IPE asked two Nordic pension funds how they invest in green bonds and to what extent sustainability is considered part of their fixed-income strategies

Ilmarinen

Everything must be green
We do not have a specific allocation target for green fixed income because all of our investments need to fulfil all our responsible investment criteria.

Actually, we do not have a green portfolio, in the sense that we do not separate green or sustainable assets from non-green ones. We think we have an extensive responsible-investment policy, with guidelines for every part of our portfolio.

Therefore, when we invest in fixed-income assets, we consider ESG criteria as a regular step of our investment decision-making process.

Our responsible-investment policy consists of three main requirements. The first, is that our investee companies follow international norms. It is not enough for them to follow national laws and regulations.

Secondly, our portfolio managers are required to take ESG issues into account as part of their investment decisions. For that, we have plenty of tools, including ratings from external providers and internal databases, as well as a three-person specialist ESG team which sits alongside portfolio managers.

Finally, we are active owners and always aim for engagement first.

While we do invest in green bonds, we will not invest in a fixed-income asset just because it has a green label. Our investment decisions are partly driven by our target to be carbon neutral in our investment portfolio by 2035. This does mean we need to hold bonds in companies that provide decarbonisation solutions. But we won’t invest in the greenest company in the world if no one will buy their product or services, because it would not be secure or profitable in the long term.

By law, we are required to invest our assets in a secure and profitable manner. Internally, we added an extra dimension, which is that the assets need to be invested in a responsible manner.

Each side of this triangle needs to be balanced.

Our thinking behind our carbon-neutrality target is that we should not just apply exclusion policies. We expect companies to come up with science-based targets for emissions reduction, taking into account the Paris Accord. 

When it comes to engaging with companies as a bondholder, things have changed since I was a credit analyst over a decade ago. Today, the importance of engaging with investors, regardless of their position in the capital structure, is recognised.

Kommunal Landspensjonskasse

Putting faith in the EU’s taxonomy
Although we invest in green bonds we do not have a specific mandate or strategy for the asset class. 

Sustainability is a quality we try to build into the whole portfolio. We have a long history of being responsible investors that started on the equity side, but increasingly we are working on the fixed-income side as well. 

We recently started investing in project finance. We launched a co-investment with DNB, the largest Norwegian bank, to finance international renewable-energy projects. The plan is to channel NOK12bn into such projects. It is an innovative structure for us, in that a life insurance company is joining forces with a bank that has project-financing expertise. Working jointly allows us to channel more capital towards renewable energy.

KLP has a portfolio of loans to public sector entities, such as Norwegian municipalities and the companies they operate. As part of this portfolio, we offer a discount for climate-friendly projects, such as green buildings, water-efficiency programmes or green infrastructure projects. 

We also invest quite heavily in renewable energy in general. We hold more than NOK20bn worth of bonds issued by Norwegian utilities, for example. 

We follow with interest the debate on whether green bonds actually contribute to the transition to a low-carbon society that we aim for. There is an argument that transition bonds, which are an asset class in its infancy, would be better suited, but I am generally sceptical to see these as a different asset class. Rather, they are features of individual assets. 

The challenge with green bonds is that they often finance projects that already exist or companies that already have sustainable or climate-friendly business models, whereas transition bonds would help facilitate changes in ‘brown’ companies. The problem is that there is no accepted definition of what a transition bond is. 

We think the European Commission’s plan for sustainable finance, particularly its taxonomy for sustainable activities and the green bond standards, will help, given that, as investors, we cannot yet rely on a common definition of what sustainable means. 

Any definition will have its challenges, and there will always be dilemmas to face, but we think the taxonomy is a needed and positive development overall. It will help us figure out what the next steps should be. 

As of today, KLP has not developed measurable, standardised criteria defining what green or sustainable means that can be applied to any investment, but we have developed a first set of frameworks for our portfolio of green lending as well as for infrastructure. However, we use the UN’s Sustainable Development Goals (SDGs) as a framework and, of course, from now on, the EU taxonomy. We always seek to base our work on international standards and best practices.

The lack of data on sustainability is an added challenge when it comes to fixed income investing, particularly given the large number of varying sizes of issuers. Large companies have always been better reporters. But this is changing, thanks to a generally increased awareness of climate as a financial risk.

Interviews by Carlo Svaluto Moreolo

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