Exclusion doesn’t equal underperformance

Last year, it paid to be a responsible investor. KLP, one of Norway’s largest pension fund insurers with assets of €35bn, published its SRI report last week, including, among other things, an updated list of companies it excludes and the reasons why. Also in the report is its financial track record comparing the KLP World Index with the MSCI World Index without exclusions. Last year, KLP’s index outperformed the MSCI World Index by one percent. KLP World is a customized benchmark index where companies that have been excluded are removed from the index. This index is rebalanced so that that the industrial group’s weight corresponds with MSCI World. This method of industrial group neutralization is utilized because the difference in return between the two indexes is expected to be minor. At the same time as minimizing the effect of the exclusions, KLP is working systematically to influence the excluded companies’ in order to reinstate them into their investment portfolios. This strategy – using the synergy between exclusionsand engagement as a tool for responsible pension fund management – has been consistent since 2002. The only change in criteria has been the exclusion of weapons, which was introduced in 2005. Tobacco, on the other hand has been excluded from investments since 1999. So far this year, KLP’s benchmark index KLP World has a level of return that is 0.24 percent higher than the MSCI World. Since inception the return of KLP World is approximately one percent lower than the MSCI World. All of KLP and KLP Mutual Funds portfolio’s are benchmarked against these customized indexes and continuously deliver index return. (See downloads for performance chart). While it is too short a time period to draw any solid conclusions about the long-term financial effects, it is reasonable to conclude that to exclude a limited number of companies has a very limited, close to zero, long-term financial effect.
Link to KLP SRI report

Jeanett Bergan is head of responsible investments at KLP