ESG 100 THE STOCK - EXCHANGE

An analysis of how the 100 largest companies on the Oslo report on ESG GLOSSARY

SUSTAINABILITY The concept was introduced in 1987 when the Brundtland Commission defined sustainable development as resource utilisation that meets the needs of the present without compromising the ability of future generations to meet their own needs. Corporate sustainability entails managing a business in a manner that ensures that today’s decisions also will work in the foreseeable future with regard to economic, environmental and social conditions.

ESG ESG is an acronym for “Environmental, Social and Governance” factors. Pollution and energy consumption are examples of environmental factors, human rights and labour conditions are examples of social factors, and compliance with laws and internal company control mechanisms are examples of governance factors.

THE UN SUSTAINABLE DEVELOPMENT GOALS The 2030 Agenda for Sustainable Development, adopted by UN Member States in 2015, sets out 17 sustainable development goals (SDGs). The goals recognise that ending poverty and other deprivations must go hand-in-hand with strategies to improve health and education, reduce inequality, and spur economic growth – all while tackling climate change and working to preserve oceans and forests. The goals have been broadly endorsed by corporations and investors.

CORPORATE SOCIAL RESPONSIBILITY/CSR To engage in CSR means that, in the normal course of business, a company is operating in ways that enhance society and the environment, instead of contributing negatively to them. CSR is often used synonymously with sustainability.

COMMUNITY ENGAGEMENT The term “community engagement” is primarily used to describe corporate activities such as contributions to charitable organisations, culture and sports, or support for volunteer work and active involvement in political issues. It is used less to refer to responsible practices within a company itself.

SOCIAL RESPONSIBILITY The term “social responsibility” refers to the social justification a business has by virtue of the products or services it provides. Important social tasks may be, for example, to supply electricity, infrastructure, health care and education, and the term is often used in reference to companies in these sectors.

The Governance Group

The Governance Group AS (TGG) is an advisory firm specializing in risk analysis and sustainability strategies. TGG has a core team in Oslo and a network of affiliated experts in Africa, the Americas, Asia and Europe. Clients include large corporations in the energy, shipping, telecom, real estate and finance sectors, as well as government agencies in several countries.

ESG 100 - THE

2 INTRODUCTION

Sustainability and ESG factors have long been perceived as a minor concern for investors. Many CEOs live by the assumption that a sustainability agenda conflicts with shareholder interests and that ESG considerations are immaterial to finance. It has become increasingly clear that this notion is outdated. Corporate management of risks and opportunities linked to sustainability may determine whether a company is included in a mutual fund or affect the risk premium on its debt and .

Sustainability assessments of corporations are in large The goal of this report is to challenge and, over time, part based on publicly available information in annual contribute to more standardised sustainability reports and websites. More than 230 standards for reporting. A large amount of resources is spent on sustainability reporting currently exist, which, taken reports that provide little or no basis for making alone or collectively, provide a wealth of information. financial and strategic decisions. Both Norwegian The challenge is that many reporting standards overlap. authorities and the EU are currently drawing up This has led to a tremendous reporting burden for regulations that will tighten standards for sustainability companies. Moreover, the sustainability information reporting. Therefore, we have for the second year in a produced is of questionable value. row analysed the sustainability reporting of the 100 largest companies listed on the Oslo Stock Exchange1 Comparing sustainability data across companies, sectors and critically evaluated the extent to which the and countries is demanding, and the information is information provided is integrated in the companies’ rarely consistent over time. Notwithstanding increased goals, strategies, risks and opportunities. attention paid to sustainability, a key question remains: do sustainability reports provide a basis for making In our view, sustainability reporting is only useful for decisions on company boards, in management teams boards, corporate management and investors if it and more generally in the financial sector? Do reports contains consistent and measurable information numbering more than 100 pages provide valuable pertaining to a company’s most significant risks and information or cause confusion? What is the usefulness opportunities. While the 2019 report shows a clear of this reporting from a financial and risk perspective? improvement compared to the 2018 it also reveals that many companies listed on the Oslo Stock Exchange are ill-prepared to meet stricter demands for more specific ESG reporting.

1 A complete list of all the companies analyzed is found in Chapter 5. Also provide link the English Executive Summary of the 2018 report.

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3 1. Background and Methodology

