Ericsson ESG Highlights
Marouane Samghour
MSc Sustainable Finance & Fintech - Corporate finance graduate - SKEMA BS. Looking for an opportunity in Finance, ESG or Investment Analysis
?? Strong environmental commitment but questionable ethical behaviour.
Board Members:
?? Ericsson’s board is made up of experienced professionals with good industry knowledge and strong track records. The company has named a new CFO and a Head of Strategy, Technology, Marketing, and Business Development.
The board of directors is ultimately responsible for the organisation of Ericsson and the management of its operations. The board appoints the president and CEO, who is responsible for managing the day-to-day operations, in accordance with guidelines from the board. The president and CEO ensures that the board is updated regularly on issues of importance. This includes updates on Ericsson’s business development, results, financial position, and liquidity. The current board of directors consists of ten directors elected by the shareholders at the 2023 AGM for the period until the close of the 2024 AGM. The board of directors also includes three employee representatives appointed by the trade unions for the same period. Regarding gender diversity, as of 2024, 40% of the company’s directors are women. This ratio has been significantly surpassed by its closest competitor in the network market (Nokia i.e. 50%). The board of directors and its committees are subject to a variety of independence rules under applicable Swedish law, the code and applicable US securities laws, SEC rules, and the NASDAQ Stock Market Rules. The supervisory board is made up of Jan Carlson (chair of the board, chair and president and CEO of Veoneer Inc. 2018-22, president and CEO of Autoliv Inc. 2007-18, and chair of Autoliv Inc. since 2014), Jacob Wallenberg (deputy chair of the broad, chair of Investor AB and the Confederation of Swedish Enterprise), Jon Fredrik Baksaas, Jonas Synnergren, Christy Wyatt, Carolina Dybeck Happe, B?rje Ekholm, Eric A. Elzvik, Kurt Jofs, Helena Stjernholm, and Kristin S. Rinne. The board of directors has currently established four committees:
Members of each committee are appointed for one year from among the board members. The main task of these committees is to prepare matters for resolution by the board. However, the board has authorised each committee to determine and handle certain issues in limited areas. Regarding remuneration, each board member is allocated board fees and committee fees depending on their role. For 2022, the board excluding employee representatives received compensation of SEK5.29m (excluding social security charges). While this compensation is not linked to meeting attendance criteria, the attendance rate was 95% in 2022. In our view, the board is appropriate for the company’s development. It is worth mentioning that the independence rate of 60% is much lower than at Nokia, which has already reached 100% of independent members. This could be cause for concern regarding the integrity of the board’s decisions.
Ericsson’s management board is appointed by the supervisory board and is responsible for handling the day-to-day management of the company in accordance with guidelines issued by the board. The president and CEO is supported by the executive team. B?rje Ekholm assumed the role of president and chief executive officer (CEO) in January 2017. While B?rje Ekholm was not a telecom industry veteran, he knew the company fairly well after being a board member of Ericsson for nearly ten years (he was first elected back in 2006). Just before his appointment as CEO of Ericsson, he was CEO of Patricia Industries over 2015-17, a division within Investor AB. Prior to that, he was president and CEO of Investor AB over 2005-15. His previous positions also include Head of New Investments and President of Investor Growth Capital, as well as various positions at Novare Kapital AB and McKinsey & Co. B?rje Ekholm holds a master’s degree in electrical engineering and an MBA from INSEAD. The company announced the appointment of Chafic Nassif as its new Head of Market Area North East Asia and senior vice president. Nassif who is currently Head of Ericsson’s Customer Unit Latin America North within Market Area Europe & Latin America, will replace Chris Houghton, who was appointed COO of Ericsson in November 2023. Nassif will take up his new position from February 2024, and will be based in Japan. He has held several executive and management positions within Ericsson across various business segments and regions worldwide. Yossi Cohen, currently Head of Strategy, Technology, Marketing and Business Development within Market Area North America, will replace Niklas Heuveldop as Head of Market Area North America as of February 2024. Cohen will be a member of Ericsson’s executive team and report to the CEO. Cohen has a multifaceted 22-year tenure at Ericsson, bringing with him global expertise in technology, business, operations, and innovation. His roles within Ericsson include Head of Customer Unit Verizon, Global Head of Radio Sales and Business Management in Stockholm, and Head of Global Customer Unit Softbank in Tokyo. His experience extends beyond Ericsson, encompassing positions in a telecommunications technology startup and a mobile operator.
