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January 10, 2023

Why Sweden’s Alecta believes bondholders can effect change

The $107bn pension fund is working to influence debt issuers and to assess better the impact of green and sustainable bonds.

By Joe Marsh

Alecta, Carina Silberg, green bonds
Carina Silberg of Alecta realises that engagement via groups, such as Climate Action 100+, has risks attached to it. (Photo courtesy of Alecta.)
  • Can bondholders exert influence over debt issuers? Sweden’s Alecta thinks they can.
  • The Swedish pension fund had exposure to 65 green bonds within its portfolio as of last year.
  • Alecta is also exploring how it can work more systematically on ESG in the private markets.

Swedish pension fund Alecta seems keener than most institutional investors to measure the impact its SKr1.12trn ($107bn) investment portfolio has on people and the planet. It has a fast-growing focus on gathering and assessing data on fixed income and private asset holdings and is building green bond exposure and engaging with debt issuers.

While bondholders hold far more sway than shareholders over the companies issuing such securities, equity owners are more often considered the corporate ‘stewards’ who engage companies with a view to influencing their behaviour. Institutional investors do not tend to announce that they persuaded a firm to, say, cut emissions or increase staff diversity by threatening to stop buying its bonds.

But deciding whether to buy or sell debt, or engaging with the bond issuer, with an eye on its behaviour, can send a “very powerful message”, says Carina Silberg, head of governance and sustainability at Alecta. “I have peers in the Nordics who say you cannot engage or have an impact through bond investments, but we do engage with our bond issuers,” she tells Capital Monitor.

Pulling funding is a “strong signal”

Citing a case in point, Stockholm-based Silberg says that shortly before she joined Alecta, the fund decided not to refinance a bond issued by a big forestry company. The move had followed a period of substantial engagement during which Alecta had expressed its concerns over what it saw as major social problems at the firm, to which it had provided financing for some years, she added.

“That [decision to cut funding] was a very strong signal,” Silberg says. Alecta and several other investors had raised concerns, leading the forestry company to seek to address the issues in question but it had not made sufficient progress, she adds.

The Swedish fund is well placed to engage with corporate issuers, as it holds its fixed income assets – which account for 45% of its portfolio – directly, rather than through external managers.

However, making such a call as an individual investor is one thing; doing so as a group raises challenges, notably around the question of competition, something Silberg acknowledges may be a concern for asset owners. For instance, voices both within and outside industry coalitions such as Climate Action 100+ and the Glasgow Financial Alliance for Net Zero that private sector collaboration to tackle climate change could amount to illegal, cartel-like behaviour.

These investor collectives “create the impression of working together and engaging as a group, but actually they don’t,” says Wolfgang Kuhn, an independent consultant based in Munich. “They are all acting as individual investors, because they're afraid that if they ganged together – which would be very effective, particularly if they did so as bondholders – then they would get in trouble with the law.”

The anti-ESG movement, spearheaded by certain US Republicans, has seized on and heavily pushed such arguments. In turn, some market participants argue that antitrust legislation should be reformed to facilitate sustainability efforts.

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Where’s the money going?

A further issue Silberg flags is that while debtholders can have a big influence on corporates, it is not always easy to determine what the proceeds of a bond will be spent on. So it is not always clear what impact the financing will have, and whether it will provide "additionality", she says – that is, whether it funded something that would not have happened otherwise. That is a benefit she sees that green bonds can offer over conventional ones.

Accordingly, as Alecta has been fast ramping up its investment in green and sustainable bonds in recent years, it has sought to sharpen its focus on measuring the impact of such instruments. The fund started investing in the asset class in 2014 and now holds some Skr60bn ($5.75bn) of green and sustainable debt, roughly double what it owned three years ago. By year end, Alecta had exposure to 65 green bonds within its portfolio, about one-third – in terms of value – was corporate debt.

It has mainly bought issues from municipalities and supranational organisations such as the World Bank, but has also allocated to green sovereign and corporate bonds. Alecta has also invested in social bonds, mostly from municipal or non-corporate issuers, and holds just one sustainability-linked bond, says Silberg.

The fund has a strong appetite for green debt but has not set a volume target, she adds, but it has sought to increase the supply of such securities. For instance, Alecta has often had conversations with corporate issuers about whether a green bond might make more sense than a conventional one in certain cases.

Impact measurement

What’s more, given the substantial size of its green bond portfolio, “We believe this is a good time to start measuring the impact,” she adds. “We're not benchmarking them against each other, but it will create a bit more understanding for us and insight into what is more efficient or what does create more impact.”

“When I started at Alecta five years ago, I began asking: ‘Are we measuring the impact from those green bonds, do we have any idea when they're efficient, or [if] they're really contributing to the improvements that are promised?’”

The companies did issue impact reports for the bonds, she adds, “but it was very difficult for us to aggregate the data in a meaningful way to be able to say to our beneficiaries that the green bond portfolio has delivered on X, Y and Z”. The fund has found it easier to do for its equity investments (see chart below).

To improve visibility on the debt side, Alecta has been working with Nasdaq since 2020 on the data provider’s sustainability bond portal, the Nasdaq Sustainable Bond Network, and is on the advisory board. It is a platform where issuers can list green and social bonds and file their impact reporting. The fund is also in the early stages of looking at other data sources in this area, says Silberg. “But these types of aggregated data, where there may be proxies or underlying assumptions, have always been a bit of a black box.”

“Some of the initiatives in the market now, like the European Green Bond Standard [GBS], will contribute to the standardising of KPIs [key performance indicators] and so on,” she adds. But comparing data on bonds outside the EU market, for instance, is a challenge.

Moroever, progress has stalled on the GBS, which will aim to support growth of issuance and promote transparency and integrity. Negotiators had hoped to finalise the standard in December, but talks between the European Parliament and member states have collapsed, reported Bloomberg last month.

Private market progress

Alongside its activity in the green bond space, Alecta is exploring how it can work more systematically on ESG in another of its fastest growing asset classes: private markets. For the Swedish pension fund, that means real estate and infrastructure above all, and some unlisted equity. This allocation has roughly doubled from 10% to 20% of its portfolio in the past four years, thanks to a concerted focus on this area.

Silberg has seen a big jump in the amount and level of ESG data provided on private market investments in the past few years – reflecting similar sentiments among other retirement funds like Sweden’s AP6, UK-based Border to Coast and the Netherlands’ PGGM.

“We’ve been looking at [private market] fund managers’ ESG capabilities. How do they work with ESG, what is their capacity, and do they have any particular goals?” Silberg says. “As we have a net-zero target for 2050, that's one of the things that we've been pushing a lot in the dialogues with external managers.

“Now we’re in a phase where we really want to try and see what kind of data we can get from these managers in terms of their assets and their ESG impact. We’ve discussed the kind of indicators or data points that we're looking at and that we would like to get from them.” Examples of such data is diversity on fund manager level, financed emissions, share of renewable energy consumption for assets in the fund.

Two or three years ago private market managers would say they don’t have that sort of data, Silberg adds. “Now they can provide coverage for X percent of their portfolio; it's such a different conversation.”

“Most of the external managers that we now talk to already have processes or are in that process of gathering the data. So I think it's moved tremendously fast in this space.”

Alecta is, then, highlighting how asset owners might more effectively exert pressure for positive impact on companies through their debt and private investment holdings. Could such action be a precursor for more effective collective institutional action?

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