By Hamlin Lovell, NordicInvestor
Rasmus Juhl Pedersen, Head of ESG, has been with PBU since 2008 and has been a board member of Dansif since 2018, including a spell as Chairman. He is also a Guest Lecturer on Responsible Investing at Copenhagen Business School since 2014. Pedersen also spent several years on the board of Danish charity Humanity in Action, which promotes understanding of human rights locally and globally.
Streamlining and focusing the portfolio
PBU manages over DKK 100 billion (USD 14 billion) for teachers of young children in Denmark. Listed equities make up about 60% of assets and are managed both internally and externally.
The portfolio of listed equity and high yield has been streamlined from 3,000 to 450 names, for both investment and ESG reasons. “The portfolio is now focused on larger, more established companies and divestments that really make a difference. We got tired of having to defend small positions of no importance in the Danish media and to NGOs. We would rather defend a consequential position size,” explains Pedersen.
Focused exclusion list
As a consequence of the reduced investment universe, the exclusion list has come down from 240 to 50 companies. “This is more workable to monitor and review,” finds Pedersen.
The largest exclusions include Amazon, Tesla, Wal Mart due to issues around labour rights, trade union recognition and track records on treatment of workers. Pedersen is aware that the Norwegian oil fund, like many competitors, have included Wal Mart again and could also reconsider the exclusion.
Oil companies Chevron and Conoco are excluded for not having credible transition plans. Several European oil companies – Total, ENI, Shell and BP – rank higher on energy transition plans. “Norway’s Equinor however does not rank well based on the Transition Pathway Initiative (TPI),” points out Pedersen.
Geopolitics and defence exclusions
PBU’s exclusion list would not cover companies in countries that are not invested in, such as Russia and China. PBU actually stopped investing in Eastern Europe before the 2014 invasion of Crimea and also ceased investing in Latin America. In China the situation is more nuanced: they can invest in government bonds and quasi investment bonds, and are mainly invested in Hong Kong.
PBU has gone further than some pensions that only ban controversial weapons. “We have a near complete ban on defence or defence-related companies, including Boeing and Airbus. We also exclude suppliers of components or services to nuclear armaments. We do this regardless of whether the company is based in the West, China or Russia,” explains Pedersen. This policy has not changed in response to recent geopolitics, and is based on consulting members. “We asked delegates if the Ukraine war made defence part of corporate responsibility, and they said no”.
There is no direct exposure to Gaza. PBU owns only a few Israeli companies in the renewables space and some leisure companies. PBU is still debating whether to exclude Caterpillar based on the use of its heavy equipment to demolish Palestinian houses
Mainly Article 8
Very few funds meet the criteria for “sustainability” under the EU taxonomy. “It is very hard to live up to it. The bulk of PBU funds report under article 8 and only one reports under Article 6. The split is around 10% Article 6, 80% Article 8, and 10% Article 9,” says Pedersen.
“We want to be a responsible investor and active owner. The bulk of our funds integrate ESG, but could not be described as full impact strategies,” he explains.
Double Materiality Priorities
Double materiality has become a regulatory requirement. “It is a question of compliance with ESG regulations. Regulators in Denmark are actually more worried about materiality in terms of investment risk than negative impact,” reveals Pedersen.
Data challenges in biodiversity and private markets
The main data challenges are quality, comparability and consistency, especially in biodiversity. There is also weaker disclosure on the private side. Most data is gathered externally. There are hopes for a central EU reporting platform but no firm date has yet been set.
“MSCI ESG data is used for most data needs, but for private companies we are still trying to find the right solution to collect and aggregate the data. Individual portfolio managers also vary their reporting, which makes it more difficult to work out use cases” says Pedersen.
Some data providers are using AI. “We have not yet seen big breakthroughs but realize it is being used behind the scenes,” says Pedersen.
Engagement mainly in house and bilateral
Another consequence of owning fewer companies is that PBU has just brought proxy voting and engagement in house, having previously worked with external advisers since 2008. “We can now be more focused because we do not need to cover as many names,” says Pedersen.
PBU is however seeking an external adviser for “reactive engagement” such as responses to incident driven controversies. The pension fund had previously used a team at Columbia Threadneedle who had also been under corporate umbrellas of BMO Global and Foreign and Colonial.
Engagement had historically included collaboration via Climate Action 100 Plus, where PBU was a passive supporter. “We do not now have the resources to collaborate,” says Pedersen.
Impact and thematic focus
For impact per dollar spent, South East Asia can be the most promising region. “We would love to do more in Africa if we found derisked vehicles. We have looked at a Danish SDG fund for developing countries. We always expect a market return,” says Pedersen.
Thematic allocations have included renewable energy, solar, onshore wind and offshore wind. “We also work with sustainability enablers in the private space to try and find sustainability cogs like cogs in a wheel,” points out Pedersen.
At one stage PBU also had a portfolio of directly owned companies but as part of the streamlining drive to reduce complexity the pension fund now only owns funds and listed real estate.
Triple decarbonisation targets
Net zero is targeted by 2050 with an interim target of 50% reduction by 2030. The baseline for carbon reduction is 2019 and PBU is on track for its 2025, 2030 and 2050 targets.
The second leg is to build green investments in renewable energy, energy infrastructure and green enablers.
The third leg is to be active owners and push the highest emitters to adapt.”
“The investment universe has already been cut and should be further refined. New reductions should come from clean energy,” expects Pedersen.
TCFD reporting standards and guidelines are used for climate reporting, governance, board oversight and strategy. PBU also belongs to the Paris aligned asset owner group under IIGCC and follows their net zero approach.
The holy grail of a global standard?
PBU would welcome more standardized approaches since having an EU Green Taxonomy and a UK Green Taxonomy creates more work.
“We hope that efforts under the International Sustainability Standards Board (ISSB) will create a global standard, since TCFD ended this mandate and passed the baton onto ISSB. A more institutional approach could still reference TCFD guidelines. For now TCFD is still workable. It addresses climate change in a systematic fashion and works out good governance. The next step is a more widely recognized international reporting standard,” argues Pedersen.
This article will feed into NordicInvestor’s upcoming special report on Sustainable Investing