Ericsson has appointed Lars Sandstr?m as its chief financial officer (CFO), senior vice president, and Head of Group Function Finance, effective from April 2024. Sandstr?m, currently the CFO of Getinge, a global leader in Medtech, brings a wealth of financial and management experience from his roles at companies such as AB Volvo, Scania, and Swedish Orphan Biovitrum AB. His appointment is aimed at supporting Ericsson’s strategic goals in mobile networks, enterprise expansion, and cultural transformation, following the departure of Carl Mellander in April 2023, who had been with the company for over 25 years. Ericsson’s executive board has established the “Sustainable Business Reference Group”, which consists of a select number of C-suite officers and is chaired by the CFO. This committee is tasked with providing strategic guidance and oversight of sustainability-related matters as needed, including those related to climate change, and for pre-approving any major plans or targets related to sustainability before they are presented to the executive board for final approval and confirmation. However, none of the board or executive board members has experience in sustainability or ESG, which could make achieving the company’s objectives in this area challenging. To sum up, the executive team has a rich background in fields that align with Ericsson’s activity, and enough experience to manage, lead, and succeed in Ericsson’s new business strategy.
Remuneration:
?? Ericsson's executive compensation strategy, particularly for its CEO, emphasises long-term value (LTV) over short-term incentives, reflecting a commitment to aligning leadership interests with those of shareholders and sustainable business practices.
The remuneration policy for the CEO differs from that of other executives, as he does not receive any short-term variable compensation. Executive compensation is made up of:
It is also important to note that the STV and LTV are subject to malus and clawbacks. The CEO of Ericsson received SEK53.1m in 2022. In comparison, the CEO of Nokia received EUR4.3m for rather similar revenues at the company level. Ericsson’s long-term value programmes aim to align executives’ interests with long-term company and shareholder goals. These multi-year, variable remuneration programmes depend on personal commitment, company performance, share price, and sustainability efforts. Specifically targeting senior executives, these programmes include share-based incentives and encourage significant shareholding. The 2022 programme introduced ESG criteria, emphasising sustainability and responsible business. This includes goals like reducing carbon emissions and increasing female leadership within the company. The board proposed that this approach be continued in the 2023 programme. The remuneration committee and the board decided to propose a LTV remuneration programme for 2023 with a similar structure as the LTV remuneration programme for 2022 to the 2023 AGM.
Shareholders structure:
Ericsson’s capital structure, characterised by Class A and Class B shares with differing voting rights, leads to a concentration of voting control among historical shareholders like Investor AB and Industriv?rden, despite a diverse economic interest spread across multiple shareholders.
The capital of the parent company is divided into two classes: Class A shares and Class B shares. Both classes have the same rights of participation in the net assets and earnings. Class A shares, however, are entitled to one vote per share, while Class B shares are entitled to one-tenth of one vote per share. Ericsson’s shareholding structure is spread out among many shareholders, including FIL (5.6% of shares), Cevian Capital (4.9% of shares), Investor AB (4.7% of shares), BlackRock (4.5% of shares), Fidelity International (3.7% of shares), Swedbank Robur (3.6% of shares), and The Vanguard Group (2.9% of shares). In terms of voting rights, Ericsson remains largely controlled by its historical shareholders, Investor AB (23.8% of the voting rights) and Industriv?rden (15.1% of the voting rights). It is worth noting that CEO B?rje Ekholm was previously CEO of Investor AB. Besides these two historical shareholders, the shareholding structure is well balanced among investors, with no shareholder holding more than 5% of the voting rights. There is an imbalance between economic interest and voting control (e.g. Investor AB and Industriv?rden). We believe a simplification of the share systems with a merger of Class A and Class B shares would be welcomed by the market.
Quality of reporting:
Despite the challenges faced by Ericsson in 2016-17 and a significant write-off in 2023 related to the acquisition of Vonage, the company has consistently maintained high-quality earnings over the past decade, standing out within the network sector. Ericsson excels in financial communications, regularly providing detailed business updates through events like its Capital Markets Day and the Mobile World Congress.
