Pension funds on the record: Impact through corporate engagement

Focus on energy demand

When it comes to achieving impact through investing, engaging is hugely important. But there is a limit to the extent we want to be involved in companies. 

We have seen ABP, our largest client, make a major announcement last year. It announced that it will stop investing in oil and gas producers, saying that it did not see the potential for its engagements to be effective in this sector. That is a huge decision because it means that it will no longer be able to directly influence the whole sector. However, as part of ABP’s decision, an increased engagement effort with the demand side was also announced. 

Quite often in our conversations we have heard this chicken-and-egg problem, where companies are saying they are supplying products that people demand, which is true. So ABP have aligned itself with the demand side, including an increased effort to work with companies to change the way they demand energy, and therefore hopefully also lower the demand.

Therefore, in a way we are still involved in the energy sector indirectly, but we will be influencing companies through engaging with the demand side. 

Even though ABP has made its announcement about divestment, engagement is still hugely important and collaboration between investors in engagement is key. We are actively involved in engagement initiatives through Climate Action 100+. These collaborative efforts bring huge benefits in terms of setting a common agenda, but also in terms of addressing issues more structurally.

Within Climate Action 100+, there are also sector strategies and collaborations. There is shared thinking among investors about what a certain transition means for a sector. Through the coalition’s net-zero benchmark, a lot of data is unlocked that can help us in assessing companies as well.

Traditionally we have had a big allocation to private markets, and generally speaking we are working through what it exactly means to integrate ESG and climate change into the asset allocation. At the moment, we identify two different objectives, minimising risks or optimising for impact.

That is a key distinction, because in order to minimise risk, for instance, one could be incentivised to step away from emerging markets, where arguably most of the impact is to be made.

More tangibly, we can be innovative within certain asset classes. Recently, we helped our clients to invest in a private debt fund in emerging markets with a strong focus on the United Nations’ Sustainable Development Goals (SDGs). I think those kinds of innovative products can already help within the boundaries of a certain asset class to put the SDGs and systemic issues much more front and centre.

Transparency is core

We adopted a roadmap toward aligning our portfolio with the targets of the Paris Agreement last year. One of the main elements there is that we would like to use shareholder access to investee companies. But since we hold shares in around 7,000 companies, we are unable to engage with all of them and must prioritise certain companies and engagements.

Because we are large shareholders in Norwegian companies, it is fair to say that we are closer to our own market. But at the same time we can look at particular sectors such as oil and gas or steel production. To tackle the crisis we are facing, we need to make sure that nature has the capacity to absorb and store carbon, which is why we must also look at sectors such as palm oil production and agriculture.

As investors, we need a holistic approach because E, S and G affect each other. For instance, we can foresee that climate change will have a strong negative impact on human rights. We can set targets to fight climate change, but need to ask ourselves how to measure the negative impact on human rights.

When engaging with companies, collaboration between investors is quite effective, given that most share the same concerns and risks that we would like to address.

With regard to climate change, there are some best practices and standards such as the frameworks created by the Taskforce for Climate-Related Financial Disclosures (TCFD) and the Carbon Disclosure Project (CDP). We urge companies to use and report according to the same frameworks. Regulation can be a burden, but it is important to remember that it is not about reporting itself but the value you can extract from the reporting.

ESG has been voluntary for a lot of actors but now that it is becoming law in many jurisdictions, I think we will see totally different behaviour.

Transparency is core to what we do. When we exclude a company, we publish an exclusion document where we give a thorough assessment of why we have excluded them and where we see future risks linked to the company. That is to help the companies to see where we draw the line, to know what we see as acceptable and unacceptable, but also for other investors and stakeholders to use. We expect transparency from companies and we as investors should also live up to the same.

There is a huge debate about emerging markets at the moment, and we are being asked whether we will stop investing in emerging markets due to the war in Ukraine. However, there is also huge potential in emerging markets if you perform due diligence where there is risk. If we show that ESG is core for us, I think emerging market companies will be very keen to learn and engage with us.

Collective engagement

At PKA we believe in active ownership and that collaborative engagements are the best possible way for us to maximise our influence on companies. We are committed to becoming carbon neutral by 2050, but in fairness it is hard to accomplish that goal if the companies we invest in are not on the same path.

We need to invest in companies and we need them to commit as well. Therefore engagement and active ownership are important to achieve our goal.

Collaborative engagements have a better chance of maximising influence. In the past we occasionally reached out to companies and did not receive a response simply because pressure from an individual investor, even though we represent a large amount of assets under management, is sometimes not enough for some of the largest companies.

But when we join forces with 615 investors through Climate Action 100+, representing €54trn of assets, companies start to listen and engage. That is very positive and the investor community should be supportive of that.

