Stockholm (NordSIP) – In 2021, Danish philanthropic organisation Realdania intensified its endeavour to boost investments in which financial returns and philanthropy go hand in hand. With the ambitious goal to have more than DKK 1 billion in mission-related investments by 2026, CIO Kenneth Lillelund Winther and the Realdania team have been busy searching for the right matches. After a thorough screening, facilitated by Global Fund Search (GFS) and an extensive due diligence process, the association awarded two such mandates at the end of December. For their passive ESG equity portfolio, Realdania chose to team up with NN Investment Partners (NN IP) and invest in their Enhanced Sustainability Strategy. Meanwhile, the new listed equity impact mandate was awarded to Ninety One.
NordSIP reached out to Realdania’s CIO to hear more about the challenging search for mission-related investments and the reasons for choosing these two asset managers in particular. In the first of two articles, we talk to Winther about how passive managers can differentiate themselves from the crowd. NN IP’s Directors for Nordics, Jochem Wiersma and Jaap Kraan, share their thoughts on what makes their strategy a good match for Realdania.
Aligning investments with mission
A philanthropic organisation with some 170,000 members, Realdania uses the returns on its portfolio investments to support large and small projects that contribute to creating quality of life for Danes through the built environment: cities, buildings, and the built heritage. The association’s capital, accrued during the 150-year history of Danish mortgage banking, has since 2000 managed to provide on average grants of about DKK 1 billion annually. Most importantly, Realdania aims to align commercial investment assets with its philanthropic goals.
“In Realdania, we set aside resources from both the investment and the philanthropy department when we make mission-related investments as the impacts we look for are both financial and philanthropical,” explains Winther. “We have identified six sustainable development goals (SDGs) that we target in alignment with the philanthropic mission of Realdania and our goals; SDGs 3, 7, 11, 12, 13 and 17. We invest in products that have a positive footprint on these six SDGs or directly positive impact on our other philanthropic goals,” he adds.
At NN IP, integrating a client’s mission-driven target presents a welcome challenge. “For a philanthropic association like Realdania, the investment objective is not limited to enhancing returns or tracking a certain benchmark but also making a difference by putting their capital to work,” comments Wiersma. “It is a joy to cooperate with Nordic institutions like Realdania as there is a good cultural fit with NN IP’s sustainability standards,” he adds.
Standing out by investing in transition companies
Reflecting on what made Realdania choose NN IP to manage their passive mandate, Winther points out the complementary nature of the strategy to their existing portfolio. “NN IP Enhanced Sustainability Strategy is a good diversifier to our active strategy in terms of process and targets,” says the CIO.
“Engagement rather than exclusions is at the core of our beliefs across all asset classes and in our manager selection process. The manager shared our views on that topic and has demonstrated that both skills and resources are allocated to the ongoing dialogue with companies to improve their commitment to sustainability. NN IP’s strategy invests in companies best positioned to reduce CO2. It doesn’t just exclude the worst emitters, but also makes a positive selection of companies based on carbon emissions and ambitions,” he adds.
Kraan agrees that one of the distinguishing features of NN IP’s approach is the selective use of exclusions. “The transition to a low carbon economy is one of the key elements of our strategy, which also perfectly matches Realdania’s objective. And, whilst it excludes investments in the most harmful forms of energy generation such as coal, shale oil and gas, oil sands and arctic drilling, we prefer to take an engagement-led approach where we help companies’ business models move towards lower emission operations,” he explains. “Our ESG screening methodology is appreciated by our clients as it is forward-looking, reduces ESG risks and rewards positive behaviour,” adds Kraan.
Engagement is key
While on the topic of inclusion, both parts emphasise the importance of engagement and stewardship for the concept to work. It is evident that Realdania’s expectations of their new managers are high. “Whether you invest in a passive or an active mandate, it is very important to have an active engagement strategy,” asserts Winther. “All managers, irrespective of their investment approach, have an equal say, and we believe that only by engaging you can affect companies’ behaviour,” he adds.
For NN IP’s Enhanced Sustainability Strategy, engagement and voting are essential tools to influence companies towards more sustainable behaviour and practices. “By actively engaging with companies and exercising our voting rights, we can truly put our clients’ capital to work in generating a more positive environmental and social impact,” says Wiersma. “Constructive and regular dialogue with investee companies on ESG factors enables us to help them tackle a wide range of issues. To increase our leverage, NN IP engages collaboratively with other institutional investors and through initiatives such as the UN PRI and IIGCC. This way, we can achieve maximum investor influence and share resources and expertise when engaging with companies,” he adds.
Realdania expects the portfolio managed by NN IP to have a low tracking error to MSCI World, which is their benchmark for equities in general. From a philanthropic point of view, however, the association wants to support the transition towards the goals of the Paris agreement. This means that the carbon intensity ambitions in the strategy will be carefully monitored. “The portfolio will have a minimum of 30% less carbon intensity than MSCI World and will be aligned with the EU Taxonomy on Climate Transition Benchmark,” explains Winther.
According to Kraan, NN IP’s strategy is well suited to the task of achieving a lower carbon footprint than the MSCI World Index while simultaneously keeping the tracking error low. Monitoring and measuring the specifics is not a problem for the asset manager either. “Our strategy reports its carbon, waste and water footprint and environmental score and emissions are disclosed on Scope 1, 2 and 3,” Kraan points out.
Leveraging resources to reach the right fit
Looking for the right combination of ambitious sustainability goals, proven engagement results, and a long track record of running an enhanced passive ESG strategy can be challenging for a lean investment organisation like Realdania’s. Luckily, external partners can provide some support. “By using GFS, we make sure that a huge part of the universe is screened,” says Winther. “They also help us structure the requests for proposals and the incoming data in a way that makes it easier to compare the different strategies,” he adds.
“GFS was positive about the characteristics of our strategy and believed this would be a nice fit with the party that was doing the search,” relates Wiersma. “Despite the fact we have managed this multi-billion passive enhanced strategy for over five years, it is fair to say that NN IP is particularly known for its actively managed sustainable and impact strategies. This win shows that we are not only able to cater to the needs of Nordic investors for active strategies but also for efficiently managed sustainable equity enhanced strategies,” he adds.
At NN IP, Kraan sounds excited about the future cooperation with Realdania. “We like to work with high demanding Nordic clients like Realdania as they help our organisation develop the product offering further and come up with solutions that benefit other clients as well,” he says.
Back to that goal of mission-related investments of DKK 1 billion by 2026, Realdania’s CIO is aware of the remaining work ahead. “We are continuously updating our portfolio and manager compositions across asset classes and will have more searches in 2022 where we usually open the searches for all global participants,” concludes Winther.
Image courtesy of Realdania (Nikolai Linares) / NN IP / edited by NordSIP
 SDG 3: Ensure healthy lives and promote well-being for all at all ages.
SDG 7: Ensure access to affordable, reliable, sustainable, and modern energy for all.
SDG 11: Make cities and human settlements inclusive, safe, resilient, and sustainable.
SDG 12: Ensure sustainable consumption and production patterns.
SDG13: Take urgent action to combat climate change and its impacts by regulating emissions and promoting developments in renewable energy.
SDG 17: Strengthen the means of implementation and revitalize the global partnership for sustainable development.