Over the years, Ericsson has completed several mid-sized acquisitions, such as Cradlepoint in 2020 and Kathrein in 2019, with limited impact on its financial profile. However, the acquisition of Vonage in 2022 for USD 6.2 billion resulted in a significant SEK 33 billion write-off in Q3 2023. Despite overpaying for Vonage, Ericsson continues to pursue an active M&A strategy to drive growth in new markets, particularly in enterprise sectors.
Since 2017, Ericsson has undergone substantial restructuring, narrowing the gap between adjusted and reported operating results significantly over 2020-22, though it widened again in 2023 due to non-cash write-offs and restructuring charges. Exceptional items are expected to remain controlled in the future, with a manageable impact on financial performance.
Ericsson's capitalized R&D has remained below 1% of sales since 2017, and the company has maintained a strong cash conversion rate, averaging 37% over the past 17 years. The group uses moderate share-based payments for employee remuneration and holds significant tax loss carryforwards, maintaining a decent tax rate of around 32%.
Historically, Ericsson paid high dividends until 2016. After a dip, the dividend has been steadily increasing since 2019, with a SEK 2.7 dividend proposed again in 2023. The company aims to continue increasing dividends, barring major market downturns or fines related to ongoing legal issues.
Ericsson's pension liabilities have grown over the years but have decreased since their peak in 2020 due to rising interest rates. The company provides quarterly detailed financial results and planning assumptions, helping analysts with accurate modeling. Despite not hosting a Capital Markets Day in 2023 due to market conditions, Ericsson remains committed to transparent and regular financial disclosures.
Business Ethics:
?? Ericsson has been involved in several corruption and bribery cases, and the group has paid a total of USD1.6bn in fines in the last six years. Ericsson still faces a US government probe into its operations in Iraq, and over 1,000 legal cases are open against it.
According to RepRisk, Ericsson has been involved in several corruption and bribery cases, in one of which the Swedish Prosecution Authority charged four Ericsson ex-employees with alleged involvement in the bribery of Djibouti governmental officials between 2011 and 2012. This alleged bribery, worth over USD2m, was reportedly paid to procure a contract worth USD24m. Additionally, in 2019, Ericsson started monitorship under a deferred prosecution agreement with the US authorities as part of its settlement to resolve foreign bribery violations in China, Djibouti, Indonesia, Kuwait, Saudi Arabia, and Vietnam. Ericsson agreed to pay USD1.1bn in penalties and entered a three-year term of compliance monitorship to settle the bribery violations as of 2020. As a result, the company appointed a third party (Pohlmann & Company) to ensure adherence to the terms of the settlement made with the US DOJ. During this three-year period, Ericsson was required to implement internal accounting controls and asset checks to ensure accurate bookkeeping, while maintaining an anti-corruption programme internally.
Unfortunately, in October 2021, the DOJ notified Ericsson that it had breached its obligations under the DPA by failing to provide certain documents and factual information. Ericsson had the opportunity to answer the DOJ (within a month) and explain the nature and circumstances of the breach, as well as the actions it has taken to address and resolve the situation. However, it did not comply, and breached the DPA by failing to truthfully disclose all factual information and evidence related to the Djibouti scheme, the China scheme, and other potential violations of the FCPA’s anti-bribery or accounting provisions. Ericsson also failed to promptly report and disclose evidence and allegations of conduct related to its business activities in Iraq, which may constitute a violation of the FCPA. These disclosure failures prevented the US from bringing charges against certain individuals and taking key investigative steps. The lack of transparency over why the DoJ did not receive all the information on Ericsson’s conduct in Iraq, which the company collected as part of its 2019 investigation, was behind opposition to the discharge of liability vote at the 2022 AGM. A strong majority of over 70% of shareholders voted in favour of discharging each director from liability.