1.1 A BREIF HISTORY OF CORPORATE SUSTAINABILITY REPORTING

A sustainability report should ideally demonstrate how for different sectors and topics, as well as verification a company systematically addresses its impact on standards for sustainability reporting. environmental, social and governance factors. Many companies prepare a separate sustainability report as PHASE 2: OBLIGATION AND LEGAL REQUIREMENTS an addendum to the annual report, while others (2009–2014) integrate sustainability information in the actual annual report. Information concerning environmental, In parallel with the voluntary reporting trend, various social and governance (ESG) issues are also sometimes national and regional legal obligations have emerged included in the board’s annual report. which require companies to report on their sustainability impact. Denmark was an early mover by Over the past twenty years an increasing number of making it mandatory at the board level for stock listed companies have chosen to dedicate more space exchange listed companies to report on company to sustainability reporting. Simultaneously, investors – guidelines and results in the areas of environment, who a decade ago only evaluated quarterly reports – anti-corruption, labour conditions and human rights. have begun to include ESG elements in their analyses. Norwegian authorities quickly followed suit by ESG data is in demand and is increasingly used as part introducing § 3-3 in the Norwegian Accounting Act, of an investment decision-making process, even which requires the boards of all large companies to though it remains unclear as to whether sustainability report on the same factors as their Danish reporting adds value to investment analyses or not.2 counterparts. In 2014 the EU introduced similar wording in its accounting directive. PHASE 1: PICTURES OF FLOWERS AND HAPPY CHILDREN PHASE 3: THE FINANCIAL COMMUNITY CATCHES ON (1998–2008) (2014–2017)

Initially, companies reported on sustainability factors A combination of corporate branding-motivated and primarily to enhance their corporate image.3 Reports legally required reporting has created a confusing were often wordy and illustrated with pictures of landscape for sustainability reporting. The gamut runs “green nature” and happy children. Companies used from legally required and reluctant minimum this material more for marketing rather than part of reporting to detailed and colourful reports covering their annual reports. Since published one hundreds of pages. A new driving force for of the world’s first environmental reports in 1998,4 sustainability reporting has also emerged in recent sustainability reporting has become the rule of thumb years. The financial sector is increasingly demanding for large international corporations. Simultaneously, specific and comparable sustainability information to multiple voluntary international reporting standards be used for investment analyses and in some cases have emerged to guide reporting practices. The most credit and insurance pricing processes.6 widely used standard is the Global Reporting Initiative5, but there exists a host of unique standards

2 Why It’s So Hard to Be an ‘Ethical’ Investor, Wall Street Journal, Sep 3, 2018 5 More than 5000 organisations worldwide have reported using the GRI 3 Gjølberg, M., Explaining Regulatory Preferences: CSR, Soft Law, or Hard Law? Standards https://fbrh.co.uk/en/80-percent-of-the-world%E2%80%99s-250- Insights from a Survey of Nordic Pioneers in CSR, Business and Politics, largest-companies-report-according-to-gri Volume 13, Issue 2, August 2011, pp. 1-31 6 S&P Global Ratings, Our Approach to Assessing ESG in Ratings 4 http://reports.huginonline.com/hugin/801260.pdf ESG 100 - THE OSLO STOCK EXCHANGE

4 The finance sector’s quest for ESG-disclosures started sector’s demand for substance. Sustainability with investors who were searching for prospects to reporting is increasingly aligned with ESG assessments include in ethical or environmental funds or looking produced by research firms such as Sustainalytics, simply to exclude the worst companies (e.g. the worst MSCI, Bloomberg and ISS. These assessments are polluters or labour rights violators). However, during based on publicly available information and place the this period a number of “traditional” investors started onus on companies to disclose relevant and accurate including sustainability criteria in their standard sustainability information. company analyses. This was based on the notion that good corporate governance within sustainability leads As companies are increasingly burdened by reporting to better financial results. Bloomberg and MSCI, two requirements, they are uncertain as to how they of the large providers of company research to the should prioritise communication with investors. financial sector, reported more than 20 per cent growth in sales of sustainability data in 2017.7 and insurance companies are working on different pricing models to integrate sustainability PHASE 4: FROM NOISE TO SUBSTANCE factors into credit processes and insurance risk (2017–present) premium assessments.10 ESG information is beginning to count in credit ratings of companies. This The correlation between returns and good demonstrates the need for standardised and reliable management of ESG factors is being more credibly ESG information from a financial perspective. The documented.8 The financial sector is broadening and Norwegian Financial Supervisory Authority’s report on deepening its requirements for ESG information in a climate risk underlines that asset managers must manner that creates new challenges for corporate expect tighter controls with the marketing of so-called communication departments. At the same time, legal “green” investment products. Customers must receive interpretations have appeared which hold that an correct and complete information about the asset manager’s failure to consider ESG factors may be investment products’ characteristics and costs – a breach of fiduciary responsibility. Discussions are “greenwashing” will be sanctioned.11 This is consequently being held with regards to the legal underscored by the EU Commission’s 2019 guidelines responsibility of boards and the company accountants and requirements for what can be marketed as to provide correct ESG information. This has coincided sustainable financial products and services.12 Tighter with a notable increase in shareholder ESG activism.9 restrictions on investors will be reflected in the type of information analysts will need when it comes to The old style of sustainability report, with its anecdotal companies’ impact on climate and the environment.13 descriptions, falls short when faced with the financial

