Stockholm (NordSIP) – As we look for best practices within the sustainability teams of some of the most influential pension funds in the Nordics, we first meet the people behind the policies and their implementation. Recently, we spoke to Pelle Pedersen, Head of Responsible Investment at PKA, one of Denmark’s largest occupational pension manager. PKA is in charge of four funds, which serve workers in the healthcare and social sectors, with total assets under management of approximately €36 billion. Starting from the very beginning of his career, Pedersen tells us how he got to heading PKA’s responsible investment efforts. He then explains what he believes are the most critical factors for successful integration of responsible investment practices into the investment process.
“While I was studying law,” Pedersen starts, “I was already interested in portfolio management. I was trading on my own account, and I wanted to join one of the large banks as a trader. After the first three years, I hesitated and considered dropping out of my legal studies. At the time, a Danish entrepreneur, well known for its ice cream shops, sold his business and went to Africa. He became the first dairy producer in Mozambique and, in the process, he realised how important it is to reconcile investment and social considerations. Combining impact with business was something that talked to me, and I decided to go and see for myself.”
Pedersen talks about how he saw an African-based project build a business on trade with Europe. He witnessed the launch of a chocolate factory, using organic raw ingredients and employing many local women. The finished product sells in Denmark and targets what Pedersen calls “social foodies”, in the form of chocolate, ice cream and pastries. Cocoa, macadamia nuts and vanilla are all precious ingredients that grow well in that part of the world.
“This work inspired me,” Pedersen continues. “I travelled across South Africa for three months, and then got back to law school. Before finishing my degree, I was still unsure about how to combine what I had learned in Africa, my new skills as a lawyer, and investing. Then I found PKA and got a position there, as they were looking to strengthen their sustainable investment process. Five years later, I am head of responsible investment.”
While this ascension may seem fast, the journey was not a simple one and doesn’t seem to have come to an end. Pedersen remembers: “The first two years, I only focused on the link between sustainability and risk and return, hence tried to change the narrative of why sustainability is important. You don’t move anything by saying ‘this is going to save the planet’ to portfolio managers with a responsibility to provide the best possible returns. Still today, I sit in the investment team and have regular debates with the portfolio managers on how to align investments with our guidelines. We also talk about what could we do to move from exclusions to introducing new initiatives around impact. This is not only about moral considerations.”
“The world is changing at a rapid pace,” Pedersen observes, “there are 1 billion people on earth without access to electricity or water and sanitation. It is a business opportunity!” At PKA, like every other pension fund, the asset allocation cannot compromise on the fiduciary duty to beneficiaries, which stipulates that return must be maximised for a given level of risk. Many people see a conflict of interests between return and impact, but Pedersen doesn’t. For him, to the contrary, impact investing can be one way of achieving better returns. “One of my colleagues came back from Tanzania, where he looked at a farming project which supports schools and the local community. Not taking care of those aspects there, would be detrimental to the long-term business case. We do impact because it’s part of the business strategy.”
Another way to look at the question is from the angle of re-allocation. “This should be the question for asset owners and managers: will Sustainable Development Goals (SDGs) or other similar definitions lead to a re-allocation? It should, especially for long-term investors, simply because it helps highlight futures risk or business opportunities in areas you hadn’t considered before. It is easy to see how new green technologies are appearing. We also see consumers changing tastes and caring about new things. As a manager, you have to accept these changes and position your portfolio against or in line with a trend you know is coming.”
These days, these discussions are commonplace at PKA, but it wasn’t always the case. Pedersen, who drove the internal transformation, stresses the importance of communication between different stakeholders. “How do you communicate internally what impact, ESG and sustainability are? The pensions’ ESG teams can only succeed if they can translate why investing in a certain way is important. I could be the best at doing what I do, but if I don’t have the attention of my board, the CEO, and the entire team, then I’m not going to be successful. Without the right spotlight, my recommendations will not be approved.”
On the theme of communicating a message right, Pedersen notices that sometimes, asset managers present opportunities the wrong way round. “They go for impact first. It should be the opposite. First, look at emerging markets and see the market failure, identify the business opportunity which will provide attractive returns. I have met with impact managers, and for the first 10 minutes, all they talk about is SDGs. Only then, do they talk about returns. I think there is a bit of a misunderstanding on how to communicate the message in the right order.”
A simple example is how similar ESG and quality factors are. “Because companies take climate-related risks seriously, because they pay fair wages, because they focus on gender-equality, and on good governance, they have a good chance of not underperforming their peers. As long as that is the case, you are not asking managers to compromise on the risk-return target, and you can change their mindset.” In fact, Pedersen argues, this is also valid for risk managers. “Our risk team makes an annual assessment of climate-related risks,” he explains, “they ask themselves what steps to take to mitigate the perceived risk. The consideration is not so much ethical as practical from the risk perspective. When you get the message focused on risk and return, you get much more traction internally.”
Picture © PKA