to be considered as an investment prospect.
Another non-negotiable aspect is the financial policies restrictions regarding activities in the fields of
alcohol, tobacco, pornography, weapons, gambling games etc.
How would you describe the current sustainability reports from the funds that you are receiving today?
Category
Response rate
Achievements from Engagement and Voting Strategy
7/12
Varied
5/12
Do not read them
4/12
Positive
3/12
Size of report
2/12
Selling purpose
1/12
The general opinion of the sustainability reports varies; some reports received by investors today is
of positive character. The sustainability reports include both motivations and strategy descriptions,
and in some cases, also examples of achievements from Engagement and Voting Strategies.
These ranges in scope, but for instance include descriptions of outputs from fund participation in
yearly corporate reconciliations and explanations of sustainability efforts made by the fund
company. Sometimes, the reports also include descriptions of how the fund company works towards
reaching the SDGs. The content is, however, very varied in sort. Different reports look very
different, which was generally perceived as negative. The size of the report also appeared as an
issue in the conversation. Interviewees described that “all information could be summarized in one page”,
and almost all participants identified that even though the reports had generally improved during
recent years, there is still ample room for further refinements. Due to them being so time-
consuming to read, four interviewees sensed not to have resources enough, and thus do not read
them thoroughly. Some also believed the reports to have an obvious selling purpose, thus
diminishing their trustworthiness.
Interviewees also brought up the need for quantitative measures, to facilitate the reading process and
also to enable a more manageable understanding regarding if a fund is sustainable or unsustainable.
Established expressed limits expressing, e.g., funds exceeding 1 tonne CO2/SEKm revenue are
48
considered unsustainable, while funds with emissions below this number are interpreted as
sustainable.
Do your organization demand sustainability reports? Why/Why not?
Category
Response rate
No
10/12
Yes
2/12
The interviewees that responded yes to the question regarding if their organization demand
sustainability motivates it by explaining that the information gathered through those reports are
crucial for sustainability screening of funds. The interviewees that responded no to the question
motivated it in several ways. All of the interviewees agree that they desire the reports, even though
the organization do not require them. One factor explaining their importance is them functioning as
a quality seal, portraying organizational sustainable investing priorities and thus minimizing risk for
negative publicity.
Even if the reports themselves are not required, the information provided in the sustainability reports
is necessary for the finance department to receive. However, many investors prefer to gain this
knowledge through their screening processes or continuous dialogues with fund managers.
Arguments emphasize the dialogue to provide superior information due to the possibility to
integrate sustainability experts into the conversations. Furthermore, it facilitates information
transferal to be niched and adjusted to the investor’s specific needs. However, reports are highly
useful when investors are required to motivate excluding processes and report back fund
sustainability achievements to politics. This is since these achievements must respond to the
minimum requirements of the financial policy of the municipality or region.
If you, in your own words, could design a sustainability report from scratch – what information would you include and why?
Category
Response rate
Engagement and Voting Strategy
10/12
Standardized
7/12
Screening
7/12
Motivations
5/12
Size of the report
4/12
ESG, Agenda 2030 and international declarations
4/12
CO2 emissions
2/12
49
The vast majority of interviewees want information regarding the fund’s engagement and voting
strategy. Information concerning companies’ conversion processes concerning revenue are
requested, i.e., change of CO2-emissions about each SEKm, rather than having a pool of CO2-
emissions for the entire company’s revenue. In the investors’ opinions, this reduces the probability
that companies with lower, or decreasing, revenues are identified as more sustainable. Investors are
also requesting descriptions regarding whether the fund includes conversion companies, and if that
is the case, in what way the companies are working with conversion as well as a concrete list of
which companies are conversion companies.
Most of the investors also want to put some onus on the fund. Thus, they are requesting a
description of cases when the fund has helped a company to create solutions towards increased
sustainability as well as scenario descriptions of how the fund has helped to push the company onto
a more sustainable path. The purpose is that the investors desire to see that increased sustainability
is a direct consequence of the funds’ investment. In addition to this, investors request information
about transition processes with corresponding effects of company activities, i.e., changes in activities
for conversion companies, and a clear illustration of which issues have actually been remedied or
alleviated as a result of these efforts.
The type as mentioned above of information should, preferably, be quantified into numbers, to get a
sense of the magnitude of the impact that the fund and its investments has. The interviewees also
emphasize the importance of clarifying what/which improvements are an effect of the involvement
of the fund, preferably strengthened by an actual example, i.e., “now, firm X has begun with a
sustainability project and has excluded fossil fuel, due to our participation and voting during the
annual general meeting”. The investors value accurate and concrete descriptions of the impact that is
a result of the investment strategy, and which strategy that is, i.e., exclusion strategy, engagement
strategy or impact strategy. Within these strategies, the respondents want information regarding
holding changes, such as inclusion or exclusion of companies in one sector, combined with
motivation and comparable index to identify how much this has affected the returns. These two-
pronged interests of investors’, both to know the sustainability and financial impact of the funds’
strategy, shines through in most answers, and reflect the multiple interests and stakeholders that the
investors’ themselves must satisfy. Both sustainability and financial knowledge – and performance –
is required.