7 Record Year of Growth for MSCI ESG Research and Bloomberg 2017 Impact 10 of England/PRA, Enhancing banks’ and insurers’ approaches to Report managing the financial risks from climate change, SS3/19, April 2019 8 Nordea Equity Research, Strategy & Quant. 2017. Nordic Ideas, 5 September 11 Report – Climate risk and financial institutions, Finanstilsynet, June 21 2019 2017; Bank of America – Merrill Lynch, The ABCs of ESG. 2018. Equity and 12 Technical Expert Group (TEG) on sustainable finance, Taxonomy, European Quant Strategy, 10 September 2017 Commission, June 18 2019 9 Harvard Business Review, 05 2019 13 Interim report on Climate Benchmarks and Benchmark ESG Disclosures, European Commission, August 6 2019

ESG 100 - THE OSLO STOCK EXCHANGE 5 1.2 ESG ON THE STOCK EXCHANGE

The financial markets’ quest for ESG information has sector is particularly concerned with and looking for radically changed communication with investors on reporting on how companies are prepared to deal with sustainability. With a shift from voluntary and the consequences (physical and regulatory) of climate supplementary information to legal requirements ESG change. Company research demands far better data factors now have a bearing on companies’ access to quality than what today’s sustainability reports have capital, pricing of debt and insurance. Although this been designed for. phenomenon is, for the time being, limited in volume and scope, companies are increasingly treating The financial sector is also seeking more information sustainability communication with a greater degree of on ESG trends. For example, are there variations importance. between sectors? Does company size, profitability or ownership structure matter? A thorough examination For analysts to correctly evaluate a company there is a of these questions is necessary to understand how need for more information on ESG performance and well companies are prepared for a future where the company’s governance approach for managing sustainability information will become an integral part sustainability risks and opportunities. The financial of how they are perceived by various stakeholders.

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6 THE FINANCIAL ECOSYSTEM

Laws and regulations impose requirements on market participants, including companies' public reporting

In the financial market, equities and bonds are Asset managers and traded at prices based Companies depend on banks carry out on projections for capital - this is ensured analyses to assess companies' future value through the raising of whether companies creation debt (loans / bonds) or will provide good collection of equity returns in the long (shares) term

Investors and The Board, savers ask for management and investment advice employees report or place money and make into mutual funds decisions that affect the company's Public reports from the companies provide a basis operations for understanding how the business is run. Minimum requirements for reporting are set by laws and regulations. The Board of Directors decides how transparent and concrete the reporting is to be. Managers, banks and rating agencies can also influence how companies report.

6 BÆREKRAFT PÅ BØRS 2019 ESG 100 - THE OSLO STOCK EXCHANGE

7 1.3 ASSESSMENT METODOLOGY

Our starting point has been to determine to what accounting laws where they are legally domiciled and extent listed companies succeed in communicating the Oslo Stock Exchange’s recommendations for sustainability results in a precise manner. We believe sustainability reporting. this is imperative for the reporting to be relevant for the financial sector. To receive a top score in our The analysis is based on publicly available information assessment a company has to integrate sustainability from annual and sustainability reports for 2018 and information into its reporting of strategy, risk and includes material publicly available on the Web. For results performance. A sustainability report that is not most companies, the information was easily available. reflected in a company’s overall reporting indicates In cases where the information was not readily that sustainability is not operationally integrated into available, or was published after the middle of June, the management of the company. relevant information may have been omitted. Communication through other channels was not used SAMPLE AND DATA SOURCES as a basis for assessment. In cases where subsidiaries The analysis encompasses the 100 largest companies refer to reporting by the parent company, we used the by market capitalisation listed on the Oslo Stock parent company’s reporting as a basis for the analysis, Exchange as of 31 December 2018. All the companies even though it is not formally a part of the subsidiary’s are subject to the reporting requirements in the reporting.

ASSESSMENT CRITERIA

The companies have been analysed over four areas:

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8 RATING SCALE/SCORECARD investors’ need for information. All the companies were independently evaluated by two analysts from The companies were scored from 0 to 4 in the four The Governance Group before the results were different areas. CDP has a separate category for collated. In any case where there was disagreement companies that were asked by their investors to on scoring a third adviser was consulted. report but failed to do so (category F “Failed to report”). These companies received a score of -1 In the table below the assessment criteria are because this signals an unwillingness to comply with described in more detail:

WEIGHTING IMPARTIALITY AND INDEPENDENT QUALITY CONTROL We believe the four criteria carry varying importance The Governance Group counts several in the financial sector and have therefore weighted of the 100 largest companies on the them. A sustainability report that covers both social Oslo Stock Exchange among its clients. and environmental factors will cover the breadth of To ensure an impartial and consistent the information needed that relates to ESG analyses assessment process, an external and requires significant effort from the companies. validation was carried out by the Norwegian Business This has therefore been given a 40 per cent weighting School (BI) – Centre for Green Growth. BI has of the total. Climate-related questions have emerged arbitrarily sampled analyses of 10 per cent of the as an important factor in most ESG evaluations. CDP selected group. The companies were selected by BI and TCFD have therefore been weighted (in sum) 40 and covered a representative sample with regard to per cent. The UN Sustainable Development Goals, on sector and company size. Three partial scores were the other hand, are far less measurable and applicable tabled for discussion with one partial company score for ESG analysis. The goals in this context are mostly a being adjusted one notch down as a result of the way of gauging whether a company is attuned to quality control carried out by BI. international sustainability trends and expectations. This criterion is therefore given a weight of 20 per cent of a company’s total score. ESG 100 - THE OSLO STOCK EXCHANGE

9 2. Analysis

2.1 MATERIALITY AND SUSTAINABILITY REPORTING

Does the company have a sustainability report, and on a transparent and systematic materiality analysis. what constitutes a good report? Reports need not The report should address sustainability factors that follow a specific standard but should be based are material for the company’s operations and stakeholders and should provide a description of relevant practice and results for these areas.

