By Hamlin Lovell, NordicInvestor 

Danish pension fund PenSam’s Head of ESG Mikael Bek has a 45-year career in the Danish financial sector that started aged 18. He was a portfolio manager for many years and has steadily transitioned to a substantially full time role in sustainability. Starting in CSR at one pension fund in the late 1990s he took on a part time ESG role at PFA while also managing Danish and global equities. Back the late 1990s Bek wrote a letter relating to ESG to 75 companies and this attracted a lot of attention including front page press coverage in Denmark. Since joining PenSam in 2016 his main focus has been ESG.

Shift in climate benchmark choice

MSCI climate change benchmarks were adopted in 2020 with two equity managers, Nordea and Amundi, following the benchmark fairly closely. There was a rethink of benchmark choice after it turned out to be very tech heavy. “Though this was clearly positive for performance in 2023. In 2024 we decided to switch to a more diversified S&P benchmark which tilted the portfolio towards more green exposure and less carbon. There are also some sustainable benchmarks for the corporate bond mandates currently run by Blackrock,” says Bek.

In house and external ESG

Over one third of assets are run in house, in Danish bonds making up nearly 27%, and Danish real estate around 7%, of assets of DKK 190 billion (USD 26 billion). The remaining 66% are outsourced to around 40 external managers. Since 2017, external managers have been ESG-scored on a list of 15 questions. Pensam’s four key focus areas are climate, sustainably real estate, labour rights and fair taxation.

Carbon targets, biodiversity and nature

PenSam targets a 55% reduction in carbon by 2025 compared with a baseline of 2019 in equities, corporate bonds and Danish real estate and is already pretty close to that. “The exact percentage fluctuates with relative asset class performance. The real estate carbon footprint is very low so in a good year for equities the carbon figure goes up and the reduction goes down,” explains Bek.

Current carbon footprints in the equity portfolio are around 70% below MSCI ACWI levels are an important metric. “PenSam avoids high emitters, partly due to its benchmarks for equities and bonds – but also due to the focus of its property and infrastructure portfolios”.

Having started with climate, biodiversity and nature have been added. “This did not change the process but did change reporting,” says Bek.

CSRD and double materiality

Though Pensam itself is too small to be covered by the Corporate Sustainability Reporting Directive (CSRD), Bek is still keeping a close eye on it how it will eventually upstream into pension fund reporting. It increases the reporting burden on smaller companies and could lead to duplicated reporting. “We hope that a happy medium is found in a few years’ time,” says Bek.

CSRD is amongst many regulations that require a double materiality assessment.” We find that climate and labour in the supply chain is most important but will be watching closely to see different CSRD issues phased in,” he points out.

Exclusions: Coal, energy, Russia, weapons, Gaza and China

“We divested coal in 2016 and most oil in 2019 based on an investment not a sustainability rationale. We thought that people might be using less oil, gas or coal in 30 years’ time. We do recognise that some oil companies do have credible transition policies but it is hard to invest in a pure oil company,” says Bek.

West bank settlements are avoided, which also means excluding Israeli banks that finance such settlements.

The exclusion list has grown from about 300 to 350 companies in the past four years. In addition to controversial weapons and many energy names tobacco is escluded. The rest are norms-based areas such as labour rights, human rights, and good governance.

“There have been discussions about whether to change the exclusions policy around controversial weapons but nothing has been decided admits Bek.

Tesla has been on exclusion lists for years due to labour rights issues that most of the Danish pension funds focus on.

PenSam operates with a dynamic exclusion list which can change, for example, if the issue has been solved. “The exclusion list might grow a bit further but we want to emphasise engagement. The Danish FSA is also closely looking at it,” reveals Bek. He continues: “It is hard to say if engagement really change company behaviour but in general we think companies do listen to us,”

“Divestment is easy but does not fully help. We need to engage,” he admits. PenSam use Sustainalytics/Morningstar to help with screening and observation exercises. “We do not do much direct engagement. We could easily employ 10 people to do it but would rather outsource it,” says Bek.

Beyond companies, PenSam recognise that other organisations need to play a role in ESG and the pension fund has a broader network: “We also have a good dialogue with NGOs,” says Bek.

SFDR, Taxonomy and Impact

Funds investing in private equity and infrastructure may be reporting under Article 8 or 9. “We do not however focus too much on these categories. Sometimes article 6 funds could be as good as article 8, because they all have to live up to our exclusion lists,” argues Bek. In total, PenSam have five Article 9 funds.

Taxonomy alignment could be 11-13% near aligned by now, including a lot of directly owned wind and solar farms via AIP. “We might get to 20% taxonomy aligned by 2030, ” expects Bek.

Impact investing also includes a UN SDGs fund dedicated to companies and projects such as a solar farm in Africa. But PenSam’s definition of impact does not sacrifice returns: “Anyway we have a fiduciary duty to produce good returns to investors,” he stresses.

Private markets and Scope 3 data need to improve

Data is improving but it is still a challenge to find the right balance and level of reporting. “The sheer volume of data keeps growing but there are gaps on the private side. We are working with ATP and other Danish pension funds to try and get data, and we are also looking into other ways to get data We expect that data providers and CSRD will improve data quality as well as AI,” Bek expects.

Overall, he is optimistic about the future of data: “Five years ago there was more or less no data. Today there is a lot and it is improving day by day”.

This article will feed into NordicInvestor’s upcoming special report on Sustainable Investing