Almost half of the interviewees would include motivations in the sustainability reports. It is
relevant to be able to allocate changes from a sustainability perspective, returns, and a thorough
overview of the holdings. An observation list illustrating companies on the verge of being excluded
or that previously have been excluded but are currently in an improved state, although some of the
interviewees are aware of the difficulties that the fund companies are having when the fund is
exposing companies from a negative aspect regarding sustainability. It can be sensitive to disclose
why certain companies have been excluded, even though it is interesting from the investors’ point of
view. Furthermore, the fund can jeopardize relationships between investors’ and companies if they
exclude certain companies from investment, as the relationship between the investors and the
company can become infected.
The interviewees also wish to see a list of companies that are investment candidates for the fund,
and motivations of why these companies are considered. Motivations would, in their opinion, lead
to transparency between the investors’ and the fund. This could, however, be sensitive information
50
from the funds’ point of view if they deem their investments/investment strategies proprietary to
some extent. In addition to this, investors seek descriptions of the funds’ overall main principles, as
well as what the funds’ investment strategy emanates from. A majority of the investors want to be
provided with an easy and qualified screening portal, where funds can be compared against each.
This comparison should be expanded with e.g., new qualitative ESG parameters beyond CO2-
impact. This screening should include information concerning whether the fund has signed
international declarations on sustainability since it is often a requirement in the financial policy
Furthermore, the judgment of the companies’ market positions and which field they are operating in
is also an interesting data point, as it can be used to assess which sectors the fund is exposed to
(such as fossil fuels, non-renewable energy, etc.). Also, the interviewee's value description of the
funds’ screening process, to identify the stability and capability of the fund, as well as a description
of the fund managers’ sustainability work, mainly whether it is done by themselves or outsourced to
consultants. In other words; to what extent the fund is screening internally versus externally, and
what kind of competence is provided from each party. Two of the interviewees emphasize
information on CO2-emissions associated with the fund and a description of the funds’ level of
emissions in comparison to a benchmark maximum/minimum level. Investors also desire
statements along the lines of e.g., “this fund will not hold its investments in more than 5 percent of
aggregate revenues directly reliant on CO2-emissions; current figure is 4.2 percent).
Information about fund ambitions in accordance to ESG factors, the Agenda 2030 and
international declarations constitute an essential part of sustainability reports according to one-
third of the investors, and many require reporting from an ESG-variable perspective (preferably
emanating from the fund's alignment towards specific SDGs outlined in accordance to Agenda
2030). Fund managers must work in line with the UN Principles for responsible investments, which
works as a quality index indicator showing valuable priorities of the fund.
Since municipalities and regions have a widespread of tasks, not only including financial decisions,
the size of the report is considered being too excessive. More than half of the respondents’ desire
sustainability reports from different fund companies to be standardized, erected with similar content
and structure as well as more compiled and to the point. The interviewees argue that standardized
sustainability reports would facilitate the process of comparing different funds utilizing KPI:s and
industry sustainability benchmarks.
51
5.2.2 Case Company Employees
Through interviews with six employees at Storebrand ASA, various perspectives were explored, and
excellent knowledge was gained from several different views since all the employees worked at
different departments. The interviews thus provided a deeper and broader understanding of how the
institutional investors’ demand of ESG information can be fulfilled from a fund company’s point of
view.
5.2.2.1 Standardized sustainability reports
All Storebrand ASA interviewees agreed that there exists both pros and cons with sustainability
reports becoming uniform. The benefits with a standardized sustainability report in the potpourri of
funds would entail eased workload for both fund managers and investors. This is since standardized
reports would facile for investors to compare sustainability between the different funds, hence
reducing the need for various qualitative dialogues between institutions and funds. The fund
interviewees also believe that standardized reports come with additional benefits for municipalities
and regions. Even though Sweden is at the forefront of sustainability, these institutions rarely have
resources enough to monitor the sustainability of their investments carefully. Thus, it is clear that
these investors would benefit most from the reporting format and content being simplified and
abbreviated.
There are also disadvantages with a uniform standard for sustainability reports. One of these
downsides is that the marketing purpose of the report disappears. As of today, the sustainability
report is to some extent perceived as a marketing tool. This is sinc the report partly has the purpose
to illustrate to current and potential clients how the fund company profile themselves through a
unique sustainability strategy. If all fund companies began publishing the same kind of sustainability
report, they would experience larger difficulties distinguishing themselves. According to the
interviewees, this implicates that the standardized sustainability reporting format needs to be
provided by the government, formulated in law. If a standard format is developed but remains
voluntary, funds utilizing it would lose their competitive edge while the funds not applying the
format would keep theirs. A mandatory format would, thus, force all fund companies to
unanimously divest from the view that a sustainability report offers competitive advantage and
instead allocate other means to market themselves.
5.2.2.2 Confidentiality issues
One thing that appeared during the institutional investors interviews was how to improve the
reports by including additional motivations section regarding the fund managers investment
strategies, especially describing potential exclusions. This type of information can however,
according to the fund interviewees, be of sensitive character and include confidential information.