GLOBAL REPORTING INITIATIVE For a company to receive a top score, we set as a requirement that its sustainability information be GRI is the most widely used international reporting integrated into its overall reporting on strategy, framework for sustainability reporting, with over governance and financial performance. The report 90% of the largest companies in the world must clearly set forth how sustainability is linked to uses this standard *. GRI is based on international the company’s strategy and performance standards such as the UN Guiding Principles of management, as well as how sustainability is attended Business and Human Rights, UN Global Compact and to in the work of the board and top management. OECD Guidelines for Multinational enterprises. Many sustainability reports are still separate documents disconnected from the company’s other reporting. Independent third-party verification is * ESG Reporting Reshapes Global Markets, Forbes, April 24 2017 weighted positively as this ensures increased quality control of the information provided.

Sustainability Report 35 31 30 30

25 22

20

15 13

10

5 4

0 Score 4 Score 3 Score 2 Score 1 Score 0

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10 Thirty-five companies provide very good sustainability A total of 31 companies received a score of 2, which reports with specific performance indicators and reflects good reporting on several issues, but lacks a clearly defined material factors for their operations description of the company’s material challenges and and their stakeholders and therefore received a score stakeholders’ perspectives. of 3 or 4. A total of 13 companies received the top score because sustainability reporting is visibly Thirty companies received a score of 1. These are integrated into the company’s overall strategy and primarily companies that mention sustainability only governance. Seven of these companies also provided in general terms. This may include reference to some externally verified reports. Norsk Hydro (industry), statistic concerning health, safety and environmental (aquaculture) and Orkla (food and beverage) are factors. This is rather alarming as § 3-3c in the examples of companies that received the top score in Norwegian Accounting Act requires all large our ranking. Norsk Hydro’s reporting shows that the companies to account for guidelines, procedures and company, including the board and top management, results with regard to environment, social factors, treats sustainability as a central part of its strategy and climate and human rights. The wording in the governance, especially in the presentation of the Accounting Act is too vague to unequivocally claim Alunorte situation. Mowi’s reporting is a good that there has been a legal breach, but it is difficult to example of how a company can clearly and credibly see how the sustainability reporting of most of the explain the challenges and opportunities facing their companies receiving a score of 1 comply with the business model and industry. Orkla’s reporting also law’s intention. Several of these companies operate stands out by clearly presenting a highly diverse set of in sectors with a significant environmental footprint, business areas where sustainability is included as a or in sectors with known challenges within health, natural component. safety and the environment, corruption or human rights violations, without mentioning any of these Twenty-two companies provide good sustainability issues. 4 companies provided no sustainability reports but demonstrate to a lesser degree how reporting at all and therefore received a score of 0. sustainability factors are integrated into overall Likewise, it’s hard to see how these companies are strategy, governance and performance management. compliant with minimum reporting requirements. These companies did not receive a top score despite solid stand-alone sustainability reporting. The failure to integrate sends a mixed signal regarding the actual importance of sustainability for the company. Sustainability is obviously not on the agenda of the board and top management to the same extent as companies receiving a score of 4.

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11 2.2 CDP – CARBON DISCLOSURE PROJECT

We employed the CDP rating, which assesses the 19 received the grade of B or C, five companies’ climate strategy and emissions of companies. Among reports were consistent with the grade D, and 46 the 100 largest companies on the Oslo Stock companies do not report to the CDP. Twenty-three Exchange, 31 reported to the CDP. Seven companies companies were recorded as “Failed to report”. These received the highest grade, an A, which is a significant are companies that have been contacted by the CDP achievement. The seven companies represent a broad on behalf of investors and asked to provide range of sectors: aquaculture, oil, finance, information but refrained from doing so. These construction, telecom and real estate. companies were penalised and received a negative point in our analysis for signalling an unwillingness to satisfy investors’ demands for information. CDP It is interesting to note that CDP reporting in 2018 CDP is the largest reporting framework for declined compared to 2017 in percentage terms, the environmental information and the annual ranking average score for the whole group fell by 23 per cent. from CDP is actively used by the finance industry. A-ranked companies declined by 22 per cent, and 15 Over 5500 companies report via CDP, and the per cent more companies fell into the category “Failed database encompasses close to a fifth of global to report”. A possible explanation may be that CDP climate emissions. CDP is backed by over 800 reporting has become very time consuming for institutional investors with over $ 100 trillion * of companies: the CDP survey was recently expanded total assets. with a number of new and complex questions that, in our view, are of questionable added value. The same downward trend in CDP reporting has been noted in Ireland this year.14

