Sustainable Investments 2023

This report, as previously, has been produced by the financial staff after consultation with the Asset Management Council. Asset management in dioceses, parishes and congregations are not included in this report. Sustainable investment activities are conducted throughout the Church of Sweden.

The year in figures

• The result for the asset management´s overall portfolio after bank and management fees amounted to MSEK 1,018.
• The return for the overall portfolio amounted to 9.9 per cent.
• The market value of the assets in the overall portfolio as of 31 December 2023 amounted to MSEK 11,143.

Table of contents

• The year in brief
• Commission, asset management and follow-up
• Financial development in the long-term
• Result, return and assets 2023
• Sustainability during the year
• More about our sustainability investments

The year in brief

During the year, investors were concerned about geopolitical events and the economy. While at the same time, technological developments, with an increasingly strong focus on artificial intelligence (AI), led to expectations that affected the stock market. 2023 concluded by being a vigorous year for the stock market despite worrying geopolitical events, high inflation, and concerns about interest rates.  The Swedish Stock Exchange went up 19 per cent while emerging markets rose by almost 6.0 per cent (everything calculated in SEK).

Pretty much the entire increase in the Stockholm Stock Exchange occurred during the last two months of the year. The central banks' signal of a less strict monetary policy together with falling inflation contributed to the strong end to the year. Falling inflation provides hope that the peak in interest rates with a focus on the central banks' key interest rates is behind us, and that interest rate cuts await in the future.

The negative fixed income security’s yield in the historically weak 2022 was reversed in 2023, and the return on our benchmark indices for interest-bearing securities and corporate bonds was 5.0 per cent and 8.0 per cent, respectively. The rate of return on fixed-income investments has risen with the rising interest rates, and the possibility of obtaining a real return on fixed-income investments feels realistic again after many years of extremely low interest rates.  

The asset management's unlisted holdings in real estate and alternative investments experienced weaker development yielding a negative return during the year. Here we see a lag in valuations. These asset classes are not immune to developments in the real economy. The rapid appreciations that took place in these asset classes, which peaked in 2021-2022, have been replaced by depreciations. 

The year was thus strong in terms of returns for both equity and fixed income asset classes, while real estate and alternative investments yielded a negative return.
The result was MSEK 1,018, corresponding to a return of 9.9 per cent. 

The overall portfolio has shown a positive return in nine of the last ten years. The portfolio has exceeded the return target eight of the last ten years.

The Church of Sweden had representatives present at COP28 to monitor the negotiations. Criticism was directed at the risk of the climate meetings becoming a platform for fossil industry lobbyists, and the Church of Sweden emphasised the importance of not leaving the negotiations to such forces, but instead ensuring broad representation, especially for groups already affected by climate change. The Church of Sweden was clear that the climate issue is a matter of justice and commits to working to achieve the 1.5 degree target.

Read more on our website, About our Sustainable Investments

Commission, management model and follow-up

The mandate from the Central Board of the Church of Sweden focuses on the long-term performance of asset management at the national level for the Church of Sweden.  The overall return target is three per cent per annum above inflation, measured over rolling ten-year periods. The capital must also be managed in an ethically defensible manner in accordance with the church's fundamental values. 

The model we employ in our asset management to achieve this goal consists of allocation of capital, i.e. distribution among different asset types, as well as selection of fund managers and monitoring of the management. 

Capital Allocation

To create conditions for achieving the long-term goal, we use a strategic reference portfolio that we also use as a reference portfolio when evaluating our asset management. The strategic reference portfolio is based on the return target of three per cent in real terms and a time horizon of 10 years. This strategic reference portfolio demonstrates the optimal distribution between the asset classes (equites, fixed-income securities, real estate and alternative investments) to achieve the return target considering the decided level of risk. The distribution within the strategic reference portfolio is continuously followed. Depending on how the various markets develop, the distribution between the asset classes in our portfolio also changes.  

Selection of asset manager

When selecting managers, focus is on two overarching areas:  sustainability orientation in management and the ability to deliver stable financial returns.

In terms of sustainability, the manager must meet the requirements according to the financial policy and our investment rules for ethics and sustainability. The manager must have an exceptional ability to integrate factors concerning the environment, nature, social issues and corporate governance in the financial analysis of the companies they select. The managers should also see sustainability issues as opportunities in asset management and not only as risk management. Risk management is an important area, but the manager must also be able to identify companies that consider how sustainability work can create new business opportunities and values, rather than problems and costs. It is also important to see that the sustainability work generates a stable financial return. It helps if the manager can demonstrate a stable financial historical return, but in the end, trust in the manager is primary. 

In the analysis we do of the managers and asset management, we also ensure that the managers have a regulatory framework that enable us to avoid investments in companies that violate the financial policy. This applies, for example, to companies active in fossil energy, weapons, tobacco and pornography. It is important for the Church of Sweden to feel secure with the  manager’s organisation, strategy and ability to meet the requirements set in the financial policy and the investment instructions.