Furthermore, if a fund company publishes a potential exclusion list it could affect the market value
of the company in question since other large investors would be alerted and potentially sell their
shares. This might, in turn, lead to a decrease in the market value of the stock in question. If this
decrease occurs before the fund company decided to exclude or not to exclude the company from
their portfolio, a lot of capital might have already vanished.
52
Another inquiry from institutional investors is motivations of why companies finally have been
excluded. Arguments against providing this kind of information are, as mentioned above, that it is
not rarely confidential information. Furthermore, the fund interviewees argue that those types of
statements have the power to severely damage the relationship between the company invested in
and the fund company. Instead, fund companies believe that observation list is a more feasible
project if they are of positive character, i.e., including motivations of companies that has been
included in the portfolio.
5.2.2.3 No unanimous sustainability definition
Another issue that emerged during the interviews were the lack of a unanimous sustainability
definition. Within the fund industry, along with any other asset management institution, no agreed
definition of sustainability exists and thus no standard method for how to evaluate sustainability
from both an internal perspective and an external investor point of view. Followingly, it is difficult
to motivate how the fund company define sustainability since there exists no benchmark
sustainability definition. Thus, it is difficult for a fund company to measure its sustainability
accomplishments against competitors. The issue is further explained by the fact that institutional
investors, especially municipalities and regions, are rarely experts in the field of sustainability, due to
them lacking resources to monitor sustainability achievements of their investments. Therefore, the
funds want to provide ESG information that is easily understandable and comparable for the
investors. However, due to the lack of an agreed sustainability definition fund companies are
experiencing this to be difficult.
5.2.2.4 Lack of data
There is an undivided opinion amongst the interviewees that one major issue is the lack of available
sustainability data. Large corporates are, in Sweden, required to report their sustainability impact,
such as CO2 emissions. This data is later summarized and used as a basis for investment evaluations
by investors. As of today, the funds import corporate data from several different data providers,
such as Sustainalytics. The issue is that the available data is insufficient. Different funds have varying
limits of how many companies that need to report their data to be able to provide a sustainability
report of the fund. For instance, several fund companies have set up limits regarding how much of
their portfolio assets must be accountable from a sustainability perspective. SPP Funds has a
requirement to be able to report sustainability of at least 75 percent of its holdings in a fund. In
other words, if SPP Funds wishes to summarize CO2 impact of a specific fund, at least 75 percent of
the included assets need to have their sustainability data reported and included in Sustainalytics for
SPP Funds to acquire. The interviewees do, however, point out that data availability has increased
during recent years. Furthermore, the hope is that the EU Taxonomy will further ease the availability
of data since part of the taxonomy aims at creating a sustainability reporting framework which can
facilitate the current reporting process.
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6. Discussion and analysis
In this section, the importance of our findings will be debated and connected to the theory presented in the literature
review section. Furthermore, generalizability, reliability, validity and ethics will be discussed.
6.1 Institutional investors’ perspective The general trend is that sustainable investment strategies are increasingly influencing portfolio
management among institutional investors. Institutional investor has always, naturally, been required
to be observant of market status and perform continuous market analysis in order to ensure a
reasonable level of risk and return of their investments. During recent years, however, several new
demands have been put on institutional investors extended beyond the two financial requirements of
risk and return. Institutional investors today witness that their organizational attitudes have changed,
and investors can no longer execute profit maximizing behavior without considering the
consequences. Instead, they are required to be transparent and motivate their investment decisions
to both stakeholders and society. Furthermore, sustainable investing and increased CSR is today
perceived to positively correlate to long term value creation amongst institutional investors. This has
resulted in investors demanding more honest, transparent and detailed ESG information in order to
distinguish investment prospects level of sustainability and to mitigate ESG risks.
As mentioned, most of the institutional investors interviewed in this study have experienced drastic
changes in their organizations since COP21 in 2015. These changes include an extensive rework of
their organizations’ financial policy. The changes vary but includes for example an increased
implementation of ESG criteria and defined limits of these that the investment object must fulfill.
Thus, regardless of the investors personal belief, they must require ESG information that at least
satisfies the requirements of the financial policy. The institutional investors also witness that an
increased emphasis has been put on organizational ethics to prevent negative publicity. This, and
other ESG related activities is thus becoming of increased importance. During 2015-2016, extensive
audits were made of Swedish regions and municipalities where investment decisions in e.g., oil
companies were questioned. This scrutinization received large attention by the Swedish public and
incentivized the investigated institutions to reform their financial policies to include more exclusion
demarcations. This implicates that fear of being exposed in public audits further pushes
organizations towards a more sustainable path. It is thus apparent that institutional investors highly
value the social norm criteria of CSR, and are willing to alter their organizational investing objectives
to fit the society’s beliefs.
6.1.1 Qualitative data Risk aversion amongst the institutional investors permeates the screening process. Apart from
concrete statements, quantifiable data and signatures being presented in the reports, many of the
interviewed institutional investors emphasize how they inquire ESG information in qualitative form.