CDP-reporting 50 46 45 45

40

35

30

25 23 20 20

15 11 11 12 9 10 7 8 5 5 3

0 A B C D Ingen rapportering Avstått fra å rapportere

2018 2017

14 Number of Irish companies reporting carbon emissions to CDP falls, Irish Independent, March 27 2019 ESG 100 - THE OSLO STOCK EXCHANGE

12 2.3 DISCLOSURE OF CLIMATE RISK (TCFD)

Reporting on climate risk may represent a paradigm regarding companies’ climate risk was developed in shift within sustainability reporting. In this paper, we response to a commission from the Financial Stability have not emphasised how a company itself impacts Board. In 2015 Michael Bloomberg and Mark Carney the climate through its own emissions, but rather the were appointed to lead the “Task Force on Climate- financial consequences of climate change on the related Financial Disclosures” (TCFD) to develop a set company’s bottom line. Banks, insurance companies, of disclosure recommendations on climate related investors and authorities fear the economic risks, primarily aimed at investors, banks and consequences of climate change. This includes insurance companies. The recommendations, physical climate changes such as increased damage to published in 2017, include eleven specific disclosures assets, operating downtime and raw material (see the TCFD box on the next page) on governance, shortages due to extreme weather and ecosystem strategy, risk management and metrics, and targets. disruptions. Full disclosure in accordance with TCFD will provide a good picture of the board and management’s role in Another concern relates to so-called transitional risks, handling climate risk, what strategy the company has namely changes in the business framework driven by developed, and how risk is identified, analysed and stricter climate regulations and shifts in market dealt with, as well as specific targets and results within preferences. This type of risk is much harder to climate risk management. predict, but if the goal of the Paris Agreement is to be met,15 it will involve radical changes in legislation, Our analysis indicates a clear positive development: technology, the competitive landscape and market The number of companies with a score of 0 fell from dynamics. This again will trigger changes in investor 75 last year to 63 this year. Awareness about the and consumer behaviour. Several companies with importance of mentioning climate risk increased heavy global emissions have become the targets of markedly, and the total average score went from 0.51 lawsuits demanding compensation for their negative last year to 0.76 this year – an improvement of nearly contribution to climate changes and for the failure to 50 per cent. Nonetheless, it is disconcerting to note disclose information on climate-related risks. For that 63 of the 100 largest companies on the Oslo Stock investors the challenge is to identify companies best Exchange fail to mention climate risk at all, although prepared to deliver good returns in a low-emission the word “risk” appears as many as 300 times in society. An international framework for information several annual reports.

Climate Risk

80 75

70 63 60

50

40

30

20 15 10 10 8 10 5 7 5 2 0 Score 4 Score 3 Score 2 Score 1 Score 0

2018 2017

15 Number of Irish companies reporting carbon emissions to CDP falls, Irish Independent, March 27 2019 ESG 100 - THE OSLO STOCK EXCHANGE

13 Our conclusions is that we have a long way to go Fifteen companies mention climate as a risk factor but before investors will get the information on climate fail to provide any further information. Ten companies risk that is actually needed for company investment. provide a short paragraph and mention a few factors analyses, despite the fact that several banks have linked to physical risk or transitional risk but say very announced that climate risk will be included in little about how they manage these risks. Seven investment and credit evaluation processes. More companies make a decent attempt to describe the worrying, however, is that the companies themselves type of risk they face and how they manage it and apparently do not understand the type of climate receive a score of 3. To receive this score, we require related risks they face, and only a few companies that companies describe both the physical and seem to systematically address this issue. It is transitional risk, but also make meaningful disclosures pertinent to ask whether the board of a company is on governance, strategy, risk management, and compliant with the responsibility to report on “risk targets and metrics. factors that are of material importance for the company’s financial position in the annual report”, as In our view, five companies provide disclosures that required by § 3-3a of the Norwegian Accounting Act. allow the reader to evaluate the quality of the company’s work on climate risk. This includes Norsk Several of the 63 companies that make no mention at Hydro and Borregaard. Norsk Hydro provides all of climate risk are to be found in the oil and gas thorough climate risk disclosure in an understandable sector. Companies in this sector will be among the first manner. The information presented is structured to be affected by stricter climate regulations and according to the recommendations of the TCFD. general “climate shaming.” The primary sector is also Borregaard stands out by providing an in-depth particularly exposed to more frequent extreme analysis of how different types of climate risk may weather and changes in the ecosystem. impact the company, while clearly showing how the company’s strategy is being adapted to meet those challenges.

