Danish pension fund, the DKK 925 billion ($140 billion) ATP, is protecting against greenwashing in its growing allocation to green bonds with a variety of in-house screening processes.
Its latest investment to green bonds via an internally managed DKK 7 billion ($1 billion) allocation to euro-denominated investment grade green sovereign and corporate bonds encapsulates a due diligence process that is shaping the fund’s green bond push where it seeks low-cost, resilient, risk-adjusted returns.
From having no green bond investments in 2017 when it first began dipping a toe in the new asset class, ATP had DKK 30 billion ($4.5 billion) invested in green bonds by the end of 2020, making it one of the leading investors in the asset class in Europe. Today the allocation sits within an ambitious target for DKK 200 billion ($30 billion) in green investments by 2030.
“We have not set a target of how much of this will be fixed income, but presumably the majority will come from green bonds,” says Christian Kjaer, head of liquid markets at ATP.
Protecting against greenwashing is a central tenet to success. The absence of standard measurements and reporting metrics means ATP has formulated its own precise screening criteria based on ICMA’s green bond principles which assess the quality of the issuer and the level of transparency about the use of proceeds and the green impact.
That said, Kjaer says the development of the EU’s green taxonomy which creates green standards and definitions will help define more clearly what is green and create standardisation across issuers. Elsewhere, trends in impact reporting are improving the market.
In the corporate bond segment, ATP has added an additional layer of due diligence to assess the issuers “commitment” to sustainability.
“We believe this is a good indicator of the issuers’ credibility,” says Kjaer.
It involves screening the issuers for involvement in ESG controversies; examining if the corporate reports all three scopes of emissions, and if they have set any environmental targets, or have an overall sustainability strategy, in an approach designed to ascertain if green bond issuance is part of the company’s wider transition across the entire business.
“Transparency is key to limit the risk of green washing,” he says.
By managing the entire green bond allocation in-house, ATP hopes to not only reduce greenwashing risk but lower costs and have better control of the investment process that must navigate often limited liquidity and the operational logistics of trading many different bonds and issuers.
The allocation to green corporate bonds sits in ATP’s investment portfolio, but green supranational and government bonds are in the hedging portfolio. Green government bonds are as good a hedge as traditional bonds as long as they have the right credit rating, says Kjaer.
ATP’s hedging portfolio (around 80 per cent of assets) is intended to fully protect the pensions guaranteed to plan participants by law, while the 20 per cent allocation to riskier assets in the investment portfolio seeks to provide additional return. ATP doesn’t use any derivatives in the green bond allocation.
In the current market, ATP expects to get “about the same” return from green bonds as it gets in traditional bonds.
However, a key difference is resilience with Kjaer citing “some indications” that green bonds could be slightly more resilient in a crisis.
Due diligence
ATP’s in-house screening is the fruit of several of years analysis of the new asset class. In 2017 the fund decided green bonds were a “good fit” with ATP both in terms of creating returns and as a contribution to the green transition.
Green due diligence on bonds issued by development banks involves exploring if the issuer details its green strategy, and how the projects it is seeking to fund fit into that strategy. ATP likes issuers to describes their process for selecting projects. The pension fund also requires insight on when the proceeds are expected to be fully allocated to projects and favours issuers reporting at the project level.
Regarding government bonds, ATP seeks to understand how green bonds will contribute to country-level targets outlined in the Paris Agreement.
The pension fund also checks proceeds are not going to green projects that have been double counted like, for example, projects in state-owned companies that issue their own green bonds.
ATP also asks government issuers to describe what budget periods are financed by the bond issue.