The managers' investment processes can be illustrated as a funnel, as shown in the image above. This description mainly applies to equity management, but the sustainability requirements apply to all asset classes. The managers select a number of companies from their investment universe, which is the large number of companies available to choose from for the market portfolio in question. Then the managers conduct both a financial analysis and a sustainability analysis to ensure that the selection of companies from which the portfolio can choose meets the Church of Sweden's financial policy. Finally, the optimal portfolio is then assembled (steps 1-3). Steps 4 and 5 illustrate how the managers actively work with the portfolio through continuous follow-up and dialogue with the holdings.

Follow-up of management

In addition to the ten-year return target, there is continuous evaluation of the individual asset managers and the overall portfolio. The managers are compared against relevant benchmarks, and regarding the total portfolio, returns are compared against our weighted benchmark.

In addition to the financial evaluation, the Church of Sweden also reviews the asset managers and holdings based on our sustainability requirements using Sustainalytic’s screening tool. More about this in the section "Sustainability review of the investment portfolio shows long-term value creation".

Result, return and assets 2023 

The result in 2023 for the Church of Sweden's asset management at the national level amounted to MSEK 1,018. This corresponds to a return of 9.9 per cent (benchmark index 11.6 per cent).

In seven of the last ten years, the return has exceeded the weighted strategic reference portfolio's benchmark. However, the return for 2023 was 1.7 percentage points lower than this index. The main reason for this is that our Swedish equites did not achieve the index return, and that Real Estate and Alternative Investments generated a negative return during the year, while its benchmark index (CPI +3 per cent) ended at 7.4 per cent.

The market value of the overall portfolio as of 31 December 2023 amounted to MSEK 11,143 (previous year: MSEK 10,324). In December, a withdrawal of MSEK 200 was made from the asset management to the liquidity management at the Church of Sweden's national level.

Allocation based upon a Strategic Reference Portfolio

To create conditions making it possible to achieve the long-term target, we use a strategic reference portfolio that we then also use as a reference portfolio when evaluating our asset management against the ten-year time horizon.

The distribution, also called the allocation, among the asset classes in our portfolio, is constantly changing depending on how the various markets develop.

The allocation between the asset classes is shown in Figure 1; Return per asset class, Table 2 and the Largest shareholdings in Table 3.

Equity management

Equity management constitutes the portfolio's largest asset class and amounted to 55.1 per cent of the portfolio at the end of the year. This asset class contributed positively during the year with MSEK 906, corresponding to a return of 16.0 per cent.

The biggest contributors were global equities, which yielded a return of 19.8 per cent (index 19.3 per cent). Swedish equities returned 17.4 per cent (index 19.2 per cent) and emerging markets generated a return of 6.9 per cent (index 5.9 per cent). The asset class contributed 8.8 percentage points to the portfolio's total return.  

Ethos Swedish Equity Fund had the highest return among Swedish equities with a return of 19.4 per cent (index 19.2 per cent). Among global equities, the Generation IM Global Equity Fund had the highest return of 23.2 per cent (index 19.3 per cent). Stewart Investor's EM generated the highest return within emerging markets with a return of 8.9 per cent (index 5.9 per cent).

Fixed Income Investments

Swedish fixed income investments yielded a 6.5 per cent return, which is 1.1 percentage points better than the index (5.4 per cent). Corporate bonds generated a return of 10.5 per cent, which was 2.4 percentage points better than the index, which concluded at 8.1 per cent. 
Total fixed income investments accounted for 22.4 per cent of the portfolio and contributed 1.7 percentage points to the portfolio's total return. 

Real Estate

Real Estate produced a negative result of MSEK -42.4 corresponding to a return of -3.0 per cent and contributed negatively by -0.4 percentage points to the return for the total portfolio. The return was 10.4 percentage points lower than the benchmark index which was 7.4 per cent (CPI +3 per cent). The market value of Real Estate amounted to MSEK 1,395.2.

Alternative Investments

Alternative Investments yielded a negative return of MSEK -25.4, which corresponds to -2.3 per cent. This is significantly lower than the comparison index of CPI +3 per cent (which for 2023 ended at 7.4 per cent) we use for Real Estate and Alternative Investments. The result contributed negatively by -0.2 percentage points to the portfolio's total return. The market value of the Alternative Investments as of 31 December 2023 amounted to MSEK 1,062.2.

The ongoing valuation of Real Estate and Alternative Investments that are illiquid assets is associated with uncertainty. In the vast majority of our holdings within this asset class, one has to wait until maturity before the result can be determined.

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1. Distribution between asset classes on 31 December 2023

2. Earnings and return 2023 per asset class and a five-year overview

3. Our largest holdings in shares as of 31 December 2023

Financial development in the long-term

Asset Management over 10 years

From a ten-year perspective our portfolio is robust. For the ten-year period 2014 - 2023, the accumulated return was 121.3 per cent, corresponding to 8.3 per cent in annual average return. The return target for the same period amounted to 75.0 per cent, corresponding to 5.8 per cent per year (see diagram 4 below).