TCFD RECOMMENDS INVOLVEMENT OF THE BOARD STATEMENTS ON: ▪ The Board’s follow-up of climate-related risks, including opportunities ▪ The company’s management of risk

STRATEGY ▪ Climate-related risks and opportunities for the business over different time horizons ▪ Climate-related risks and opportunities for the company’s business areas, strategy and financial plans ▪ Scenario analysis for different temperature increases (including a less than 2° change)

RISK MANAGEMENT ▪ The company’s processes for identifying and addressing climate-related risks ▪ The company’s processes for managing climate-related risks ▪ The processes for identifying, assessing and managing climate risk in the company’s risk management system

MEASURING AND TARGETS ▪ The relationship between the measurements for climate-related risks and strategy as well as risk management ▪ The company’s greenhouse gas emissions (Scope 1, 2, and possibly 3) and associated risks ▪ The targets the company uses to monitor climate-related risks, and how the targets are achieved

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14 2.4 THE UN SUSTAINABLE DEVELOPMENT GOALS

Our analysis finds that the UN Sustainable Two companies use the SDGs actively and receive a Development Goals (SDGs) are extensively referenced score of 3, but most often this comes across as mere and used for visual design in annual reports. However, cross-referencing of already existing information and few companies provide information that is the sustainability goals do not provide additional meaningfully aligned with the SDGs. information of substance. Twelve companies provide sporadic references to the SDGs, while 17 companies Fifty companies make no mention of the SDGs and mention sustainability goals more as a source of only nine companies provide meaningful reporting on inspiration (score of 1). Nevertheless, this is an the SDGs. These nine companies offer a clear improve compared to the 2018 reporting where 59 explanation of which goals they have selected and companies made no mention of the SDGs, and only manage to use these goals actively in their results three companies received the maximum score. reporting. Leading by example are Borregaard, Forsikring and SpareBank 1 Østlandet. Despite the popularity of the SDGs in the business Borregaard provides excellent visual illustrations of world a lot remains before these goals function as a how their SDGs are linked to the company’s strategy. meaningful framework for reporting purposes. There Gjensidige Forsikring provides a clear presentation of are currently several initiatives, including one led by how the SDGs are reflected in the company’s core the UN Global Compact, to develop a framework for business areas and the company’s own sustainability corporate reporting on the SDGs. Our analysis of goals and furnish a good overview of the status of corporate reporting practice, however, indicates that ongoing actions and future measures to be taken. the SDGs appear to be better suited for inspiration SpareBank 1 Østlandet stands out by providing an and advocacy. From an investor perspective, the goals overview of how the company can contribute to their may appear too bundled and inconsistent to be useful goals from an internal company perspective and as a basis for company analysis. through cooperation with partners outside the company.

UN Sustainable Development Goals 70

59 60 50 50

40

30

20 17 13 14 12 12 11 9 10 3 0 Score 4 Score 3 Score 2 Score 1 Score 0

2018 2017

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15 3. Key findings

What does comprehensible reporting by a company on sustainability signify? Do more profitable companies provide better sustainability reporting? Are some sectors more focused on disclosing ESG information than others?

Notwithstanding the limited statistical basis for the short term until these failures to adapt create ESG 100 analysis, this report has identified some challenges for the company in meeting future interesting correlations. emissions standards and quality and competence requirements. Our regression analysis reveals that there is a clear and statistically significant positive correlation Sustainability reporting does not directly generate between the quality of a company’s sustainability income but indicates whether a company is carrying reporting, the share of state ownership in the out analyses of factors that will have an impact in the company and its dividend yield. longer term. When companies that provide good sustainability reporting also offer higher direct returns There is a high level of direct state ownership in (larger dividends), it indicates that they are capable of . Twelve different ministries administer the paying dividends today while simultaneously thinking state's ownership interests in 73 companies. The broadly and in the long term about its role in society. state’s shareholdings in the companies in which the state has the objective of achieving a return were Last year’s analysis showed that a company’s size was valued at NOK 833 billion at the end of 2018. The a crucial factor in determining the quality of its Government is currently preparing a new State sustainability reporting. There is no such statistically Ownership Report.16 The last ownership report holds significant correlation to be found this year. Several that “the Government expects companies where the smaller companies now provide good reporting. state has an ownership share to work systematically to Borregaard is a good example in this respect. integrate social responsibility into the business and be leaders in their fields.”17 Our analysis shows that To summarise, companies with state ownership and companies with public ownership interests (through higher dividend yields were overrepresented among the Ministry of Industry and Fisheries and the the companies with the best sustainability reporting. Government Fund) provide a higher overall quality of sustainability reporting. This indicates that the boards and management teams of companies in which the state has an ownership stake take sustainability more seriously.

Our analysis also reveals a positive correlation between dividend yield and the quality of sustainability reporting. This may seem paradoxical: a company that invests less capital in new equipment with lower energy consumption, good labour conditions and control measures to avert corruption may be able to make larger dividend payments in the

16 UNFCCC in Paris – two years after The Paris Agreement, Office of the Prime 17 Valuable input for a new State Ownership Report, Forum, Ministry of Minister, December 2017 Industry and Fisheries, 28. august 2018 ESG 100 - THE OSLO STOCK EXCHANGE

16 3.1 SECTOR FINDINGS

We also looked for significant sector correlations at a leads to significant emissions that will be sector level. To this end, we used the Oslo Stock impacted by increased environmental taxes. Exchange’s sector classification and combined sectors ▪ Large energy companies, generally, provide where the number of companies and the market broad and in-depth information on how they capitalisation are small in order to facilitate manage ESG factors. The sector, however, also comparisons on a sector basis – we chose to retain includes many small companies which provide real estate as a separate sector although the sector’s investors with little or no insight into the weighting is small. sustainability of their activities.

