Q & A

Frequently asked questions

The Council on Ethics

• How come that the AP Funds have investments in so many companies? What is index management?

  Asset managers’ asset portfolios differ depending on which strategy they choose; internal or external management, concentrated portfolio with greater ownership in a smaller number of companies or a wider exposure, choice of markets and regions, etc. The AP Funds follow generally accepted principles in modern asset management and have a conviction on how the financial market works and how value is created. The same applies to the conviction that diversification of risk taking can increase the risk-adjusted return. The funds therefore diversify the portfolios between different asset classes, regions and sectors. The funds also diversify the risk within each asset class by spreading the invested capital over more assets. For example, the funds have normally seen scattered ownership in quite a few listed companies. The advantage of a diversified equity portfolio is that the financial risk is lower and the portfolio thus becomes more resilient during troubled times. Another advantage is that a broad equity portfolio is normally a more cost-effective way of managing capital than a more concentrated equity portfolio.

• How does the Council on Ethics work?

  The Council on Ethics work consists of two approaches:

  Partly a reactive effort to identify companies implicated in violating international conventions. Through dialogue we encourage companies to redress convention breaches and to implement preventive measures and systems. And partly a proactive effort that involves taking sector-specific and investor-led initiatives to encourage companies to increase transparency, act more responsibly and address important aspects of social and environmental responsibility.

  The Council’s reactive working process is based on a biannual review of the share portfolios of the AP Funds to detect violations of international conventions. Reported incidents are monitored on a continual basis between the reviews. The Council pursues dialogue with the companies for which a violation is suspected or has been verified. The purpose of dialogue is to persuade the company to stop engaging in the violation and to adopt preventive measures that will avert future violations. Dialogue is conducted directly by the Council, as well as by its service providers.

Frequently asked questions

The Council on Ethics work process

• Do you exclude any companies?

  The Council on Ethics can recommend the AP Funds to exclude companies, see list. The Council on Ethics contacts all excluded companies annually to encourage them to act in accordance with international conventions. In cases where companies can verify that they have corrected what was the reason for the exclusion, the Ethics Council may consider recommending the funds to reinclude.

• How do you handle companies that violate international conventions?

  We have a systematic process that makes sure we react to any indication of a convention violation. We monitor a wide range of sources, including the media, UN organisations and NGO reports, which alert us to whether a company has infringed a convention.

  The Council on Ethics then selects a core group for dialogue with the aim of spurring them to act responsibly. In spite of our extensive monitoring, there is always a risk of companies slipping beneath the radar. If we learn about violations from other sources we make sure to integrate this information into the main process.

• Does the Council on Ethics exclude companies that breach international conventions?

  Our primary goal is drive change, and we believe the best way to do that is to retain our investment and work to achieve that change. The aim is always to bring about a permanent end to violations. Should we find ourselves in a situation where we cannot achieve a change based on our demands then the Council on Ethics may advise the four AP funds to sell their holdings. But this is a last resort.

Frequently asked questions

Company dialogues

• Why don’t you engage more companies in dialogue?

  The dialogues are time-consuming and resource-intensive and we are keen to bring about a change in the companies. Read more about all the dialogues we have in our annual reports.

• What companies is the Council on Ethics in dialogue with?

  In our annual report we describe the dialogues we have with companies. Read more in the Council’s annual reports.

• Wouldn’t it just be easier to exclude companies that violate international conventions rather than spend time debating with them?

  Our primary goal is that any violations cease. If we simply expelled companies from our portfolios we would not be doing as much as we could to influence those businesses – and the violations would continue. We firmly believe dialogue is the most effective and responsible way to exert influence. Exclusion reduces our ability to influence the company, especially in North America.

• Why does the Council on Ethics pursue dialogue with offending companies?

  Dialogue is our most important tool for encouraging companies to act responsibly. The aim is to persuade the company to redress documented violations and to commit not to repeat them. As a long-term investor, we want to see companies take action and implement preventive systems to avoid recurrence of convention breaches. Driving change requires discipline and a great deal of patience. Ideally we would wish for rapid and sustainable improvements, but we know it can take time to achieve results.

• What happens with companies that fall short of the Council’s requirements but where the Council doesn’t pursue a direct dialogue?

  Our ethical consultant monitors and holds discussions with companies that are not part of our core group but which have been implicated in convention violations.

• What happens to companies removed from the dialogue list because they have met the Council’s demands? Do you stop monitoring them?

  No, we continue to track them to ensure that the promised actions are actually implemented and have the desired impact.