Issue 6, 2018

The Nordic Fund Selection Journal's 2018 edition highlights several key themes shaping institutional investment, including ESG integration, gender diversity, and sustainable fixed income investing. The spread of ESG beyond equities into fixed income, exemplified by innovations such as green bonds and collaboration between UBS and the World Bank, has increased investor allocation towards sustainable fixed income instruments. However, effective ESG integration requires a nuanced, fundamental approach rather than relying solely on third-party ratings, emphasizing the importance of credit analyst input and sectoral analyses. Cybersecurity has also emerged as an important emerging consideration for fiduciaries managing investment risks, with pension funds recognizing its impact on corporate valuations and operational resilience.

Within the Nordic investment community, sustainability drives new organizational and strategic adaptations. For example, the Swedish Folksam Group’s long-term commitment to green bonds and municipal investments reflects aligning assets with company values and clients' long-term interests. Meanwhile, Nordea Life & Pensions has expanded its cross-country team coordination to meet regulatory and sustainability demands after the Danish entity’s spin-off, emphasizing ESG as a core component of investment decisions. Additionally, Nordic investors grapple with ethical and reputational risks associated with sovereign bonds, exemplified by debates around Saudi Arabian government bonds amid serious human rights concerns. Efforts to curb negative climate lobbying led by Sweden’s AP7 further underscore the active stewardship dimension in supporting global climate goals.

Gender diversity in asset management is increasingly recognized as important for enhancing decision-making and mitigating biases, though its integration into manager selection remains nascent in the Nordics relative to the US. Several Nordic selectors note that team composition and organisational culture are considered, yet formal scoring of gender diversity is not yet common. Industry initiatives and academic research point to the financial materiality of diversity, along with a growing acknowledgement that diverse teams yield better outcomes. Simultaneously, academic insights advise investors to sharpen evaluation metrics, navigate complex market risks including Brexit and trade tensions, and adopt innovative portfolio construction approaches that integrate ESG and long-term risk management. Overall, Nordic institutional investors are progressively embedding sustainability and governance considerations into diverse facets of investment processes, while balancing regulatory requirements and evolving market dynamics.

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Table of content

ESG Integration in Fixed Income Investing

Growth of ESG investing beyond equities to fixed income with innovations like green and social bonds. Challenges in applying equity-style ESG integration to fixed income due to differences in risk focus and the need for fundamental credit analysis combined with multi-step, materiality-based integration.

Leadership Challenges at Nordic Pension Funds

High turnover in leadership at Nordic pension funds, with examples such as ATP facing reputational pressures and the sensitive context of tax avoidance scandals affecting CEO tenures. The importance of appointing leaders with unblemished records.

Swedish AP3 Pension Fund: Strategy and Leadership

Return of Kerim Kaskal as CIO following predecessor’s passing; focus on climate change risks and alternative risk premia re-evaluation. Emphasis on fundamental investment approach amidst regulatory changes aiming to relax investment rules.

Investor Focus on Cyber Security Risks

Increasing recognition of cyber security as a financial risk among investors. The role of data protection, ethical concerns, disclosure challenges, and the potential impact on company valuations and investor decisions.

Investing in Saudi Arabian Bonds Amidst Human Rights Concerns

The inclusion of Saudi Arabian government bonds in emerging market indexes raises ethical questions. Diverse responses from Nordic pension funds range from passive exposure to active exclusion based on human rights violations, highlighting tensions between investment returns and ethical considerations.

AP7’s Leadership on Climate-Linked Corporate Lobbying

AP7 and the Church of England Pensions Board lead an investor initiative to expose and address corporate climate change lobbying that conflicts with publicly stated climate commitments. The campaign targets transparency and alignment of corporate political activities with climate goals.

Pensam’s Position Against Aggressive Tax Behaviour

Danish pension company Pensam publicly condemns tax avoidance practices, urging higher ethical standards within the financial industry. Reflects broader concerns among Danish pension funds following high-profile scandals and underscores ESG integration including tax morality.

Nordic Fund Selection Trends and Industry Updates

Insights into likely search areas such as emerging markets, people moves including CEO changes and appointments in major pension and fund firms, and newly formed partnerships and initiatives reflecting evolving market focus.

Interview with Folksam Group on Sustainability and Investment

Folksam’s journey towards sustainability integration, starting with green bonds and expanding into regular bonds and other asset classes. Discussion of portfolio management philosophy aligned with company values and operational challenges in managing multiple regulated portfolios.

Integration of Different Regulatory Frameworks in Investment Management

Folksam’s experience in handling multiple investment portfolios under different regulatory regimes like Solvency II and IORP II, emphasizing the need for operational simplicity and strategic clarity in complex regulatory environments.

Real Estate Investment Strategies and Outlook: Nordic Roundtable

Discussion among Finnish investors highlighting trends like increasing international diversification, manager selection, ESG integration, political risks, asset classes including alternatives and real estate debt, and the impact of emerging market forces like e-commerce and prop-tech.

Gender Diversity in Investment Manager Selection

Growing ESG focus includes gender diversity as a factor in manager selection. While still nascent among Nordic selectors, awareness is increasing with emphasis on diversity of thought, data challenges, and convergence towards broader inclusion as part of due diligence and investment philosophy.

Gender Diversity Perspectives: Q&A with City Hive

Expert insights on importance of gender diversity in investment teams, increasing investor questions, data limitations, the necessity of cultural change and diversity as a driver of superior investment outcomes in manager selection processes.

Nordic Selectors’ Views on Gender Diversity

A recent survey indicates gender diversity is not yet a key selection criterion among Nordic fund selectors but is increasingly recognized. Firms incorporate overall team diversity qualitatively and anticipate greater integration in future due diligence processes.

Nordea Life & Pensions Post-Danish Breakaway: Organizational and Strategic Changes

Following Danish operations spin-off, Nordea Life & Pensions restructures into a pan-Nordic unified team split across Sweden, Norway and Finland, managing ESG integration, governance and scaling manager mandates while adapting to regulatory and organizational changes.

Norway’s Gjensidigestiftelsen: Transition to Internal Asset Management

The foundation’s move from outsourced investment management to internal oversight, team-building, portfolio consolidation and enhanced infrastructure. Questions sustainability strategy evolution and plans for further diversification in asset classes like infrastructure.

AP2’s Green Bond Experience: A Decade of Development and Impact

Reflection on AP2’s pioneering green bond investment and reporting contributions, market evolution including standardization challenges, and portfolio composition focus. Emphasis on role in climate finance and desire for sectoral diversity in green bond issuance.

Academic Insights on Sustainable and Factor Investing

Selected papers address sin stock anomalies and substitution with ethical stocks, performance persistence in fund selection, factor investing risks and diversification, ESG impacts on bond yields, impacts of factor ETFs on active flows and currency hedging optimization in multi-asset portfolios.

Up-Close Personal Profile: Peter Køhler Lindegaard, Industriens Pension

Career and personal insights from Industriens Pension’s head of listed investments, professional background choices, investment philosophy emphasizing risk management and diversification, views on regulatory complexity, and personal interests outside work.