▪ On average, industrial and materials companies, ▪ The financial sector, which is strictly regulated as well as consumer goods producers, provide and subjected to standardised reporting the most comprehensive and best documented requirements, provides surprisingly sparse sustainability reporting. Companies that produce sustainability information in their annual consumer goods are more likely to be exposed reports. The sector average is lifted by large to ESG reputational risks e.g. from players like DNB and who provide environmentally damaging activity, poor labour high quality information, while the smaller conditions or corruption. Negative media companies’ reporting is by and large inadequate. attention arising from such activities may result in consumers punishing the such companies. ▪ The real estate sector receives a low score – Industrial companies and material producers including on climate-related information – which are, generally, energy intensive. This, in turn, is alarming given the sector’s vulnerability to climate change in the longer term.

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17 ESG 100 - THE OSLO STOCK EXCHANGE

18 3.2 LEADING BY EXAMPLE – THE BEST SUSTAINABILITY REPORTING

Each company’s total score was compiled by adding the number of points for each criterion assessed (0–4), adjusted for the weighting given to each as described in the section on methodology on page 9.

The companies who achieved Sustainability highest scores this year reporting CDP-score Climate risk UN SDGs Total score

Equinor 4 4 4 4 4

Borregaard 4 4 4 4 4

DNB 4 4 4 3 3,8

Orkla 4 3 3 4 3,6

Telenor 4 3 2 4 3,4

Mowi 4 2 3 4 3,4

Norsk Hydro 4 2 4 3 3,4

Grieg Seafood 4 4 2 3 3,4

Gjensidige Forsikring 4 1 3 4 3,2

Yara International 4 3 3 2 3,2

Veidekke 4 4 2 2 3,2

Storebrand 3 4 3 2 3

SpareBank 1 Østlandet 4 0 3 4 3

Entra 3 3 4 2 3

18 BÆREKRAFT PÅ BØRS 2019 ESG 100 - THE OSLO STOCK EXCHANGE

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In general, these companies provide specific and We have rated all the 100 companies and decided to accurate descriptions of how they address group them in the following categories: sustainability, including climate risk. Their sustainability work appears to be well integrated into ▪ Total score of 4 (top performers) the business model. The reports are highly rated and ▪ Score between 3.9 and 3 regard them as good practice for sustainability ▪ Score between 2.9 and 2 reporting. and Borregaard stand out with top ▪ Score between 1.9 and 1 scores in each category. Borregaard is not among the ▪ Score between 0.9 and 0 40 largest companies on the Oslo Stock Exchange as measured by market capitalisation, but their The companies for each group are listed in sustainability reporting surpasses most of the stock alphabetical order. We are also aware of the fact that exchange’s heavyweights. This is surprising and shows some of the companies are not subject to Norwegian that a company can take sustainability seriously even accounting laws and are therefore not necessarily with limited ressources. required to provide reporting on environmental or

social conditions. Three companies deserve mention due to significant improvement in their reporting compared to last year:

Borregaard, and Gjensidige Forsikring.

These companies now provide ESG information on par with the best.

The report does not aim to single out poor performers but focusing only on the top performers will provide a skewed view of sustainability reporting challenges.

ESG 100 - THE OSLO STOCK EXCHANGE

20 TOTAL SCORE – 100 LARGEST COMPANIES ON OSLO STOCK EXCHANGE

SCORE 4,0 Borregaard Equinor

DNB Mowi Storebrand SCORE 3,0-3,9 Norsk Hydro Gjensidige Orkla Veidekke Grieg Seafood SpareBank 1 Østlandet

Aker BP SalMar Solar SCORE 2,0-2,9 Atea Lerøy Seafood Group Schibsted Nordic Semiconductor Wallenius Wilhelmsen Fjordkraft Petroleum Geo-Services

AF Gruppen EVRY Salmones Camanchaca SCORE 1,0-1,9 Akastor SpareBank 1 Nord-Norge Aker Höegh LNG Holdings SpareBank 1 SMN Automotive SpareBank 1 SR-Bank AKVA Group B2Holding Norway Royal Salmon TGS-NOPEC BW LPG Norwegian Property Systems BW Offshore Limited NRC Group Wilh. Wilhelmsen Holding Elkem Odfjell XXL Europris RAK Petroleum