This overwhelming support can be interpreted as a clear directive from the shareholders to the board, indicating a general satisfaction with the directors’ performance and a preference not to pursue any legal actions against them, assuming there were any grounds for such actions. In February 2022, Ericsson announced that it had conducted an internal investigation on its own initiative (supported by external legal counsel) into alleged irregularities in expense statements for its operations in Iraq. The first lawsuit related to this case filed against Ericsson was in March 2022 by shareholder David Nyy. Another was filed in August 2022 by US victims of terrorism. The group has been operating in Iraq since the lifting of a UN embargo led to the reopening of the telecom equipment market there. The investigation also looked into the conduct of Ericsson employees, vendors, and suppliers in the country over 2011-19. The group’s internal investigation revealed evidence of corruption-related misconduct by employees, including:
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The investigation also revealed some violations of Ericsson’s internal financial controls, conflicts of interest, non-compliance with tax laws, and obstruction of the investigation. Ericsson also noted that over the course of the investigation it also discovered that payments had been made to intermediaries, and alternate transport routes had been used at times to circumvent Iraqi customs, as terrorist organisations (including ISIS) controlled certain transport routes at that time. The investigators could not identify the ultimate recipients of these payments, which raised concerns about the risk of money laundering. Ericsson has invested a significant amount of time and resources to understand the problem and the investigation has not been able to demonstrate that any Ericsson employee was directly involved in financing terrorist organisations. That said, several employees have been fired and many other disciplinary and remedial actions were taken as well. The group has also terminated a few third-party relationships (with suppliers, agents, etc.). Nevertheless, the group still faces a US government probe over its operations in Iraq, which will likely include a review of the questions raised about the firm’s contacts with ISIS. We think that a guilty plea could lead to reviews of public contracts or struggles with bank loans. In March 2023, as part of the DPA, Ericsson paid a total criminal penalty of over USD520m and agreed to the imposition of an independent compliance monitor for three years. According to the Plea Agreement, the Department of Justice acknowledged Ericsson’s considerable improvements to its compliance and internal accounting controls.
These enhancements were attributed to structural and leadership changes, notably the recruitment of a new Chief Legal Officer, a new Head of Corporate and Government Investigations, and the formation of a multi-disciplinary Business Risk Committee with senior executives from the group level. Ericsson has also pledged to keep advancing and evaluating its compliance initiatives and has significantly stepped up its efforts in cooperation and information sharing. In May 2023, Nasdaq Stockholm concluded its review of Ericsson’s public disclosure obligations concerning its 2019 Iraq internal investigation report and dismissed the matter, stating that Nasdaq could not conclude that a reasonable investor would have used the content of the report as part of an investment decision. After having reviewed Nasdaq Stockholm’s investigation and conclusion, in June 2023, the Swedish Financial Supervisory Authority also decided to formally close its review of Ericsson’s prior disclosures relating to the 2019 Iraq internal investigation report.
Environmental Footprint:
?? Ericsson has met and surpassed previous SBTi-approved 1.5°C-aligned targets (2016-22). The company replied to the CDP questionnaire in 2023, which resulted in a “A” rating. Ericsson demonstrates a significant commitment to reducing its footprint by relying on renewable energy and achieving reuse and recycling rates of up to 81.9% and 97%, respectively.
Ericsson was graded “A” by the CDP in 2022, upgraded from a “B” grade in 2021.
It now aims to be net zero by 2030 for its own activities, including fleet vehicles, facilities, business travel, and commuting/teleworking. By 2040, it aims to reach net zero across its value chain. To reach this objective, Ericsson set mid-term absolute reduction targets (-50% GHG emissions vs. 2020). Ericsson is graded “A” by the CDP, meaning that the company shows environmental leadership, disclosing action on climate change, and demonstrating best practice in strategy and action, as recognised by frameworks such as the TCFD, Accountability Framework, and others. The sum of emissions in scope in the base year (2016) was 560k tonnes of CO2e, and Ericsson committed to reducing these by 35% by 2022. Actual reductions by 2022 came in at around 60%, meaning the target was surpassed by a wide margin. This can largely be attributed to substantial increases in purchased renewable energy. Other major contributing factors were the optimisation of service fleet vehicle composition and usage, and a decrease in the overall real estate portfolio, which meant lower energy consumption overall. The company previously set a science-based target to reduce emissions from its own activities (scope 1+2 and operational scope 3) by 50% by 2030. Hence, the company expanded its carbonneutral target for its own operations into a net-zero emissions target for its own activities by 2030, including fleet vehicles, facilities, business travel, and commuting/teleworking. The new target covers the scope 1 and 2 emissions, as well as scope 3 categories: business travel and employee commuting (including teleworking). In addition, Ericsson commits to reaching net zero across its full value chain by 2040. To reach this objective, the group aims to reduce its operating GHG emissions (including operational scope 3) by 50% compared to 2020 levels. This is similar to the target set by Nokia, which aims to halve its total emissions by 2030 versus 2019 levels. All in all, Ericsson’s new environmental engagements significantly improved compared to the commitments made in 2019, and given that Ericsson is in the process of developing a tailor-made executive upskilling training focusing on how sustainability-related matters, including climate change and the challenges it presents, is relevant to the company.
