By Hamlin Lovell, NordicInvestor

Nordic Investor interviewed Peter Lööw, Head of Responsible Investment at Alecta, which is Europe’s 5th largest occupational pension provider, managing SEK 1,007 billion (EUR 98 billion) in occupational pensions (including disability insurance and life insurance) for 2.6 million private sector employees, and 35,000 businesses, in Sweden

Alecta’s ESG policy applies across all asset classes apart from currencies, where the only exposures are to developed market currencies such as USD, EUR, CHF and SEK; there is no exposure to emerging market currencies.

Alecta has been pursuing ESG for 20 years, but it was not always labelled as such. “We initially described ESG as active ownership or non-financial issues, and have started using the language of sustainability and integration of sustainability over the past 6 or 7 years”, says Lööw.

Alecta has a medium sized ESG team of 4 people, but ESG is integrated into the investment process. “Responsibility for ESG lies with every PM and analyst throughout the company”, says Lööw.“Our ESG strategy is based on the core belief that companies taking ESG into account will be better investments. Companies need an ESG process to consider their impact on employees, society and the environment….

Those that put short term profits before ESG will suffer in the long term….”

the old view was that ESG would sacrifice returns, but we would say the opposite. We have seen plenty of ESG controversies that hurt performance and lead to tomorrow’s losers”, says Lööw.

We think that sustainability should be part of fiduciary duty, but regulators should not be too prescriptive over how it is applied. They should leave some room for diversity”, he continues. For instance, UNPRI membership is not compulsory for Alecta’s external managers: “the UNPRI is not a binary thing. It is one question in our very thorough ESG questionnaire. If managers are not signatories, it is more interesting to discuss why”, says Lööw. All strategies are managed in house apart from real assets and foreign real estate, which are managed externally.

Alecta’s ESG policies are evolving;

We are on a journey to enhance ESG integration processes, and to get better at integrating ESG, through searching for data, and external dialogue, to raise our competence….”

For instance, Alecta uses data from Sustainalytics and is a member of SWESIF (the Swedish Forum for Sustainable Investments), where Lööw was a board member until May 2020.

We highlight some distinguishing features of Alectas’ ESG policies.

Exclusion lists

Alecta’s active management approach means that it can run concentrated, high conviction portfolios without paying too much attention to indices – or requiring extensive exclusion lists. “Exclusions are not a high priority. Though controversial weapons, tobacco, commercial gaming, and energy coal above a 10% threshold, are excluded, there is no need for a long exclusion list because we are not passive benchmark conscious asset managers. We are an active investor doing our own fundamental analysis with only 110 names in our portfolio. Other investors who are benchmarked against an index containing thousands of names naturally need to exclude more names”, explains Lööw.

Engagement and Proxy Voting

Alecta’s engagement with companies is partly direct, and partly through Climate Action 100+, which covers seven or eight companies that Alecta owns. “We also work with Sustainalytics for some engagements”, he adds.

Some asset managers mainly or wholly outsource proxy voting, but Alecta votes every single AGM  item for all companies it owns.

We do have an advisor for foreign holdings, but we still make the voting decisions on each and every resolution….”

This hands-on approach is more practical for a group that holds around 100 companies than for asset managers investing in thousands of firms.

Climate Targets

Climate is high on our agenda: we were among the first 12 asset managers to found the United Nations-convened Net-Zero Asset Owner Alliance”, recalls Lööw. “We have committed to make the portfolio climate neutral by 2050, to align with the Paris agreement target of 1.5 degrees”. Since founding in 2019, the Alliance has already grown to 33 members managing $5.1 trillion as of November 2020 that include asset owners like pension funds and insurance companies globally.

Carbon and SDG reporting

Carbon reporting is quantitative: “we have been reporting carbon data for 5 years for equities, and for 2 years for fixed income. Service providers help us to collect the data from the companies, and the volume of data is growing a lot”, says Lööw and adds;

We gather more data from Sweden and Europe. The US has room to improve and the rest of the world is quite poor on reporting…”

Reporting on the UN SDGs is more qualitative: “SDG reporting is more descriptive. We are not setting monetary targets for individual SDGs, but more viewing the SDGs as a good framework. Some impact bonds are geared to the SDGs while others do not report on them”, he observes.

Impact Investing in Fixed Income

“Impact investing is definitely increasing every year, but there is no actual target for the percentage allocation to it. We are not setting fixed targets mainly because we do not know what supply and pricing will look like. But today we already have 50 billion SEK in green bonds, and another SEK 13 billion in social and sustainability bonds”. So far all of this is in fixed income. Alecta has not yet pursued impact investing through equities or real estate, but may do so in future.

ESG is Going Global

Sweden has set a target of climate neutrality by 2045, defined as zero net greenhouse gas emissions, five years before the EU (and Alecta) target of 2050. Sweden’s goal is an ambitious target that would be 85% below the level in 1990. Lööw admits that he is not clear if this can fully apply to Swedish pension funds: “it applies to the extent that we are invested in some Swedish companies, but it may not apply to our holdings outside Sweden”. Since Alecta is investing globally, it also needs to pay attention to targets set for the EU, US and Asia.

Lööw sees the Nordics setting a good example, which will often be followed in other countries such as UK or Dutch firms and governments.

Some investors have expressed the view that new EU rules on labelling activities and funds could possibly become a global standard. Says Lööw: The EU regulations will certainly affect Alecta, but it is still difficult to say how much. The taxonomy defines green activities so narrowly that very few companies will be fully aligned with it, and some sectors are totally excluded. The disclosure rules will have more impact”. In any case, the rules are at an early stage. The EU sustainable finance agenda is only just beginning: “we expect a lot more regulation within the EU Sustainable Finance Action plan, to transform the entire finance industry to a sustainable agenda”.

And beyond Europe, many other countries are making commitments. The US President-Elect Biden will most likely rejoin the Paris Agreement and Asian countries are also setting targets for climate neutrality. Japan and South Korea have followed the EU target of 2050 while China is aiming for 2060. “Japan, South Korea and China have all set ambitious targets that will have an immense effect on financial markets, with capital flowing into climate aligned sectors and out of other sectors. This in turn will impact costs of capital and profitability”, Lööw predicts.