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Environmental Risk: The Changing Climate: ‘Control is a key to success’

Rachel Fixsen talks to Tapiola Pension CIO Hanna Hiidenpalo about integrating climate risk management into the insurer’s portfolio

Over the last few years, Finland’s Tapiola Pension has set about integrating environmental issues more deeply within its investment research process and decision-making. However, responsible investing policies that take financial, social and ecological perspectives into account have always been a key element in Tapiola Pension’s investment process, says CIO Hanna Hiidenpalo.

“We believe that responsible investing has been a significant driver of our excellent returns over time as well as reduced risks in the portfolio,” Hiidenpalo asserts. “Furthermore, we also strongly believe that by engaging in environmental, social and governance issues we align us better with broader objectives of the society.”

While the €10bn pension insurance company’s assessment methods do not involve active, negative screening, when it chooses its investments, it aims to avoid companies and issuers with an approach which conflicts with the pension provider’s values. It has developed individual evaluation methods and rating processes for sovereign states as well as for companies – for equity as well as credit – as it has for real estate investments. The company has also signed up to the UN Principles for Responsible Investment.

Beyond this, Tapiola Pension has made a commitment to co-operate with other institutional investors and to promote awareness about responsible investment.

“We believe in strategic engagement to promote environmental, social and governance performance in companies that we invest in,” Hiidenpalo explains. “Our responsibility approach is definitely positive screening, and we strive to find best-in-class companies across all industries.”

Climate change, for Tapiola Pension, is the biggest theme and one of the most important underlying trends in the environmental issues it looks at in its company and sector analysis.

“We do not give explicit weightings on different ESG-related risks, but in our assessment climate change is one of the key themes investors should be focusing on,” says Hiidenpalo.

The team believes that the efforts companies make to curb global warming are important when it comes to assessing potential returns. The pension provider has developed its own customised criteria and rating process to address this issue in conjunction with an external environmental consulting agency, Hiidenpalo explains.

“Based on this approach, around 70% of the companies in Tapiola Pension’s portfolio contribute towards mitigating climate change,” she claims.

They do this through having products or processes that consume less energy, by using renewable sources of energy such as wind power, hydro power or bio fuels, and they may recycle waste efficiently, save water, energy or raw material in the production processes or develop water treatment and purification solutions for various industries.

Beyond this, nearly one-fifth of the companies in Tapiola Pension’s portfolio have an indirect link to climate change, according to Hiidenpalo. She explains that these include companies that promote and develop better production processes, for example in logistics, warehousing or waste management, as well as healthcare companies providing treatments for illnesses caused or exacerbated by global warming. The final 10% of companies tend to be best-in-class within their sector, but without a direct link to the issue of climate change.

The key factor in assessing climate change risk for Tapiola Pension is interaction and communication about this risk specifically, as well as about environmental issues in general.

“We always meet the company management before doing an equity or credit investment,” says Hiidenpalo. “Regular meetings will also be held during the investment period.”

The pensions insurer then goes on to compare decisions coming up at AGMs with its own corporate policy and attends AGMs either in person or with the help of third-party corporate governance service providers.

Hiidenpalo finds company directors are more conscious of corporate responsibility nowadays, and notes that many companies have clarified their targets for improvement in this area. They report on these issues in their annual reports or in separate corporate responsibility reports.

“For this reason, we believe that our taking an active role is also really beginning to bear fruit,” she says.

In terms of sectors, Hiidenpalo says climate change risk is important for each one because the consequences are so broad, hard to predict precisely and affect all parts of society.
The destruction caused by extreme weather conditions – which are ultimately due to climate change – is an example, she says. Because the damage varies depending on the location, it causes problems for many different industries.

“Naturally, companies operating in industries that are polluting heavily or operating in energy-intensive industries – airlines, industrial metals and paper companies – are most at risk through stricter regulation and increasing cost impact,” she says. “On the other hand, we also believe a company’s response and attitude towards climate change can work as a major differentiator and source of competitive advantage within its peer group.”

Tapiola Pension has made forward-looking assessments of corporate responsibility by analysing operations from the angle of climate change. This has thrown up companies in the portfolio that are helping to slow the progress of climate change by developing their own operations. They may be, for example, devising new operating models, or reducing their climate and environmental load, says Hiidenpalo. “We believe that it is among these kinds of companies that future successes are to be found – as well as profitable investments,” she says.

But it is important, too, to keep an open mind when evaluating different sectors and companies, she says. “Some sectors are, by their nature, ‘polluting’ but still cannot be replaced; as an investor you should look for companies that are either best-in-class or that are driving change for the better in that sector.”

As an example, Hiidanpalo cites Tapiola Pension’s real estate investments. It invests in commercial and residential property, with most of the current 13% allocation invested directly in domestic properties. Tapiola Pension has adopted a long-term strategy to increase energy efficiency, decrease water consumption and shrink the CO2 footprint of its portfolio, she says. The current target is to cut 6% of energy and water consumption by 2016 from the 2011 level – an aim Hiidanpalo says seems ambitious but still achievable. All asset management operations from acquisitions to leasing and exits are planned and executed within an internal organisation that gives maximum control over the life cycle of an individual asset, she says.

“Control is a key to success when turning ESG principles from theory into practice,” she says.

 

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  • QN-2546

    Asset class: Real Estate Equity Fund (non listed).
    Asset region: Europe.
    Size: Total CHF 600m, approx. CHF 100-300m per fund investment.
    Closing date: 2019-06-28.

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