Areas that are planned to be covered include, but are not limited to, climate-related risks and opportunities for Ericsson, its customers’ decarbonisation ambitions and strategies, how the ICT sector can help support decarbonisation in the broader economy and society, as well as the link between the company’s (and unit-level) business strategy and Ericsson’s net-zero ambition. Therefore, we believe Ericsson will keep improving in the coming years, allowing the group to keep its “A” grade for 2023.
Climate Change Impact:
?? Ericsson’s achievements in enhancing energy efficiency within its 5G product portfolio and surpassing targets in installed base modernisation underscore its leadership in sustainability and environmental responsibility, directly contributing to reduced network operational carbon emissions and advancing global efforts towards a more sustainable and energy-efficient telecommunications industry.
The improved energy performance of Ericsson’s products and solutions plays a key role in reducing customers’ total cost of ownership and minimising the network-related carbon footprint. From a lifecycle perspective, the bulk of Ericsson’s carbon footprint comes from the energy use of delivered products. Ericsson’s work with network energy performance, including energy efficiency and absolute energy consumption, is one of the workstreams within its Circular Economy and Portfolio Sustainability programme. The company has set the following targets for improved energy performance:
Health & Safety:
?? Ericsson’s operations are currently certified under ISO 9001 (quality), ISO 14001 (environment), ISO 45001 (health and safety).
Ericsson is committed to achieving zero fatalities and lost workday incidents by 2025. To track its progress, the company regularly reviews both leading and lagging safety indicators. Recently, there has been a notable decrease in fatalities, down to 8 in 2022 from 14 in 2021, primarily involving site service suppliers and third parties. The main causes were driving accidents and height-related work. Similarly, lost workday incidents were reduced to 131 in 2022 from 145 in 2021, affecting both suppliers and Ericsson employees, with most incidents involving slips, trips, falls, and manual labour. Encouragingly, there has been a 45% increase in reported near-misses, indicating heightened awareness and improved reporting. To further enhance safety, Ericsson has been reinforcing its supplier consequence management practices, focusing on safety performance and risk management. Moreover, Ericsson launched a mandatory health, safety, and wellbeing induction course, achieving a 92% completion rate among employees and contingent workers. The company has also introduced mental health training and carried out campaigns on musculoskeletal health, underscoring its commitment to reducing health risks and promoting self-care awareness.
Working Conditions:
?? Working conditions at Ericsson are average. The company ranks below Nokia in terms of staff turnover and training hours per employee but boasts better gender diversity.
At Ericsson, employees received an average of 18.6 hours of training in 2022 (down from 19 hours in 2021). It is also worth noting that internal candidates have filled 51% of the open positions. Additionally, the employee satisfaction score was 81, a decent showing on a scale of 0 to 100. Regarding gender diversity, the percentage of female representation within the workforce has remained quite stable at 25% over the last few years. The company has not defined any sort of objective to increase female representation within the workforce. European network vendors (including Alcatel-Lucent, Ericsson, and Nokia) have been struggling with the rapid expansion of Chinese vendors (including Huawei, and ZTE to a lesser extent) over the past 20 years. Most network vendors have lost significant market share to Chinese vendors over the period and have significantly restructured operations, with large headcount reduction plans. On top of that, network vendors have been gradually consolidating to protect margins in a very tough competitive landscape. Fortunately, the competitive landscape has stabilised over the past few years, as the market has finally consolidated and Chinese vendors’ market shares have peaked (notably now that they are excluded from several markets, including the US, Japan, Australia, New Zealand, India, and some European countries). While the market has benefited from solid underlying trends since 2018 with the ramp-up of 5G network deployments, European networks vendors have also started to slow headcount reduction plans.
