INVESTING/PORTFOLIO STRATEGIES

Finnish manager Ilmarinen moves to sustainability indexes to dictate compensation

Finnish manager Ilmarinen has moved to MSCI sustainability benchmark indexes for its equity portfolio and portfolio managers’ compensation will be determined based on their performance relative to the benchmarks.

Ilmarinen has €36.5 billion ($38.4 billion) in assets under management and manages the Finnish pension fund assets.

The firm’s portfolio managers will now compare their stock selections against the indexes, which include the most responsible companies in each sector and geographical area. Companies that manufacture tobacco and controversial weapons, or are in breach of acceptable international standards are among those excluded entirely from the indexes.

The new benchmark indexes cover about half of Ilmarinen’s public equities portfolio, which represents more than one-third of its total assets.

The new environmental, social and governance indexes cover 50% of the equity allocation and replace market-cap-weighted benchmarks used previously, said Tiina Landau, senior adviser, responsible investments at Ilmarinen, in an email. Ms. Landau said it has not been applied across Finnish investments, which does not have a sustainability benchmark available.

Ms. Landau said the benchmarks include the best-rated companies by ESG factors in each sector that represent 50% of the market value of the corresponding parent index. She added that Ilmarinen adopted sustainability ratings in 2015, and responsible benchmark indexes “were a logical step forward for us. In our view, a sustainable company also has access to better financing opportunities, which contributes to making it a profitable investment. By adopting the ESG benchmarks, the incentive system we have for portfolio managers is better aligned with these views.”

The benchmarks are used internally to measure manager performance. “The portfolio managers are taking a relative risk against their benchmark if they invest in a company out of the benchmark, so we have created an incentive system that encourages them to invest in more sustainable companies. We consider the absolute performance as the key component, but also performance against the benchmark has an important role,” Ms. Landau added.