Game Changers: from the Nordics to Paris

    Stockholm (NordSIP) – Last week, at the Sustainable Investment Forum Europe 2019 (SInvEU) in Paris, organised by Climate Action in collaboration with the UNEP FI, 302 attendees from 29 countries gathered and listened to 43 speakers in just one packed day. Among the industry leading experts were several prominent Nordic experts, including Eva Halvarsson, CEO at Swedish state pension fund AP2 (pictured above), Wilhelm Mohn from Norges Bank Investment ManagementPeter Lööw, Head of Responsible Investment at Alecta and Ulf Erlandsson, former fixed-income manager at AP4. In different sessions, the representatives of Nordic asset owners shared their best practice and talked about what they thought could serve as – what became the motto of the conference – the ‘game changers’ of sustainable investing.

    The Tripple Cs

    In a panel about integrating ESG and sustainability into decision making and analysis, Eva Halvarsson‘s game changers were, elegantly put, AP2’s 3Cs: Commitment, Culture and Curiosity. The fund, with close to SEK 35 billion in AUM, started its journey 17 years ago, she explains and has focused in particular on climate, diversity, reporting and corporate governance. In her position as CEO of the fund, Halvarsson is particularly pleased with both the top-down and bottom-up integration of ESG among the fund staff. The board and management team are fully aligned with the staff in pursuing sustainable investment practices, so that it has become an integral part of AP2’s culture. Far from knowing everything, however, the organisation strives to learn. That is where the curiosity to look for new ideas becomes an essential feature of the game change.


    Ulf Erlandsson

    Ulf Erlandsson spent eight years at Swedish state pension fund AP4 where he ran the credit and sub-government fixed income book, including the green bond mandate, which became a globally recognised franchise. In an inspiring keynote address about “Fixed Income in the Anthropocene”, he reminded us of modern portfolio theory and showed how correlation and volatility could be the game changers in making fixed income more sustainable.

    When pursuing Sharp ratio maximisation, a portfolio will always benefit from including two assets when they are not perfectly correlated. In other words, a portfolio’s risk-adjusted return increases when adding an inferior asset, by virtue of diversification. Following the same logic, Erlandsson shows, the benefits of diversification decrease as the correlation between the assets increase. With this in mind, he concludes, modern portfolio theory would support the idea that portfolios should substitute traditional bonds with sustainable bonds, as the correlation between the two is almost one, the returns are practically the same, but sustainable bonds may exhibit lower volatility.

    Forward-looking risk may be the critical difference between ‘green’ and ‘brown’ bonds. While there may be no difference between different-coloured bonds issued by the same entity, green issuers may prove safer than others. Generally, Erlandsson reminds us, bonds are left-taled instruments, and that is why this market should be more keen on working on climate risk.

    A journey as remarkable as its goal


    Wilhelm Mohn

    In a panel dedicated to the implementation of TCFD recommendations, Wilhelm Mohn makes the argument that the purpose of the TCFD framework is to bring about better reporting, but that an organisation improves while implementing the framework, not only because it will ultimately become more transparent, but because it will have spent valuable resources in getting there.


    The game starts changing when an organisation begins thinking about climate change, risks and opportunities in the context of their own business, mandate or institutional setup, such as in the case of NBIM. Each organisation will need to integrate new instruments as well as to adapt its existing tools. The entire decision making and management structure will have to consider climate change risk. Only once this integration process is complete can an organisation start monitoring its risk.

    Learning from scenario analysis


    Peter Lööw

    Peter Lööw talks about the stress tests Alecta performed on its investment portfolio in 2018. The fund has an active fundamental investment approach which is highly concentrated, with an equity portfolio of only 100 names, for instance. Two years ago, the organisation committed to making its equity portfolio aligned with the Paris agreement, and therefore the risk department had to start work on monitoring the alignment by using stress testing and scenario analysis.


    Echoing Mohn’s insight, Lööw believes that the game-changing aspect of stress-testing a portfolio was in the journey. Not only the risk team but also the board and the investment team learned a tremendous amount from scenario analysis. They looked at specific cases, including one where they observed how a company would fail as it could not cope with the transition to a low-carbon economy. One of the essential premises of the analysis was that to curb climate change effectively, the price of carbon would eventually have to increase. The biggest challenge for Alecta remains the quality of data and methodology they can implement. This year, the teams will benefit from models and products they didn’t have access to previously, thereby reaching further in their journey, to be able to reiterate the exercise after the summer and every year after that.

    Pictures courtesy of Climate Action

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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