Responsible Investor

agreements. This leaves the field open to companies and people with low moral values. Solving, or at least minimizing, this problem would ensure a minimum level of ESG that we all, under the auspices of the UN, could agreed upon.
The Seventh Swedish National Pension Fund (AP7) implemented ESG guidelines in 2000. By ensuring that the approximately 2500 companies the fund invests in globally follow UN agreements the fund has succeeded in achieving a good return, while at the same time following ESG considerations. About 30 companies have been excluded from our portfolio on the basis of failing to meet the conventions. All exclusions have been based on court decisions, official investigations by governments (or government agencies) or international organisations like the United Nations, and even confessions by companies themselves. This makes the ESG policy as objective and legitimate as possible. The funds experiences so far from its ESG policy are:
1. The return and risk are unaffected, i.e. the characteristics of the screened global indices are the same as the unscreened ones.
2. Companies have been open to dialogue and change, partly because they have found our ESG policy objective and legitimate.
3. Companies have adapted to the result of the policy and hence the policy has had a real effect.
4. The policy has given AP7 goodwill with stakeholders, and has hence been economically sound.
Despite our findings, a clear majority of asset owners do not have a clear ESG policy. Why not?

There are three traditional investor arguments against engagement. The first derives from what is traditionally referred to as modern portfolio theory. By diversifying investments into assets not fully correlated, the risk adjusted return can be improved. This is a fact, but it has also been proven, decades ago, that the benefits of diversification are large in the beginning and actually insignificant after having invested in a certain number of companies. For a global investor following a global benchmark the fact is that excluding a few companies simply does not affect the risk in a significant way.

“The asset management industry has so far taken a conservative approach, to say the least.”

The second argument is often referred to as “The business of business is business” or put another way: everyone should focus on what he or she is good at and assigned to do and not take initiatives outside this since such initiatives might be in conflict with the assigned task, or worse, with democratic rules. Milton Friedman wrote an article on the subject in The New York Times Magazine, in 1970, which has been used as a case against ESG. One might suspect many people had never actually read the article, because they would realise that Friedman actually supports an ESG policy based on international law.
He said: “there is one and only one social responsibility of business: to use its resources and engage in activities designed to increase its profits so long as it stays

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