Alecta, the largest occupational pension provider in Sweden, with SEK874bn (€85.4bn) in assets, now invests SEK31.4bn in green bonds.
To test the green investment waters the mutual pension provider invested in the World Bank’s green bond programme in 2014. At the end of 2018, the World Bank celebrated its programme’s 10-year anniversary by issuing another $1.3bn (€1.1bn), as total issuance surpassed $12.6bn.
The underlying principles in investing green bonds are the same as for other bonds, according to Peter Lööw, head of responsible investments at Alecta.
“Nothing is dramatically different and we want to communicate and be clear on that,” he continues. “The evaluation process of the underlying asset is the same. Nor does ‘green’ mean that the return objective changes. We have to pay pensions and always have to be mindful of our liabilities.”
Lööw also points out an important characteristic of green bonds – the transparency on how the capital is deployed, which is not the case with regular bonds. “Green bonds are earmarked for green or sustainable projects, products and initiatives which is stated from start. It is a win-win situation,” Lööw says.
Alecta’s first foray has worked as an educational process. “We have increased our internal know-how in the area of sustainability and green bonds and continue to do so.”
The firm only operates in the primary market and holds green bonds to maturity. “In some cases, we have invested in green bonds through private placement. This way we are always in a position to negotiate. Cost efficiency is key, not just in green bonds but everything,” Lööw says.
Alecta at a glance
• Mutual occupational pension provider
• Located in Stockholm
• 2.4m members
• 34,000 employers
• Assets: SEK874bn (€85.4bn)
• Green bonds: SEK31.4bn (€3bn)
• Impact investments: SEK5.8bn (€570m)
• €200m in residential housing
• €500-600m in impact investments (mandate to be awarded in Q2)
Alecta has chosen not to set an allocation target for green asset classes. “We want to be in a position where we choose our projects with care. We do not want to end up in a situation where we are forced to invest in something we do not believe is value for money,” he says, adding that all its fund managers have sustainability as a lodestar and the green bonds are not managed in a separate unit.
In addition to the World Bank green bond programme, Alecta has also committed $200m to the Dutch development bank’s NN-FMO Emerging Markets Loan fund. This was followed by a $200m allocation to the Amundi Planet Emerging Green One fund. The Amundi fund has a first-loss guarantee from the International Finance Corporation (IFC), making it an even more attractive proposition, as emerging markets investments are new to Alecta, Lööw emphasises.
Having built up the internal competency and nurtured relationships with counterparties with a documented track record, experience and capacity, Alecta has also invested in the first ever bond of the International Development Association (IDA). While the bond is conventional, it supports sustainable development in the poorest countries. These types of blended financing initiatives fits within Alecta’s sustainability and green approach.
Lööw argues that because of the learning curve, Alecta’s meticulous scrutiny is a way of countering ‘greenwashing’, where companies spend considerable time claiming to be green rather than acting in accordance with its claims. “This is the reason we partner with the likes of the World Bank and share risk with the likes of the IFC. We have not yet invested in corporate bonds, except for financials, as this segment can be harder to evaluate.”
Lööw is optimistic about the future and believes there will be more green bond issuance in 2019, despite the lull in 2018. He also anticipates an increase in issuance in green bonds from emerging markets, supranational entities and development banks. Alecta is in continuous discussions with the World Bank on how to further increase diversification.
Challenges remain, Lööw concedes. The lack of viable projects is one. “Scalability is an issue and too much capital chasing the same investments is another. This is a problem as demand outpaces supply pushing prices up. This happened in 2018 and we only invest if we see value for money and good risk-adjusted return potential.”
Lööw believes that while Alecta’s mission is not to save the world, it can take a longer-term view as well as allocating money to projects that are both financially, socially and environmentally viable. “The longer-term perspective you take the more sense this makes. Good companies with good governance will do better in the long-run,” Lööw concludes.
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