Ericsson has materially restructured its business over the past decade, with a refocus on mobile networks and services (the group exited all fixed networks markets). Following the appointment of B?rje Ekholm as CEO in 2017, Ericsson has materially restructured its business with a SEK10bn cost-savings plan for mid-2018 and specific actions in networks (refocus on technology leadership and the fast ramp-up of the Ericsson Radio System), managed services (with the review of the 42 non-performing contracts), and digital services (with the turnaround of the 45 critical/non-strategic contracts). While the RAN market deteriorated materially in 2023, Ericsson announced in 2023 another large cost-savings programme (targeting SEK12bn of savings), and potentially affecting 8,500 employees globally.
From 2018 to 2022, Ericsson notably increased its workforce from 95,300 to 105,529 employees, demonstrating a commitment to growth and expansion. However, as part of the latest cost-saving measures, Ericsson’s workforce was trimmed by 5.3% in 2023, settling at 99,952 employees. Ericsson has reinvested in its operations since 2019 to support renewed growth opportunities and completed several acquisitions (including Kathrein, Cradlepoint, Vonage, etc.) to expand into new areas. Although the networks sector has ranked poorly with respect to employee management in the past, Ericsson has gradually been reducing headcount. The situation is gradually improving, with more limited headcount reduction plans in the coming years.
Ericsson has not been directly affected by human rights controversies. However, the company has signed contracts with governments in countries where human rights are often questioned. For example, the company is operating in Cuba, Sudan, and Syria. Ericsson is also facing legal action by American families affected by the war in Iraq, as already discussed. If found guilty, the company will face consequences in relation to financing terrorism and its failure to uphold human rights commitments.
Product Responsability:
?? The shift to 5G introduces higher frequency mmWave bands and a denser network through increased antennas, raising concerns about heightened exposure to radio frequency radiation.
Ericsson is one of the leading vendors of wireless network equipment and is therefore indirectly affected by controversies linked to mobile networks and their potential effects on human health. The debate has returned to the forefront since the start of the ramp-up of 5G rollouts, especially as 5G will run on higher frequency bands with the mmWave, along with a much more densified network with a multiplication of the antennas to transmit data within the network. While there are many different frequencies of wavelength interacting with the human body in different ways, a higher number of low-frequency antennas could increase human exposure to radio frequency radiation. Some scientists have been lobbying for many years, claiming that the multiplication of mobile and broadcast antennas (on top of other radio frequency emitting devices) could produce cancer risks due to the electromagnetic field radio waves they produce.
Supply Chain:
?? Ericsson is committed to reducing its supply chain emissions, which is integral to its netzero ambition, by engaging with suppliers and enhancing product designs. By 2025, the company aims for 350 high-emitting suppliers to set public emission reduction targets aligned with the 1.5°C goal, with significant progress already made. These efforts are supported by initiatives like the 1.5°C Business Playbook and rigorous supplier engagement, underpinned by Ericsson’s Responsible Sourcing programme.
Ericsson’s supply chain emissions, accounting for 9% of its total carbon footprint, are a key focus in its net-zero ambition. The company is actively working to reduce these emissions through product design enhancements, transport efficiency, and engaging with suppliers. Recent efforts include reducing product weight and size, and targeting carbon-intensive materials and processes, particularly aluminium. Additionally, Ericsson is improving methods to capture supply chain emissions data more accurately. A significant goal for Ericsson is to have 350 high-emitting and strategic direct suppliers set their own emission reduction targets by 2025, aligning with the 1.5°C ambition. These suppliers, along with their supply chains, constitute the majority of Ericsson’s supply chain-related carbon footprint.
To be recognised, a supplier’s target must aim to halve emissions by 2030 (relative to their baseline), be publicly declared, and include public progress reports. By the end of 2022, 225 suppliers had set targets meeting these criteria, indicating good progress towards the 2025 engagement goal. Ericsson continues to work with suppliers that have not yet set aligned targets. To foster collective action in climate efforts, Ericsson hosted an online webinar with the Exponential Roadmap Initiative. The company also co-created the 1.5°C Business Playbook and Supplier Engagement Guide, tools designed to assist companies in setting targets aligned with the 1.5°C ambition and to engage their supply chains in these efforts. Ericsson’s code of conduct (CoC) for business partners is the basis for its Responsible Sourcing programme, covering four main areas: environmental management, human and labour rights, occupational health and safety, and business ethics and anticorruption. Ericsson offers free online training for business partners that covers the CoC in general, as well as specifically focused training on anti-corruption, conflict minerals, and occupational health and safety.