By Hamlin Lovell, NordicInvestor

NordicInvestor’s contributing editor Hamlin Lovell (HL) interviewed Jonna Ryhänen (JR), Director, Securities Division, and Katja Einesalo (KE), Director, Responsible Investments, at ELO, pension insurance company in Finland, which manages EUR 26 billion in pensions for one third of all Finnish companies and about 40% of self-employed people in Finland.


HL: How do lower rates affect your strategic and tactical asset allocation?

JR: An investor cannot have an impact on low return expectations, but one needs to acknowledge the risks to low return expectations. In planning the strategic allocation, the limits and return requirements of the Finnish pension system need to be taken into consideration. We strive to implement investments efficiently and take into consideration the related cost structures.

HL: Which asset classes are you increasing and reducing over the next year and why?

JR: As a pension insurance company we are a long-term investor – no special changes between asset classes

HL: Which asset classes are you using active management for – and why?

JR: Our investment strategy is based mainly on active strategies in all asset classes.

HL: Which asset classes are you using passive management for – and why?

JR: In some asset classes passive strategies are included when we consider that there is not possible to generate added value with active strategy in efficient markets.

HL: Which asset classes are run internally, which use external managers – and why?

JR: We mainly invest directly in house in majority of asset classes. We use external managers in private equity/debt investments and in hedge fund investments. Those investments would not be possible with internal resources. We also have some investments via managers in equities and bonds, but they are not our main investment method.

HL: What do you see as your top 3 challenges for 2021 and beyond?

JR: Uncertainty related to Covid-19 in 2021. Low return expectations and climate change related challenges in longer term.


HL: What are your ESG priorities?

KE: Our priorities are in developing our climate change approach according to our climate strategy roadmap including considering the risks and possibilities arising from biodiversity loss and just transition. Developing and levelling up our engagement by ourselves and together with co-operation partners is definitely a priority area and deepening and developing our both internal and external reporting on ESG to a more data analytics driven direction.

HL: Which asset classes and strategies are you applying ESG to? Are there any gaps and why? eg Can you apply ESG to sovereign debt, currencies, equity indices? What challenges do you face in applying ESG?

KE: Our Principles of responsible investments are applied to all asset classes. Obviously, there are differences in how and to what extent ESG can be integrated to different asset classes. Our processes and practices are most advanced in direct equity and corporate bond investments.

HL: Are your ESG policies the same for internal and external management?

KE: Basically yes, we expect that our managers apply the same principles as we do with our investments and finding this out is a core part of our pre-investment analysis with the managers. While the majority of our investments are made directly by our portfolio managers, the manager selection process is under development.

HL: Are you planning on excluding more companies, industries or countries in 2021? Can you give any examples of proposed exclusions?

KE: At the moment, we do not have any particular plans to increase exclusions. We exclude from our direct investments tobacco, controversial weapons and companies that generate more than 25% of revenues from business concerning coal production or the use of coal in energy production and have no clear strategy to reduce coal use.

HL: Are you increasing your engagement activities with companies? Are you doing this directly or via other groups such as proxy voting advisors eg ISS, ESG ratings agencies eg Sustainalytics, or global industry groups eg Climate Action 100 Plus?

KE: We have identified engagement as one of the ESG development areas where we focus our resources and activities in the coming years. In Finland, which is a home market we use mainly one-on-one engagement but in other geographical areas we focus in engagement with partners. IIGCC (Institutional Investors Group in Climate Change), Climate Action 100+, Climate Leadership Coalition and CDP are our main co-operation partners in terms of engagement. Moreover, during this year, we plan to review some potential new collaborations in engagement.

HL: Are you increasing your Impact Investment allocations? What percentage are you allocating to Impact, across which asset classes? Eg Green bonds?

KE: During 2021 we will review and set a target for climate solutions according to our climate strategy roadmap. We are currently reviewing different methodologies and approaches to measure climate solutions and Taxonomy is one of the ways we might consider when setting our targets. It is still however early days in this regard and the development work we will doing this year will give us answers in this complex question.

We have investments in green bonds and the amount has grown during the last years. We do not however have any particular allocation target for green bonds.

HL: What forms of increased ESG reporting are you planning? What challenges do you face with your reporting?

KE: We are developing our reporting as part of continuous development of ESG in general. We made some additions in our TCFD reporting this year – for example we started to report the contribution of our equity and corporate bond investments to the weighted average carbon intensity, the assessment of the readiness for transition of our equity investments and the weight of equity and corporate bond investments that produce clean technology solutions. We plan to develop our TCFD reporting in the following years.

HL: Are you already reporting backward-looking carbon footprints, or if not when do you plan to? Which measure do you or would you use? Which strategies and asset classes does it or will it apply to?

KE: We have reported the carbon footprint and carbon intensity of our equity and bond investments since 2016. We have decreased the weighted average carbon intensity by 34% in equity investments and 54% in corporate bond investments during 2016-2020. Data coverage of our investments that are included in the calculations is almost 100%. We have also reported the carbon footprint of our real estate investments since 2016. The carbon footprint of our real estate investments has decreased by 42%.

During 2021 we will set a target or specialized approach to deal with the carbon footprint or/and climate risk more broadly in our sovereign bond and private equity investments.

HL: Are you reporting any forward-looking measures, such as ITR – Implied Temperature Rise, or if not when do you plan to start? Which strategies and asset classes does it, or will it, apply to?

KE: We are in process of implementing a climate risk tool with what we can assess the warming potential of our equity and bond investments in various climate scenarios. The implementation is ongoing and we have preliminary results. The tool can also be applied to sovereign debt instruments and we will study that this year. Warming potential is a useful point of view in studying the climate risks of the portfolio but as it is highly dependent on the chosen scenario and the chosen portfolio, we need to study the tool further before we use the results for reporting.

HL: Have you calculated Climate Value at Risk (VaR), or will you do so in future? Which strategies and asset classes does it, or would it, apply to?

KE: The abovementioned tool can also be used to assess Climate VaR and we have prepared a first round of analysis with the tool. In this case it also applies mainly to equity and corporate bond investments. In regard to CVaR, the chosen scenario and the portfolio have an impact to the results so we are in the process of studying the tool and how we can use it in climate risk and opportunities reporting as well as in portfolio management.

HL: How do new EU Sustainable Finance rules on SFDR, Taxonomies etc influence your reporting?

KE: As a Finnish pension insurance company governed by Act on Pension Insurance Companies, the Taxonomy and SFDR do not directly apply to us and hence we do not directly report according to them. Nonetheless, we assume that SFDR and taxonomy will have an impact on the best practices in ESG processes and reporting and therefore will have an impact on our reporting in longer term. The Finnish Ministry of Social Affairs and Health is currently considering if and how it would like to SFDR to be applied to Finnish Pension Insurance companies.


HL: What has been the biggest benefit/disadvantage in the change to working from home?

JR: We were well prepared for remote working and it was done on a regular basis also before the pandemic. The entire investment organisation shifted to remote working immediately in the Spring of 2020. While not working in the same premises the communication with different functions is essential. Remote working seems to fit well to portfolio managers, job satisfaction and wellbeing has been on a very good level. Absence because of sick leave has been very low.

HL: Has it slowed down decision making? Are you more or less likely to engage with new managers remotely?

JR: Remote working has not slowed down decision making. Our investment strategy is based on direct investments by inhouse staff but the communication with external managers and counterparties via remote connections will increasingly be done through remote connections.