The following disclosure is important and is a backgrounder for both LEI and LEA modules.
In 2019, we did a major overhaul in our European direct equity strategy. The background was aligning the strategy more tightly to the purpose of the fund in a somewhat changed situation with regards of the fund long-term future cashflow needs (demography-based underlying issues).
The strategy aims at more stable and controlled cashflow generation as the cashflow needs on the pension system will gradually increase in the years to come. A factor in the background was also the renewing our investment beliefs and our principles of our responsible investment beliefs in 2017 and the consequent board-driven RI projects (document links in the strategy-section). From the perspective of RI, the strategic shift led to marked changes in our Europe portfolio (some 60% of the internally managed equity assets). The size of our internally managed domestic strategy is 40% of the (internally managed equity) total.
On the back of the European strategy, the number of shares in our European active strategy came down from 150 to 57. A driver was on one hand a more purpose-driven style tilting (description on the cashflow needs, principles and demographic constraints above) and on the other hand a better ability to engage and vote on the companies in an informed way with our limited resource pool. During 2019, we procured a proxy-voting IT system and in the beginning of 2020, we have placed our first votes.
As a result of strategy development, the weighed average issuer carbon intensity in our Europe portfolio came down markedly and is now less than half of the underlying index (MSCI Europe IMI) and based on MSCI ESG data. Also in our domestic business, our weighed average issuer carbon intensity is some 15% below that of the benchmark (OMX Helsinki 25).
In 2019, the personnel of the direct equity team was engaged in 1) Articulating the strategy 2) Equity selection for the new strategy and 3) Shifting the portfolio to reflect the new thinking. Whilst the strategy is a major improvement from ESG perspective (ability to engage increasing through concentration, carbon footprint markedly down, proxy voting processes now up and running), resources were focused on building the future rather than day-to-day business. This is reflected in LEA and LEI answers. We would like to emphasize however that the ESG improvement both from strategic and from process perspective is fundamental. We hope that this is also reflrected in PRI assessment. For us, this would be a signal that PRI values long-term strategic development and understands the consequent need for resource allocation.
ESG factors are integrated in our equity portfolio management and investment process. We integrated ESG factors in our fundamental economy, industry and company analysis (themes, megatrends, resources, legislation, regulation, risks etc). According to our investment philosophy, stocks are selected based on several quality criterion which includes ESG factors. Furthermore, we use screening and research by external service providers to complement our own resources.