Like many sustainability-focused investors, $17 billion PenSam, one of Denmark’s largest labour market pension providers, has found itself overweight US tech stocks in recent years. Not only is technology a low emitting sector, it’s also producing many of the solutions for reducing emissions by creating efficiency of production.
“We had more than 10 per cent in the IT sector,” recalls Mikael Bek, head of ESG at PenSam which introduced a climate benchmark for the equity portfolio in 2020. Over the last three years, the index successfully reduced carbon and supported positive returns in the equity allocation, but had also developed an increasing tilt to the IT sector where stocks like Amazon and Microsoft dominate the equity markets and take up a large share of the index.
“This was not the idea of the benchmark – we wanted a market portfolio with a climate tilt,” says Bek.
To resolve the problem, PenSam has just introduced a new, sector neutral climate index developed with S&P and applied to the whole $7-8 billion equity portfolio.
The index is constructed around a defined level of carbon budget linked to UN IPCC estimates on the required emission reductions to limit global warming to 1.5ºC compared to pre-industrial levels. Broadly, the benchmark has a 70 per cent reduction in emissions compared to the parent benchmark and must also further reduce carbon emissions annually by 7 per cent. If companies cannot achieve this themselves, PenSam “will make changes in the benchmark to reach its goal,” says Bek.
Alongside weighting companies in the index according to how much they cut their emissions, the bespoke index includes a higher weighting to companies having a positive climate impact. “Decarbonization is moving too slowly if we are going to reach the Paris goals. Just look out of the window! Everyone wants to continue to live the same life and emissions reduction is a very difficult task.”
The only caveat to the sector neutral approach is a large underweight to the energy sector – energy accounts for just 0.5 per cent of the index compared to 5 per cent in the underlying, broad-based benchmark. That underweight has been passed or redistributed to other sectors, he says.
“Our underweight to the energy sector is deliberate because we believe the fossil fuel sector will have problems in the long-run. We say we have a time horizon of 20-30 years ago and we need to reduce our exposure to fossil fuels,” says Bek.
In another element, the bespoke index also includes exclusions to tobacco and controversial weapon groups. Companies with poor human and labour rights are also taken out of the index.
PenSam also has a bespoke index for its corporate bond allocation that includes an exclusion on fossil fuels. But the investor is currently exploring developing the index further, seeking a climate benchmark for the bond portfolio.
Challenges reporting on climate
Climate reporting and conforming to new regulation is one of the most challenging elements of sustainability at PenSam. In 2025/2026 the investor will report emissions in its audited, annual report for the first time. “When something goes in your annual report it is audited, that’s serious and this is a new ball game that informs our licence to operate” he says.
The EU’s Corporate Sustainability Reporting Directive, CSRD, require large and listed companies report on the social and environmental risks they face and on how their activities impact people and the environment. Pension funds have to comply with both CSDR and Sustainability Financial Disclosure Regulation, SFDR, concludes Bek.