We have decided that when the first phase of the Climate Action 100+ initiative ends in 2023, we will assess companies based on the final evaluation of the initiative and whether they have set plans for how their business will be Paris-aligned by 2050. Then we will consider whether to divest from the companies that have not set such plans.

There is often a discussion about whether we should engage or divest, but if we engage without a credible divestment strategy, and the companies are aware of it, then it will be harder for engagement to really gain momentum.

We believe that there need to be consequences when companies do not respond to engagements in a satisfactory manner. For example, one consequence is that if a company does not want to get into a dialogue and engage with us and if we cannot drive them towards a more sustainable path, then we will divest.

To us, this means that active ownership is the right way to go about reaching our goals.

Also, it is possible to construct a low-carbon portfolio today, but it would only consist of companies that have naturally low carbon emissions, such as banks and consultancies. 

For the green transition to take place, we need all sectors to contribute to achieving the objectives of the Paris Agreement, and as a pension fund we are legally obliged to make a return for our beneficiaries. We therefore also need to have a diversified portfolio – not only invest in the few sectors that naturally have a low carbon emission.

ESG is increasingly integrated in our investments. We have different approaches, depending on the asset class, on how we integrate ESG, and we strive to be more ambitious so it becomes more and more integrated.

It is also considered broadly every time we make a new investment, regardless of the asset class. In general, we have guidelines, policies and exclusion lists that need to be complied with every time we make a new investment. We also have ESG due diligence where I am in a close dialogue with our portfolio managers.

Another tool we use is sustainability certifications, especially within asset classes like real estate The same goes for infrastructure investment, where we use the GRESB certification as well.

Investing for impact

As with everything in investments, and particularly with responsible investment, jargon can get the better of you. We consider ourselves to be impact investors – or perhaps more accurately, investors for impact. That phrasing allows for a broader discussion about real world outcomes rather than only considering the asset class or strategy that a manager is employing to identify investment opportunities. 

Our goal is for every investment to be a win-win and at the moment we have about 11.5% of our assets invested in impactful solutions, covering both environmental and social issues. We would love that to be 100% one day. We expect our managers to be focused on the real-world outcomes of the assets that we invest with them. We have a variety of ways that we measure impact across our portfolio but we continue to hone that as much as we possibly can. 

Measuring the impact of investments is particularly challenging on the private side of the portfolio – it’s a heavier lift for us to get data and so we have more enhanced engagement around that process. 

But it is part of our annual workflow and the way we think about our decisions, to trace them through to real-world outcomes, has been a real focus in our stewardship reporting. One of the reasons we have a dedicated impact analyst is because measuring impact and gathering data is resource intensive. 

Investing for impact in public markets is credible; investing in impactful solutions needs to happen across all asset classes. Our 2050 net-zero commitment has interim targets every five years and a large part of that is applied to our public equity holdings. 

We spend a lot of time engaging public companies and policymakers to drive improvements in policy and approaches to public markets. We’ve done a lot of engagement in the public policy sphere through the Investor Policy Dialogue on Deforestation and other collaborations, but we also have dialogue with policy makers and legislators directly. 

We want to help create a policy environment that provides the opportunity for corporates to move in the right direction. I’ve worked in investor relations and a lot of companies think about their own performance and decision-making relative to their peers. 

Sustainability challenge

Many of our investments are based on our analysis of themes related to sustainability and are expected to have a positive impact on society and the transition to a sustainable society, even though we do not consider ourselves to be pure impact investors. 

We do have a clear sustainability mandate, formulated in the Swedish National Pension Funds Act and expressed in our investment strategy, that is implemented throughout the portfolio. We occasionally invest in funds and strategies that are labelled as having impact, and they have to fit with our overall investment strategy, being sound investments from both a financial and sustainability perspective. 

We believe we capture much of the same exposure that is often referred to as impact by actively targeting investments opportunities within renewable energy, resource efficiency and energy transition, across asset classes. Moreover, we strive to develop strategies to further address carbon-intensive sectors through our thematic analysis as well as in company selection.

There are several potential challenges with strategies that have an explicit impact ambition. Perhaps the most important is related to how to credibly and accurately measure impact. We believe it is possible to do this, but one should have respect for the complexity in determining things like real attribution and net impact across different time horizons and sectors. 

Another related challenge has to do with harmonisation of reporting. Today, there is a plethora of approaches and even several different attempts to establish an industry standard. This is not surprising but it is important that the industry consolidates these efforts and establishes a best practice that is flexible enough to allow for different asset classes and investment strategies but rigid enough to reduce the risk of impact washing.   

Kiran Aziz, Louise Aargaard Jensen and Joost Slabbekorn were speaking at the Phenix Capital Impact Summit Europe in The Hague in March 2022. The text here is adapted from their verbatim remarks. Other interviews by Susanna Rust