4. Actual return, return target and inflation (CPI) 2014-2023

The asset management has exceeded the return target eight of the last ten years. The outcome for individual years can of course vary greatly, as can be seen from the bar chart (see Figure 5 below).

5. Actual return, return target and benchmark index 2014-2023

6. Actual return, return target and inflation (CPI) 2000-2023

Sustainability during the year

The Church of Sweden has a clear and long-term commitment regarding sustainable investments.

During the year, the Church of Sweden continued to be committed and proactive in its work with sustainable investments, with a strong focus on integrating its values ​​and principles in asset management contributing to a more sustainable and fair world.

An eventful year for sustainability

During 2023, several significant initiatives and decisions shaped the sustainability work of companies and organisations:

•  The OECD updated its guidelines for multinational companies, which tighten the requirements in areas such as the environment and climate 
• In 2023, Science Based Target Networks (SBTN) launched science-based targets for nature conservation, with a pilot project involving 17 companies
• The Taskforce on Nature-related Financial Disclosure (TFND) published recommendations for managing and informing about financial risks and opportunities related to nature 
• The EU taxonomy was updated with the remaining four environmental targets, which are to be integrated into reporting from 2024 onwards
• Nature Action 100, a global investor initiative to promote nature and biodiversity conservation, initiated dialogues with 100 companies in priority sectors.

Dialogue and collaboration on sustainability issues 

During the past year, the Church of Sweden continued the dialogue on sustainability issues with the managers of the 29 fund mandates. Through the collaboration with the Investors Integrity Forum (IIF) within Transparency International Sweden (TI Sweden), discussions were also held with companies in the construction sector regarding anti- corruption measures. 

As part of the agreement with Sustainalytics, the Church of Sweden had the opportunity, together with other investors, to meet with companies in the technology and extraction sector to discuss human rights. Participation in meetings with companies in the food sector and the financial industry to discuss biodiversity also took place during the year. The purpose of these initiatives is to gain greater insight into how companies and asset managers value and manage these risks that are linked to upcoming EU legislation on due diligence.

The Church of Sweden also continued to actively participate in the Institutional Investors Group on Climate Change (IIGCC). During the year, the Church of Sweden was involved in developing a guidance document for investors regarding the management of scope 3 carbon emissions.
Scope 3 covers indirect emissions that the companies do not own or control, and therefore have less opportunity to influence. By including Scope 3 in emissions calculations, the investor obtains a more complete picture of the portfolio's total climate impact. This can provide a more realistic and informative assessment of the portfolio's climate footprint.    

Other networks that the Church of Sweden participated in during 2023 are: Swedish Investors for Sustainable Development - SISD, Sweden’s Forum for Sustainable Investments - Swesif, Global Network Initiative - GNI, Hållbart värdeskapande  and Faith Invest. 

Sustainability review of the investment portfolio shows long-term value creation   

Each year, the Church of Sweden conducts a review of its investment portfolio using Sustainalytics' screening tool to ensure that the holdings are in line with our financial policy and the investment guidelines for ethics and sustainability. The results of this year's review confirm that our investments not only meet our sustainability requirements, but also generate a positive financial return. 

In addition to the annual review, an in-depth analysis of holdings in risk-filled industries such as the technology, automotive, textile and food sectors, was also carried out to ensure that they comply with financial policy. This analysis is based on established rankings and external analysis to identify industry-leading holdings and manage any potential challenges.

Although the sustainability review showed that the holdings to a large extent meet the Church of Sweden's requirements for sustainability and ethics, some deviations were identified. In order to manage these deviations, a close dialogue has been conducted with the asset managers. The deviations were related to work environment, human rights, integrity and corruption. Sustainalytics also conducts discussions directly with the companies about some of these deviations, in line with their dialogue model with companies.  

Perspective on the future

Going forward, the Church of Sweden expects sustainability work both within companies and organisations to gain increased importance. This is driven by a series of initiatives and decisions, including tightened requirements and guidelines from organisations such as the OECD, and increased efforts to address nature-related risks and climate change through initiatives such as Science Based Target Networks and the Taskforce on Nature-related Financial Disclosure.

The Church of Sweden will continue to be active in dialogue and collaboration on sustainability issues with investors and companies, with a particular emphasis in 2024 on managing climate-related risks and opportunities.

The asset management has committed to reducing the portfolio's carbon footprint by 25 % by 2030 compared to the level at the end of 2021. In line with this, a strategy to actively contribute to the climate transition will be developed in the coming years, which will promote long-term investments aligned with our goals.

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About sustainable investments 

All activities of the Church of Sweden are permeated by long-term thinking and sustainable development for humans and the environment. Therefore, it is obvious that our investments must also be compatible with these values. How this is to be done is expressed in the Church of Sweden's financial policy, which the Central Board of the Church of Sweden has established. Our financial policy rests on two basic principles: the human value principle and the idea of ​​stewardship, which today is reflected in international conventions concerning human rights and the environment. 

Church of Sweden's Financial Policy for the National level
Instructions for Ethical and Sustainable Investment  for the Church of Sweden’s Asset Management

Read more on our website, About our Sustainable Investments 

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