This information should mainly be presented in the sustainability reports, but, if necessary, it can
also be supplied through dialogues. The dialogues that occurs today provide reassurance that funds
are allocating investments in accordance to the preferences of the institutions, minimizing the
perceived risk of a fund investment. In other words, the dialogues provide the institutional investor
54
with guarantees that no assets will be invested in companies that do not fulfill the ESG requirements
of the financial policy. The investor can therefore be certain that the organization will fulfill both
financial drivers in their investment decisions and cater social norm requirements. The qualitative
information provided should also include motivations of investment strategy, e.g., if the fund is
thematic, how it executes its screening process etc.
Since more elaborated ESG information is required, one could assume that the level of risk aversion
behavior amongst investors of regions and municipalities is relatively high. These investors are de
facto responsible for their investments to generate profits to provide for important organizational
activities, e.g., medical care. Their investment choices affect people beyond themselves. An
investment with only slightly higher risk but potentially much higher returns might therefore be
disregarded due to the sense of having a responsibility to the organizational stakeholders. The
relatively high-risk averse behavior of the regions and municipalities might also depend on several
factors beyond institutional responsibilities. European investors are identified as being more risk
averse compared to e.g., the US. The Swedish institutional investors might therefore, to a higher
extent, appreciate the extra information as it functions as risk mitigating. The aim is that
sustainability reporting will improve to the extent that dialogues are not necessary in the future, but
several deficiencies with the current reports still remain. These issues will be discussed later in this
chapter.
The requested qualitative information is in most cases possible to cater for, but there are some
desires of the institutional investors that proposes a challenge. For instance, some qualitative
preferences of the institutional investors that emerged during the interviews implied difficulties from
a finance ethics perspective rather than constituting a methodology issue. One example is the desire
that sustainability reports should include reasoning of why companies has been excluded from a
fund, or why corporates are on the observation list. These requests could negatively affect the
relationship between the fund and the company. It could also alert other stakeholders that there is
an issue with the company in question. The outcome could be that these stakeholders decides to sell
their shares before the fund company, thus lowering the funds’ portfolio value.
6.1.2 Lack of a standard format for sustainability reports Looking beyond the utopia of what is wished to be included in the reports there exists shortages in
the reports provided today. Frameworks for sustainability reporting exists, but these vary in scope,
content, design and time frame. Even though industries are currently improving their reporting
process, the previous time scope is lacking since many institutional investors require that a fund
must have available data from years back. Thus, even though efforts are being made by companies,
funds cannot implement the recent data when summarizing their portfolio impact. This decreases
the incentives to apply costly readjustments in the current reporting process. There are also different
limits between fund companies regarding how much data that is required to summarize the fund
ESG impact. E.g., one fund might require that a minimum of 60 percent of the fund company
inclusions must be accounted for in sustainability accounting while another fund might require data
to be available for up to 75 percent of the included companies’ activities.
Another issue is that the reports that institutional investors receive today from the funds are partly
perceived as marketing objectives. The reports consist of funds profiling them utilizing different
investment strategies. Institutional investors may e.g., choose between funds describing their
55
exclusion levels or funds portraying an image of being the most influencing engagement strategy
stakeholder. Even though this enables investors to decide which strategy they prefer, it makes it
difficult for them to assess which of the funds is more or less sustainable due to the lack of
comparable data. Since CSR is becoming of increased importance among institutional investors, it is
vital that fund companies can deliver reassurance regarding their sustainability efforts. Lack of
transparency, consistency and trustworthiness aggravates the evaluation process when investors
endeavours investing in the most sustainable fund candidate. The consequence might be that risk
averse investors refrain from investing if reassurance is not thoroughly provided, regardless of
sustainability efforts made by the fund.
6.1.3 Difference between type of institutional investor
6.1.3.1 Differences when defining sustainability From both the interviews with the fund company employees and the interviews with the
institutional investors it was discovered that none of the interviewees knew how to describe the term
sustainable. Thus, when asking the investors what kind of ESG information they require they
answered based on either their professional role or their personal opinion, or both. The professional
requests included information that could fulfill the guidelines of their financial policy, i.e., the policy
that defined their organizations view on sustainability. From their personal views they required
information that could help them gain sustainability reassurance sufficient enough to cover their
personal perception of sustainability. For example, if an interviewee answered that his or her view
on sustainability is synonymous with performing activities that aims to create a better world, they
usually also desired to read about effects of the fund company’s chosen sustainable investment
strategy. In cases where they believed sustainability to e.g., reassuring earth’s resources to be
preserved for future generations, the investors instead valued to have measurements of CO2 impact.
6.1.3.2 Differences between organizations It is reasonable to believe that municipalities and regions derive their investment decisions from
slightly different requirements than other institutional investors. Primarily, their finance departments
are small-scale in proportion to the assets they manage. One or two persons can be in charge of
billions of SEK being distributed between different interest funds, currencies and mutual funds. Due
to the delimitations of the invested organizations, the most requested context of the reports is their
function as a comparability-tool when evaluating different funds against each other. The reports also
function as a transparency document enhancing funds’ trustworthiness, almost serving as a quality
seal for sustainability engagement. This result might differ from institutional investors in other types
of organizations. For instance, institutional investors with bigger financial departments resources
might, on the contrary, appreciate the marketing effect of larger, differentiated reports which can
provide intriguing new parameters of sustainability or alignments of funds.
