By Hamlin Lovell, NordicInvestor

Nearly all of Church of Finland Pension Fund’s assets are invested with external managers. “Since the Covid crisis, less physical face-to-face meetings means you certainly need to put more work in for newer and boutique managers,” says Joonas Huttunen, portfolio manager and responsible investment specialist at the Church of Finland pension fund in Helsinki, who previously worked for UBS and Nordea in Luxembourg.

Church of Finland Pension Fund’s strategic asset allocation is done on a four year basis and its tactical asset allocation is based on a one year time frame. The changes made are generally a few percentage points relative to benchmark constraints, rather than drastic shifts.

“One of our key challenges for 2021 is the low yield environment. The general trend is that fixed income allocations have gone down, while equities and alternatives have gone up. The consensus view is that lower interest rates imply lower returns than in the past, and return prospects for government bonds are particularly muted. Though bond yields have picked up this year, this is still a blip on a historical perspective, and bonds cannot yet compete with equities. The level of yield where bonds become a viable alternative again is of course the question. In addition, the rising inflation expectations and pressures are also central. Is it simply a base effect, or the start of a new economic paradigm and/or possible tail risk? Many structural issues are still there when it comes to growth and inflation, but as we know the stimulus has been unprecedented. This obviously needs to be closely monitored as we see restrictions continue to ease this year,” says Huttunen.

“Tactical asset allocation is considering interest rate sensitivity, which is present in long duration equities, such as technology stocks,” he adds.


The split between active and passive management varies by region. “In most regions, we have a mix of active managers and passive index-tracking exposure. The US is predominantly passive, but last year we added an active manager to try to control the increased concentration in mega cap tech in US equity indices, partly because our exclusionary ESG screens amplify the concentration. Slightly simplified, the excluded sectors and names often get re-allocated also back into those already concentrated technology names. While US large cap is mainly passive, US small cap is active,” says Huttunen.

“Japan is one market where we have no passive exposure. We view it as a market where the index level is often driven by foreign institutional flows and the corporate governance and quality of the businesses are of great importance, which is why we prefer an active manager doing stock-picking”.

“Finland is invested in through segregated mandates , which are also active, as we prefer to be direct active owners”.

“Elsewhere in Europe we have currently roughly 25-30% passive exposure, and about 15-20% passive in emerging markets”.

Diversification and Alternatives

Various alternatives are growing, but are not always classified as diversifiers.

Huttunen admits that, “portfolio diversification is not easy. During the last two market drawdowns, there have been very few places to hide. There is also a place for traditional risk-off assets in the portfolio, but the size of allocation is always a delicate balance. In terms of other forms of diversification, we have a small exposure to hedge funds, which may be expanded. In alternatives, real estate is a larger allocation including exposure to domestic real estate in Finland. Private debt is already at its 6% allocation target.”

“Private equity is being expanded to meet its 6% target, but is not viewed as a diversifier as such – it is classified in the same risk bucket as listed equity, rather than being an alternative. Private equity may have lower volatility due to the way it is valued, but at the end of the day it is the same part of a company’s capital structure”.

“The private equity allocation has been mainly European lower and mid-market buyouts, but the next few years may see us add more to US private equity. We also have a small allocation to growth private equity”.


Church of Finland formalized its “Ethical Investing Guidelines” back in 1999 and has been developing policies ever since, which are flexible and evolving.

“The passive instruments use quite a broad exclusion criteria, which includes both norm-based and product-based screens. We have preferred index funds to ETFs for example due to more flexibility in the methodology. ETFs are seldom flexible enough on the continuously developing expectations and might hence lead to more product turnover as approaches keep evolving” says Huttunen.

“For instance, climate is one area where standards are likely to evolve as roadmaps evolve. For example, fossil fuel related screens and methodologies within passive or close to index products might further develop in sophistication as we go forward,” he adds.

The pension fund is also continuing to develop the approach in fixed income when it comes to ESG. “Our bond allocation includes municipals and supra-nationals as well as pure sovereigns. It is tricky to apply ESG to sovereign debt and currencies, though we recognize that the level of sophistication on sovereign debt catching up with equities and is increasing in terms of climate reporting and engagement. Our managers within government bonds are increasingly developing approaches when engaging with governments and their institutions, something that is generally more realistic in emerging and frontier markets”.

Climate priorities and climate transition

Climate risk is one example of flexible, and evolving ESG policies, which also need to be adapted to different asset classes.

“As a small team we need to prioritise on ESG related development, and the ‘E’ is currently in focus as we are updating our own climate change strategy this year. We consider climate related risks and opportunities when making investment decisions and expect continued development in terms of approaches from our managers. When it comes to exclusions, we do prefer the application of some exclusions, but we always want to strike a balance to allow for companies transforming their business model. We do not want to exclude companies that have a credible transition plan. For instance, some utilities may have legacy exposure to fossil fuels but are in the transition process. We are aware that lower exclusion thresholds could exclude such companies,” says Huttunen.

Carbon reporting is still at a relatively early stage of development. “Climate related data is a complex and interesting area that I could spend an hour or two talking about! Emission data is backward looking, but at the end of the day lowering emissions is the actual target. In addition, you can always debate about the quality of the emission data. Then there are different forward-looking measures including green revenues, green capex and carbon risk ratings, but the methodologies are still developing so it is difficult to set long-term targets based on them. Climate Value at Risk is also an interesting concept, although putting a single figure on it is super complex. We will continue to look at methodologies and how they progress,” explains Huttunen.

It is also difficult to be consistent across asset classes. “The focus on climate data has been on listed equity and corporate debt, but standards can be completely different in illiquid asset classes. We can always argue that the data is not good enough, but we want to move the agenda forward in discussions with managers. For instance, we are looking at GRESB reporting and other certifications for real estate, and how to integrate it into the climate change strategy. Real estate currently has more tools than private equity as an asset class,” points out Huttunen.

EU Sustainable Finance Rules

“We are also in the process of working out how to include the EU Sustainable Finance Plan, such as the taxonomy and SFDR, in our responsible investment approach. For instance, on the SFDR, we have concentrated on how fund managers categorise funds into article 8 or article 9 strategies, which does on day one entail some subjectivity based on what we have seen from managers,” says Huttunen. Article 8 funds are dubbed as “light green” while article 9 funds are dubbed as “dark green”.

Engagement angles

The pension fund pursues direct and indirect engagement from several angles, which do not only focus on environmental issues but also touch on social and governance issues. “Engagement includes direct engagement – especially with Finnish companies, supported by our local Finnish asset managers. As we invest primarily through external managers, an important engagement tool is our annual ESG questionnaire, which enables us to among other things communicate our expectations towards the investment managers. Our engagement work also includes indirect engagement. Through Sustainalytics we have currently three engagement theme projects: taxation, climate transition in the cement and steel sector, and a rather new water-related project looking at two different river basins and the various stakeholders operating in the area.  We also retain ISS to screen the portfolio for norm-based breaches for example on the UN Global Compact – and ISS can carry out more reactive engagement with companies on the list,” says Huttunen.

Impact investing

“Impact investing is currently 3-4% of the fixed income allocation, and is growing with some recent commitments. This includes microfinance and certain private debt. In We are pretty strict on how we categorise impact investing, and do not currently include listed equity strategies, even if they might be marketed as impact strategies”, says Huttunen.