SCORE 0,0-0,9 Fjord1 Northern Drilling Selvaag Bolig FLEX LNG Shelf Drilling ABG Sundal Collier Frontline Norwegian Energy Company Solon Eiendom American Shipping CO Gaming Innovation Group Norwegian Finans Holding SpareBank 1 BV Arcus Hexagon Composites NTS SpareBank 1 Ringerike Hadeland Arendals Fossekompani IDEX Ocean Yield SpareBank 1 Østfold Akershus Seafood Komplett Bank Sparebanken Møre Axactor Kværner Olav Thon Eiendomsselskap Sparebanken Vest Bonheur Magseis Fairfield Otello Corporation Spectrum Borr Drilling MPC Container Ships Protector Forsikring Stolt-Nielsen Bouvet NEL Pareto Bank The Scottish Salmon Company DNO Nordic Nanovector Sbanken Treasure

20 BÆREKRAFT PÅ BØRS 2019 ESG 100 - THE OSLO STOCK EXCHANGE

21 4. Conclusion

This year’s analysis of the 100 largest companies on manage ESG related risks. Although there are many the Oslo Stock Exchange reveals that many companies stand-alone examples of comprehensive sustainability lack a systematic approach to sustainability reporting. reports, it is difficult to compare companies across However, the trend is positive compared to last year. ESG areas as the reporting criteria remain ambiguous. This is good news for investors and society at large – sustainability has become less noise and more The financial sector depends on accurate and substance. comparable information on risks, in order, to evaluate how this may affect value creation. A sophisticated The responsibility of identifying material sustainability and standardised approach to sustainability reporting risks and associated goals does not only belong to does not exist. Trust must be built by referring to a senior management. The company’s board should methodical and thorough assessment of what have access to information regarding key sustainability constitutes the material risks and opportunities for a risks to the same extent as it does in other areas. By given company. A good materiality assessment is being transparent with regard to risk tolerance and therefore a prerequisite for both governance and goals related to material sustainability factors, the reporting processes. We also welcome policy board will also aid investors in understanding the initiatives aimed at establishing a legal framework for company. simple, specific and standardised ESG reporting.

Investors need to be reassured that the board and management understand the company’s material risks. Companies that employ vast resources to solve all imaginable issues surrounding sustainability are likely to be financially punished not rewarded. A comprehensive study by Khan, Serafeim and Yoon18 shows that companies that manage to prioritise significant factors deliver higher returns than companies that operate with a broad and undefined commitment to sustainability.

What counts as significant factors differs across sectors, geography and value chains. The key for corporate leaders is therefore to identify and manage the ESG factors that are significant for the company instead of trying to please everyone with a poorly defined “commitment to sustainability”.

Since the Norwegian Accounting Act does not clearly define the requirements for ESG information, minimum reporting is likely to have little value. This makes it challenging to understand how companies

18 Report to the (white paper) St. 27 (2013–2014), Diverse and value- creating ownership ESG 100 - THE OSLO STOCK EXCHANGE

22 5. Companies analysed The below represents the 100 largest companies measured by market value on the Oslo Stock Exchange as of December 31, 2018. Companies are listed in alphabetical order.

ABG Sundal Collier Holding Golden Ocean Group RAK Petroleum AF Gruppen Grieg Seafood SalMar Akastor Hexagon Composites Salmones Camanchaca Aker Höegh LNG Holdings Sbanken Aker BP IDEX Scatec Solar Aker Solutions Komplett Bank Schibsted AKVA Group Kongsberg Automotive Selvaag Bolig American Shipping Company Kongsberg Gruppen Shelf Drilling Arcus Kværner Solon Eiendom Arendals Fossekompani Lerøy Seafood Group SpareBank 1 BV Atea Magseis Fairfield SpareBank 1 Nord-Norge Austevoll Seafood Mowi SpareBank 1 Ringerike Hadeland Axactor MPC Container Ships SpareBank 1 SMN B2Holding NEL SpareBank 1 SR-Bank Bakkafrost Nordic Nanovector SpareBank 1 Østfold Akershus Bonheur Nordic Semiconductor SpareBank 1 Østlandet Borr Drilling Norsk Hydro Sparebanken Møre Borregaard Northern Drilling Sparebanken Vest Bouvet Norway Royal Salmon Spectrum BW LPG Norwegian Air Shuttle Stolt-Nielsen BW Offshore Limited Norwegian Energy Company Storebrand DNB Norwegian Finans Holding Subsea 7 DNO Norwegian Property Telenor Elkem NRC Group TGS-NOPEC Entra NTS The Scottish Salmon Company Equinor Ocean Yield Tomra Systems Europris Odfjell Treasure EVRY Odfjell drilling Veidekke Fjord1 Olav Thon Eiendomsselskap Wallenius Wilhelmsen Fjordkraft Holding Orkla Wilh. Wilhelmsen Holding FLEX LNG Otello Corporation XXL Frontline Pareto Bank Yara International Gaming Innovation Group Petroleum Geo-Services Gjensidige Forsikring Protector Forsikring

22 BÆREKRAFT PÅ BØRS 2019 ESG 100 - THE OSLO STOCK EXCHANGE

23 The Governance Group AS Org.nr. 916 909 403 Grev Wedels plass 2 thegovgroup.org 0151 Oslo, Norway Tel +47 22 83 43 00

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