6.1.3.4 Differences in behavior Apart from organizational differences, there are also differences in individual behavior between
comparable organizations. Regions and municipalities each have very similarly structured finance
departments. Still, many of the interviewed institutional investors have varied strategies and
preferences regarding how to invest sustainably. It can therefore be discussed whether sustainability
efforts made by institutional investors are due to increased organizational demands and regulations,
56
or personal beliefs amongst the institutional investors. Previous literature indicates that motivation
for institutional investors to allocate resources to sustainable funds is partly founded in their wishes
to fulfill their self-transcendence of being socially responsible. These types of investors also consider
these investment opportunities since they associate them with lower financial risk. However,
institutional investors are as mentioned regulated by fiduciary duties and organizational requirements
in their investment decisions. They are also required to invest in accordance to organizational values.
In the case of municipalities and regions, they are furthermore regulated by governmental statutes.
The interviews with the institutional investors demonstrated that large parts of their investment
decisions are regulated by their financial policy. Some of these investors wished to allocate more
resources into emerging new projects but were obstructed by e.g., requirements of funds having
existed for more than two to three years. On the other hand, some interviewees demonstrated signs
of being risk averse. In these cases, they showed reluctance to invest in e.g., undeveloped
technologies. This was mainly due to the fact that long-term effects were not proven and thus there
existed no proof that these assets could generate stable returns. However, thanks to the financial
policies usually containing minimum sustainability requirements, other sustainable strategies, e.g.,
positive screening, were implemented by the investors.
Reasons for why some investors have certain preferences that differ from others is not specifically
investigated in this study, apart from differences in financial policies. However, one could go further
into analyzing why some municipalities and regions have riskier ESG strategies, and why some
implement CSR to a larger extent than others. Almost all of the interviewed institutional investors
had sole responsibility to manage the organizational assets. This implicates that their individual
preferences for risky activities plays a part in whether the organizations choose to execute impact
strategies or not. The interviews with institutional investors also demonstrated that many individuals
have their own strategy regarding how to invest sustainable. Some are firm believers of sustainability
being the allocation of resources towards solution companies aiming to improving the world. Other
investors rather believed sustainability to preserve what we have today for future generations to
come. Thus, one investor focuses on a solution strategy while another focuses on positive screening
as long as both strategies fulfill return- and risk requirements of the financial policy. Concludingly,
individual preferences possess a large influence whether assets are allocated to e.g., CO2 diminishing
activities or CO2 neutral activities. Individual investors choices must therefore be considered to have
importance in the trajectory towards a sustainable development.
6.1.4 Lack of organizational resources Even though the sustainability reports have improved over the years, asymmetric information is still
a large issue when it comes to responsible investing processes. Organizations rarely have enough
resources to monitor investments too distant from the relevant index and investors themselves
rarely perceive themselves as having enough insight into emerging sustainability solutions. Thus, e.g.,
the inclusion of solutions companies is aggravated both by the financial policy requiring continuous
returns and the lack of resources.
As mentioned in previous sections, many of the institutional investors choose to complement the
ESG information in sustainability reports with dialogues with fund managers. Through continuous
conversations and verbal updates, investors can confirm that funds reach the requirements of the
financial policy. In other words, a lot of emphasis is being put on receiving qualitative information.
57
Due to the close relationships between some of the municipalities and regions across Sweden, this
information also transfers to new potential investors.
Institutional investors also prefer to invest in the same sustainable assets as others, which indicates
risk averse behavior. For financial departments with lack of resources, such as regions and
municipalities, it was discovered that the organizations maintain communication between each other
regarding both SRI options and financial policy content. It is therefore not unlikely that preferences
of the institutional investors are influenced by what other investors requests. In this way, institutions
both follow social norms by choosing alternatives that the perceive has been thoroughly
investigated. If the investment later turns out to be unsuccessful, the responsibility is not solely put
on the individual investor. Instead, the blame is put on the group. This theory can be adopted to the
organization’s preferences of ESG information in sustainability reports as well. If the financial policy
includes certain ESG requirements in one region, it is likely that other regions wants to implement
the similar requirements in theirs.
6.1.5 The perspective of fund companies As for the fund managers who are responsible for supplying the sustainability information to the
investors, they are principally responsible for providing a minimized risk (often measured as realized
volatility) with a maximized return in the funds they manage. This group is non-debatably
increasingly influenced by sustainability in their investment decisions. However, reward-to-variability
i.e., a satisfactory Sharpe ratio, is still the main priority when performing investment valuations. The
focus on financial performance is also fueled by incentives of reward if their managing efforts result
in the fund beating a fund index by delivering higher returns than the comparative index. Thus, the
portfolio managers are rather influenced by their fiduciary financial responsibility than societal
concerns.
One can argue about to what extent this is still the case beyond year 2020. With the rampaging of
frameworks such as PRI and GRI, as well as increased ambitions towards reaching the SDGs in line
with Agenda 2030, the behavior of fund managers is required to change. Sustainability is an
emerging trend, already implemented or soon to be implemented through all financial organizations.
