By Hamlin Lovell, NordicInvestor

NordicInvestor interviewed Topdanmark’s Portfolio Manager, Andreas Stang who is responsible for the ESG strategy.  We learned that Topdanmark’s ESG policies are partly firm-wide while additional policies apply to certain ESG strategies that individual clients can select as part of a menu of thematic strategies. Engagement, proxy voting and ESG reporting are also being expanded.

Topdanmark, Denmark’s second largest non-life insurance company, is part of Sampo Group, which also owns If P&C (which is active in the Nordics, Baltics and Russia), Mandatum Life (in Finland), and Hastings Insurance (in the UK). Sampo publishes ESG, responsible investing and Covid responsibility reports, but Topdanmark sets its own ESG policies. Topdanmark published its first ESG report in 2020 for 2019, has been publishing CDP (Carbon Disclosure Project) reports since 2010, and CSR (Corporate Social Responsibility) reports since at 2012, including progress on the UN Global Compact.

Joining Topdanmark in September 2020 in the middle of the Covid crisis has meant mainly working from home, though Stang does attend the office twice a week. He admits that, “the biggest disadvantage of working from home has been not knowing everyone in the new office. Equally, I have been proactive in setting up online seminars on ESG and sustainable investing to develop a dialogue with salespeople and get feedback from clients. Before Covid, this took place in a physical auditorium”. Despite the challenges of remote working, multiple ESG related initiatives are underway.

Asset Allocation and ESG Coverage

Currently ESG applies across most of Topdanmark’s strategic asset allocation, which includes investments in equities, real estate and credit with a very small amount in private equity.

The benchmark for equities is MSCI Developed World, so controversies around emerging markets are not particularly relevant.

“Real estate is run in house, and is mainly invested in Denmark. This can consider energy classifications. Topdanmark exited a green infrastructure project at the end of its life. We see scope for green mortgage bonds based on energy classifications, but also find that there is some debate here and for now the priority is to invest directly into energy efficient and water efficient real estate rather than to get indirect exposure through green mortgage bonds,” says Stang.

The credit allocation invests in high yield and investment grade debt with a European and Nordic focus.

For now, ESG does not yet apply to government debt: “we have decided only to invest in government debt in the most advanced economies, thereby eliminating the issuers with low ESG scores,” says Stang. 

Tactical Asset Allocation

Stang also has responsibility for tactical asset allocation (TAA), which is considering the right equity allocations in a rising interest rate environment. TAA also sometimes needs to consider ESG constraints. “We need to consider interest rates, and the reflation trade, including the rotation out of technology stocks we have observed this year. The resurgence in oil prices is difficult in terms of ESG because we cannot do oil and gas, so we need to find other reflation trade exposure”.

ESG Exclusions

It is worth distinguishing between Topdanmark’s firm wide exclusions, and those applying to its ESG products such as “Formålspension” their ESG Pension product launched in 2020. “At the firm level, we exclude tobacco, oil tar sands, thermal coal, controversial weapons and companies violating the UN Global Compact where there is no hope of engagement,” says Stang.  The controversial weapons can be broken into five categories of UN Conventions: certain conventional weapons; biological weapons; chemical weapons; anti-personnel mines, and cluster munitions.

Thematic offerings

Additional restrictions for “Formålspension” (directly translated to Purpose pension) include oil and gas, gambling, weapons in general, mining in the global south, and pornography. Topdanmark runs Danish equities in house, but has selected external managers for one of the thematic investments. “Clients select their own thematic overlay, which can include green energy transition, technology, Danish equities, and global ESG. This provides some optionality for the end client and has resonated very well with them. They selected exposure to technology which then accounts for up to 20% of their pension savings”.

“We are still unsure about the implications on these products from the upcoming EU SFDR (Sustainable Finance Disclosure Regulation) rules”, adds Stang. These rules on ESG disclosures have just come into force in March 2021.

Expanding engagement policies

Stang was previously Senior Portfolio Manager and head of ESG at Danish pension fund PFA, which had a slightly different approach: “At my previous employer there used to be a different approach since they managed, amongst a range of other products, index funds that owned a very wide universe of over 1,500 equities, which meant that there was more emphasis on the engagement and exclusions. At Topdanmark we invest in 150 to 200 individual stocks, and we can spend more time on each company, including decisions concerning engagement”.

Historically, engagement has only been to address “negative” corporate activity, conduct or behavior. The engagement has been limited due to the use of negative screening before making investments which often led to making other investments. For instance, “as of February 2021, Topdanmark is only engaging with one company in relation to the UN Global Compact: Danske Bank. Previously we have engaged with Volkswagen, and are now happy with their changes in response to “dieselgate””, he points out.

In future engagement is being expanded to become a force for positive change. “A new development on the engagement front is positive engagement with companies that are not violating the UN Global Compact. We are at the idea generation phase, testing the waters here and figuring out what to do,”, says Stang. 

Proxy voting

Proxy voting is also entering new territory – going beyond Danish small caps to cover all equity holdings. “This is the first season that we are carrying out a full season of proxy voting. We work with a service provider to analyse the agenda and decide on every item. We also plan to start reporting on our voting,” says Stang.

Carbon reporting

Proxy votes are not the only area being reported. “We have started reporting on the carbon footprint of our equity strategies, both in absolute terms and relative to the benchmark. We are reporting Scope 1 and Scope 2 emissions at this stage. Our footprint has been lower for global equities, but higher for Danish equities because our sector selections in worldwide logistics have a higher footprint,” says Stang. Carbon emissions from investments are reported based on internal calculations using Sustainalytics data.

Green transformation targets and reports

However, these measures are by their nature backward looking, and many Danish companies have big ambitions to transition to lower carbon intensiveness. Topdanmark itself has a target of 20% of all pension assets in green or green transformation equities by 2030. “We will produce our first report on green transition in 2021, once we have guidance from the EU on what is defined as a green investment. This is a highly ambitious target and it will require a great deal of analysis of investment opportunities across all asset classes,” says Stang.

In house corporate ESG policies

Topdanmark’s own CSR and ESG reporting – for its own corporate activities – is currently more extensive than what it is able to report for the companies invested in. For instance, Topdanmark’s CSR report does include scope 3 carbon emissions. And Topdanmark practices what it preaches through corporate ESG policies, which include becoming carbon neutral by 2030 in terms of buildings and travel. “Our main office outside Copenhagen has solar panels on the roof, and residual heat from servers in the basement is used for heating in winter,” points out Stang. Topdanmark is in some cases setting an example that some investee companies should follow over the coming years.