Transition strategies top of mind at conference

Thoughtful approaches to how to handle various transitions — arising from climate change, inflation and other factors — were just some of the highlights of the 2022 Pensions & Investments WorldPensionSummit, held in The Hague, Netherlands.

More than 300 retirement and investment professionals from 38 countries gathered in person at the city's famous Louwman Museum and virtually on Nov. 2-4, where industry leaders offered insights on how they are dealing with new economic realities while also working toward a more sustainable world.

For UniSuper, a Melbourne-based fund overseeing roughly A$110 billion ($70.5 billion), "decarbonization and the energy transition will be the biggest challenge for this generation," CEO Peter Chun said on an opening investment-focused panel. For the €523 billion ($521.1 billion) Dutch pension fund Stichting Pensioenfonds ABP, Heerlen, Netherlands, their ESG focus is to "make our voice much more heard," board member Anne Gram said.

Speaking on a separate panel on ESG investing in private markets, Sonja Laud, CIO of Legal & General Investment Management, said more innovation is needed, while Martin Hartl, head of global asset management for about €18 billion for German pension funds at Bayerische Motoren Werke AG (BMW), shared the good news that with private equity "going in the direction of impact, we can write bigger tickets" for investments.

Also on the topic of ESG, the improvement in governance was highlighted by Japanese pension experts Seiji Ogishima, president and representative director of Nomura Fiduciary Research & Consulting Co. Ltd., and Hirokazu Note, CIO of Sumitomo Mitsui Banking Corp. Pension Fund, with €7 billion in assets. Speaking in a session dedicated to the topic of investing in Japan, both panelists agreed that one "good trend" increasing the attractiveness of investing in Japan is that more investors are joining corporate boards there, and there is more corporate disclosure.

The transition to a high-interest-rate environment and spiraling inflation were also major considerations for conference speakers and attendees.

"I do think the biggest transition is the change in the interest-rate environment," said Paul Colonna, president and CIO at Bethesda, Md.-based Lockheed Martin Investment Management Co., manager of more than $80 billion of defined benefit and defined contribution plan assets for Lockheed Martin Corp.

"It is the end of a 40-year cycle … and we've broken up a long-term trend globally," Mr. Colonna said. From an investment standpoint, that changes "everything that we are doing." For the first time since the global financial crisis or even earlier, "you've got the ability to think about debt and equity markets on a fair playing field … in terms of relative value, and I think that changes everything. It changes how you evaluate risk markets," Mr. Colonna said.

"That means … more debt and more fixed income going forward, which is something we haven't been doing traditionally" because of low interest rates that also made hedging long-term liabilities less enticing until now. "I think it's going to be an opportunistic time to … accomplish some of our missions for the corporation," Mr. Colonna added.

While interest rates and inflation are important, the biggest transition issue for PFA Asset Management's Rasmus Bessing, managing director and chief operating officer, is moving to a low-carbon world. "We believe that the climate crisis is an investment risk," Mr. Bessing said. Running the assets of the about $80 billion PFA Pension, Copenhagen, managers there "are transforming and we are pushing the energy companies that we have invested with," and have narrowed down the investment universe of energy companies "in order to be credible" and active with portfolio firms, he said.

The energy transition is also broader than just energy companies, and involves investing in companies "that will be winners … because they will understand that their business model is threatened by" the transition, said Mr. Bessing, who compares the disruption to digitalization.

Executives at the C$400 billion ($293.9 billion) Caisse de Depot et Placement du Quebec, Montreal, are focusing on the energy transition, said Rebecca Manuel, managing director, global partnerships. Last year they refreshed a 2017 decarbonization portfolio, with a plan to lower the carbon footprint by 60% by 2030 vs. figures as of 2017, and they are aiming to have about C$54 billion in low-carbon assets by 2025, Ms. Manuel said.

The fund also altered its decarbonization strategy to help heavy carbon emitters achieve the transition goal, and created a C$10 billion energy transition "bucket" to invest across asset classes and target heavy carbon emitters that are essential to the shift. That might increase CDPQ's carbon footprint in the near term, but the long-term point is to have "greater impact in terms of the overall decarbonization pathways, which we think is obviously very, very critical," Ms. Manuel said.

For a panel on portfolio mechanics, investment experts shared different approaches to managing risk.

For Elena Manola-Bonthond, CIO of the Pension Fund of CERN, the European Organization for Nuclear Research, Geneva, Switzerland, with 5 billion Swiss francs ($5.1 billion) in assets, focusing on risk means an annual review process that started in 2017.

And for Nacho Hernandez Valiñani, chairman of Pensions Caixa 30, Madrid, Spain's largest corporate pension fund, "it's all about building with risk in mind, instead of at the end," he said. His fund has stricter rules that limit choices of fiduciary managers, so they invest in risk premiums, and spend time educating stakeholders about that.

Even at CERN, which has more freedom to adjust for currency and other risks, "education of the stakeholders is extremely important," Ms. Manola-Bonthond said.

At AkademikerPension, the 128 billion Danish kroner ($17.1 billion) pension fund reduced the size of its management team and increased their decision power. "We see this really as a fresh start in the organization," said CIO Anders Schelde, whose organization aligns investments with United Nations sustainable development goals. The finance sector "itself cannot change the world but it can make a very big impact," he said.