Thus, fund managers need to adjust accordingly to maintain their competitive advantage.
Sustainability is now not only a tool for business to illustrate their social responsibility, but rather a
context overlapping with almost all CSR related behavior. Higher demand for sustainability reports
also increases the transparency of investments, thus forcing fund managers to allocate their assets to
non-damaging investment opportunities. Fund managers whom previously have ignored to invest
responsibly are now forced to reconsider. With the development of the EU Taxonomy and its
upcoming framework for corporate activity monitoring, unsustainable investment choices will
become more visible. For fund managers already on a sustainable path, however, the upcoming
framework will instead benefit implemented economic activities associated with easing the corporate
environmental impact. Going forward, good rewards-to-variability is no longer sufficient; it needs to
be achieved under a satisfactory ESG-framework. Another aspect is the interplay between variability,
risk and ESG factors – a societal focus need not necessarily be an opposing force to good financial
performance. Fund managers are increasingly appreciating that a lack of ESG analysis entails higher
expected variability and risk, as ESG-scandals (see e.g., BP oil-spill) can lead to sharp market
movements.
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The hope for the EU framework is that it is going to be able to capture the inside-out perspective as
well as the outside-in. The inside-out perspective will be addressed since the taxonomy framework
will include tools adapted specifically for a certain industry. For instance, for an organization
pursuing water purifications it would be probable for the framework to provide parameters of
relevance to corporate-related activities. Simultaneously, the framework will take into account an
outside-in perspective by establishing more clear reporting guidelines. Thus, financial actors will be
exposed publicly to a larger extent, hopefully driving them towards sustainability progress and
allowing various stakeholders to better assess the ESG-focus of financial actors.
6.2 Reliability, validity and generalizability Reliability, validity, and generalizability are all essential concepts when conducting research. The
research, as well as the data methods, both needs to hold adequate standards by being reliable and
valid if the study can be perceived to contain a value. According to research performed by Paulsson
(1999), validity is a measurement of to what dimension and the extent you assess what you actually
intend to measure, while reliability is the measure of the exactness of the assessment process. We
can, in other words, define reliability as the possibility to conduct iteration of the findings. If the
same study were to be conducted twice, how homogeneous are the results?
According to research conducted by Shah & Corley (2006), we also fulfil all three criteria for internal
validity, known as extended engagement in the field, triangulation of data types, peer debriefing, and
member checks. To create external validity from trustworthiness criteria, we provide grounded
theory in the literature review and disclose with honesty the entire progress in the methodology
section. However, there are some issues with reliability in the study. Due to the semi-structured
form of the interviews, a reconstruction of the interviews would probably provide a slight change in
the outcome of the results. Each interviews’ subject trajectory takes a modest jump in an individual
direction, and thus, it is reasonable to assume that the outcome fluctuates. A decrease in fluctuation
could be reached if a larger number of interviews were conducted. Even though twelve interviews is
an adequate number of interviews concerning the scope for this study, reliability and generalizability
would increase with many interviews due to the mitigation of the weight that each interview carries.
Furthermore, the qualitative nature of the interviews can also affect the results. The investors we
choose may be affected by how us researchers frame the interview questions. There is also a risk
that some of the answers were more ample than others. This is since we asked some interviewees to
explicate around certain answers when we e.g., experienced any sign of hesitation amongst the
interviewees. Additionally, our subjectivity could also affect the way we assess the responses received
(Hansson, 2007).
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6.3 Ethics Due to the explorative nature of the thesis, it is relevant to consider the ethical aspect in connection
to the execution approach for the thesis. One could consider both the ethical implications of the
findings and the ethics of our research method. However, regarding the limited scope of the thesis,
the first mentioned is excluded since an investigation of the ethical implications of our findings
would be executed in an overly speculative setting.
The qualitative part of the thesis contained ethical interferences, e.g., when our interviewees
discussed sensitive organizational views or expressed opinions of personal nature that did not align
with the view of their organization. Furthermore, since the interviews are presented in aggregated
form, interviewees might perceive that their views were misinterpreted or misunderstood since their
answers were not presented in full body form.
To prevent ethical issues from arising, we made sure to follow the established guidelines of the
Swedish Research Council, as introduced by Blomkvist & Hallin (2015). These guidelines indicate
that a researcher should follow four main requirements described as (1) information-, (2) consent-,
(3) good-use -, and (4) confidentiality requirement. To guarantee adherence to requirement (1), the
interviewees were thoroughly informed of the study’s purpose both prior the interviews as well as
during. The fact that all interviewees gave consent to partake in the study, to begin with, as well as
having us record them, displayed adherence to principle (2). Thirdly, the interview data collected has
only been applied for the purpose interviewees were informed of prior to our meeting, and thus
ensured adherence to requirement number (3). Concludingly, people were allowed (if desired) to be
anonymous, and their answers were also aggregated and thus did not allow for individual responses
to be distinguished ensured that our method followed the confidentiality requirement, (4). The
aggregation procedure was made to ensure to enhance the majority view of the respondents.
