The giant Danish fund ATP has earmarked â‚¬1 billion to a climate change action fund, deliberately timing the launch of the commitment to coincide with the UN conference in its capital, Copenhagen. Amanda White spoke with chief investment officer of ATP, Bjarne Graven Larsen, about how the fund is using its sizeable capital to incite political action, and how it plans to allocates the funds alongside other investments.
There is a time and place for everything, and the $75 billion ATP was not going to miss the opportunity to let politicians know that the world’s largest institutional investors are ready and willing to invest in climate change. Provided there is the political leadership and legal parameters to enable that to happen, that is.
ATP is collaborating with a handful ofÂ Â institutional investors to direct assets into climate-relevant investments in emerging economies, and was anxious to launch the initiative in time for the Copenhagen meeting.
Chief investment officer of ATP, Bjarne Graven Larsen, said there was no time to finalise the discussions with other institutions before the COP15 UN Climate Change conference in Copenhagen, and ATP wanted to disclose it before the event started.
“We wanted to time it for now, to get the message to politicians that we will invest, it is up to you to act,” he said.
ATP will allocate â‚¬1 billion ($1.5 billion) to the fund which will focus on emerging markets. It is not trying to re-invent the wheel, and Graven Larsen says there is no reason to use a new framework, instead it will use existing structures and experience already gained from development aid programs, the UN, the World Bank and regional development banks.
While the fund is ready to invest in climate change mitigation, there are still a number of hurdles to overcome, most specifically more firm national action plans.
“We looked at how many projects would fulfil our criteria if there was a national action plan now, and very few are ready. We could only see one solar farm in North Africa which is ready to go.”
The focus of the investments will be in emerging markets, with Brazil, India and China on the radar. Specifically the focus is on energy infrastructure, green energy or energy efficiency.
“If there is government support and regulation in place in those countries we will look at investments,” he says.
Speaking to conexust1f.flywheelstaging.com from Copenhagen, Graven Larsen said there was a positive feeling in the city that there would be a deal.
“There has been big hope, a more positive feeling in the past 10 days that it is possible to do an ambitious deal politically, and then that has to be transformed into a legal deal.”
Graven Larsen believes the biggest structural impediment is probably the mere fact that countries like Brazil, Russia and China will be in the top five economies in 30 years from now.
“We are not used to seeing them that way. The implication for our investment and the way we view the world will incorporate radical change. I don’t think our minds are ready for that. We now view it as developed countries helping those countries. Dealing with that transformation is a big issue and has huge implications.”
He believes that decreasing emissions and the need for energy infrastructure will be a big part of the transformation of those countries into leading world economies.
While ATP’s fund is called the Institutional Investor Climate Change Action Fund For Emerging EconomiesÂ – largely to attract like-minded co-investorsÂ – that is somewhat a political play by ATP.
ATP views the Fund as ‘energy infrastructure in emerging markets’, a sub-asset class where the fund has not been able to glean investments in the growth it demands.
While Graven Larsen says the wording is “pretty important” the idea of the investment is to get the growth exposure to emerging markets in a smart way, to get good risk-adjusted returns.
“Our emerging market debt has been fine but we haven’t been happy with our emerging markets equities exposure, it has more or less been an S&P500 or global equities exposure but it’s had higher volatility with equities returns,” he says. “We wanted growth from our emerging markets equities and we weren’t getting them. Energy infrastructure is a way to fulfil better exposure to the growth in these countries.”
The fund considers equities to be one of five risk classes, and within that broad bucket doesn’t break down to specific regions or vehicles but invests in whatever is the best risk/return at the time.
“Now we have a lot of private equity and domestic equities in our equities exposure, at other times it has been more global. In recent years we have been scaling down global equities and emerging markets equities because we don’t see it as being the best way to get the best implementation,” he says.
ATP manages domestic and European equities in house and has a separate subsidiary of about 20 employees managing private equity through a fund of funds. Emerging markets and Japan are externally managed.
ATP divides its portfolio into two parts, the hedging portfolio and the investment portfolio, which in turnÂ is divided into ‘beta’ under CIO Henrik Jepsen, and an alpha portfolio under CIO Fredrik Matinsson.
Most of the assets are in the beta portfolio ($67 billion) which invests broadly in asset classes distributed between the five risk classes – interest rates, credit, equities, inflation and commodities – that are subject to a certain amount of investment risk, including government and credit bonds, listed and private equities, real estate and commodity-related investments. At the end of the third quarter the beta portfolio was 45 per cent in nominal interest-rate risk, 10 per cent in credit risk, 13 per cent in equity-related risk, 27 per cent in inflation-related risk and 3 per cent in commodity-related risk.
The alpha portfolio, totalling $1 billion, is actively invested.
In a sign of its commitment, ATP also released its first climate change report in September, with a report that showed each employee has saved the environment 300 kilograms of CO2 in one year.
At the time of the report the fund also said it would make a strategic move to focus on climate and environmental considerations within its investment policy.
The report shows ATP’s total CO2 emissions were reduced by 202 tons from 2007 to 2008, equivalent to a 7.4 per cent reduction for the year. The fund entered into partnership with the Carbon Disclosure Project in 2008.