However, if a large difference were discovered in the responses received, we made sure to include
both parties’ opinions to minimize the risk of neglecting vital information.
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7. Conclusion
In this section, answers to the study’s research questions will be presented by a conclusion of the analysis and
elaboration of the results. Implications for each of the two main stakeholders - portfolio managers and institutional
investors - will be discussed, and finally, suggestions for future research in the field will be presented.
7.1 Answering the Research Questions
· What ESG information is important for institutional investors when making and monitoring
investments?
Sustainability is of increased importance amongst institutional investors and is today perceived as a
critical factor when evaluating investment opportunities. Institutional investors are looking at a
variety of ESG information to improve their investment decisions and current monitoring of
investments. All municipalities and regions base their investment decisions on individual financial
policies and institutional investors wish to receive transparent and honest ESG data from the fund
companies. It is of great importance that the fund provides genuine motivations of their investment
strategy since the fund’s definition of sustainability must align with the one outlined by the regions
and municipalities.
The requested information by the investors is motivations of ESG related choices. Mainly, the
investors ask for portfolio changes and descriptions of why and how these changes are made, e.g.,
why certain companies are included or excluded from the fund. This should preferably be
thoroughly described in the sustainability report, and continuously updated. The investors also
desire a lot of information regarding ESG strategies, i.e., if the fund follows an engagement and
voting strategy. Furthermore, the investors require information regarding what international
declarations and frameworks the fund adheres to. To evolve around this, the fund company could
describe what SDGs they work towards reaching and if they have signed PRI or is reporting
according to GRI. Another piece of ESG information is actual impact data e.g., quantified CO2
emissions measured in tonnes CO2/SEKm. There are also requests that the fund should be
compared with relevant sustainability index, for example the MSCI ESG Index.
· What ESG information is missing or needs to be changed in the current sustainability reports?
As of today, not all of the inquiries stated above are possible to cater for in the sustainability reports.
Exclusions are mostly presented in the reports, but to motivate them constitutes difficulties. This
applies to both performed exclusions and potential exclusions. Not only can motivations damage
relationships between the fund company and the company in question but it can also destroy
shareholder value if the fund company alerts that they might sell their shares in a nearby future.
Inclusion of companies could, however, preferably be developed further in the reports since these
are rarely well motivated.
Quantifiable data is a desire that fund companies are struggling to present thoroughly in the reports,
and the request for more quantified ESG data can currently not be fully met in sustainability reports
due to the scarcely available data. Not only is there lack of CO2 data since some companies are too
61
minor to report their CO2 emissions, but data must be presented from several years back as well.
Due to these issues’ funds report CO2 data to highest extent possible, but most funds can only
report emissions of 60-75 percent of their portfolio.
Even though the rest of the ESG information requested is provided in the reports, investors
struggle to only utilize sustainability reports to determine sustainability achievements of a fund. The
main reason for this is that the reports provided today varies both in scope and structure,
aggravating for investors to analyze the presented ESG information. It also obstructs comparison
between different funds’ sustainability. The current sustainability reports are also perceived as too
excessive according to the institutional investors. Large parts of the reports consist of a marketing
focus, making it more difficult to source out concrete ESG information. This issue could be solved
if the reports were simplified but would result in the funds losing their competitive edge.
Looking forward, the EU Taxonomy could potentially alter the rules for providing quantified data
forcing actors to report sustainability more frequently and in more detail. Furthermore, it is
anticipated that the EU Taxonomy will expedite the emergence of a uniform sustainability
definition. This development would provide guidelines for both investors and funds respectively
regarding what ESG information to seek and what information to report.
7.2 Implications
An implication from this study is that, as of today, institutional investors highly value the qualitative
aspects of sustainability reports such as motivations of sustainability strategy. It is unclear, however,
if this preference is due to the current lack of quantifiable ESG elements to replace the motivations
with. One can guess that as sustainability reports emerge towards a more standardized format the
demand for oral motivations will decrease. However, this conclusion cannot be drawn from this
particular study. The results from this thesis could impact several different stakeholders, especially
portfolio managers working with institutional investors since the results are indicators of what is
missing in current sustainability reports and what ESG information needs to be altered.
7.3 Future Research
There have been large improvements in the field of sustainability reporting over the past decade.
However, substantial efforts are required to reach the defined targets for achieving sustainable
development. More research is desired regarding Swedish municipalities and regions demands,
investment regulations and strategies for achieving sustainability. Future research could also focus
on relationships between sustainability and growth depending factors. It could also focus on future
ESG preferences of investors. A study could e.g., include certain ESG objectives such as meat
production, nuclear power, etc., investigating which information to prioritize in sustainability
reports.
It would be interesting to investigate organizational factors as well, e.g., by evaluating the
development of financial policies and their content. Furthermore, it could be relevant to further
study how institutional investors are affected by social norms. It would also be interesting to repeat
this study and examine the impact of the EU Taxonomy on institutional investors ESG preferences.
62
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Appendix
1. Pilot Interview Questions
Introductory interview questions:
1. What type of organization do you represent?
2. What is your role?
3. How much capital do you manage (ie how many billions)?
4. What kind of capital is that (pension, donation/foundation, surplus liquidity)?
Semi-structured interview questions:
1. What is sustainability according to you?
2. How do you describe a sustainable investment?
3. How would you describe the current sustainability reports that you are receiving today?
What content do they have? What do you think of them? (What do you think is missing in them?)
4. Why does your organization demands these reports?
5. If you, in your own words, could design a sustainability report from scratch with no
limitations, what information would you include and why?
6. How has your organization worked with sustainability over the past five years? (Why, in
what way, etc)
7. What kind of information do you require in order to ensure that a fund is sustainable?
8. What do you think of the frameworks for sustainability reporting that exists today? Why so?
etc.
2. Track changes after Pilot Interviews
* indicates an added or modified question
Introductory interview questions:
1. What type of organization do you represent?
2. What is your role?
3. How much capital do you manage (ie how many billions)?
4. What kind of capital is that (pension, donation/foundation, surplus liquidity)?
Semi-structured interview questions:
1. *Describe the process when you are evaluating a new investment opportunity? Which
factors do you mainly consider when you are investing?
2. What is sustainability according to you?
3. How do you describe a sustainable investment?
4. *What are you currently using to decide if a fund is sustainable?
5. *What kind of information do you require in order to ensure that a fund is sustainable?
Which method do you use? (Surveys, reports, dialogue etc)
6. *What kind of reports are you receiving from funds?
70
7. How would you describe the current sustainability reports that you are receiving today?
What content do they have? What do you think of them? What do you think is missing in
them?
8. *What do the monthly reports from the funds contain? Would you like some sustainability
added to them? If so, what? If no, why not?
9. *Do your organization demand these reports? How come/why not?
10. If you, in your own words, could design a sustainability report from scratch with no
limitations, what information would you include and why?
11. *How has your organization worked with sustainability from a financial aspect over the
past five years? (Why, in what way)
12. What do you think of the frameworks for sustainability reporting that exists today? Why
so?
13. *Is there something you would like to add regarding the subject?
3. Semi-structured interview questions
The questions that were asked during the main interviews with institutional investors.
Introductory interview questions:
1. What type of organization do you represent?
2. What is your role?
3. How much capital do you manage (ie how many billions)?
4. What kind of capital is that (pension, donation/foundation, surplus liquidity)?
Semi-structured interview questions:
1. Describe the process when you are evaluating a new investment opportunity? Which factors do
you mainly consider when you are investing?
2. What is sustainability according to you?
3. How would you describe a sustainable investment?
4. What are you currently using to decide if a fund is sustainable?
5. What kind of information do you require in order to ensure that a fund is sustainable? Which
method do you use? (Surveys, reports, dialogue etc)
6. What kind of reports are you receiving from funds?
7. How would you describe the current sustainability reports that you are receiving today?
What content do they have? What do you think of them? What do you think is missing in them?
8. What do the monthly reports from the funds contain? Would you like some sustainability
added to them? If so, what? If no, why not?
9. Does your organization demand these reports? How come/why not?
10. If you, in your own words, could design a sustainability report from scratch with no
limitations, what information would you include and why?
11. How has your organization worked with sustainability from an financial aspect over the past
five years? (Why, in what way)
12. What do you think of the frameworks for sustainability reporting that exists today? Why so?
13. Is there something you would like to add regarding the subject?
71
4. Swedish translation of semi-structured interview questions
Introduktionsfrågor:
1. Vilken typ av organisation representerar du?
2. Vad är din roll?
3. Hur stort kapital förvaltar ni (hur många miljarder)?
4. Vad är det för typ av kapital (pension, donations/stiftelse, överlikviditet)?
Semi-strukturerade intervjufrågor:
1. Beskriv processen när du utvärderar en ny investeringsmöjlighet?
2. Vad är hållbarhet enligt dig?
3. Hur skulle du beskriva en hållbar investering?
4. Vad använder ni i dagsläget för att avgöra om en fond är hållbar?
5. Vilken typ av information kräver ni för att avgöra om en fond är hållbar? Vilken metod
använder ni? Dialog, enkäter etc.
6. Vilka typer av rapporter får du från fonderna?
7. Hur skulle du beskriva hållbarhetsrapporterna som ni tar emot idag? Hur skulle du beskriva
fondrapporterna som ni tar emot? Vilket innehåll har dem? Vad är din generella åsikt kring
dem? Vad tycker du saknas i dem?
8. Vad innehåller månadsrapporterna från fonderna? Skulle du vilja att det lades till något
gällande hållbarhet i dem? Om ja, vad för något? Om nej, varför inte?
9. Kräver din organisation dessa rapporter? Hur kommer det sig/varför inte?
10. Om du, med dina egna ord, fick designa en hållbarhetsrapport från grunden, helt utan
begränsningar, vilken information skulle du då ha med?
11. Hur har din organisation arbetat med hållbarhet ur ett finansiellt perspektiv under de senaste
5 åren? På vilket sätt?
12. Vad tycker du om de nuvarande ramverken för hållbarhetsrapportering? Hur kommer det
sig?
13. Har du något mer som du skulle vilja lägga till kring ämnet?
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