The investment team overseeing Canada’s Caisse de dépôt et placement du Québec, CDPQ, C$45 billion infrastructure portfolio, tripled in size since 2016, is now targeting C$75 billion assets under management by 2025.

In a dynamic strategy, CDPQ deliberately hunts large, direct investments in new geographies where returns come from generating growth in the underlying companies.

Last year the portfolio returned 14.5 per cent, its highest absolute return in 1o years and streaked ahead of peers ploughing a record C$11 billion into transportation, energy and social and telecommunications assets but there is still much to do, explains Emmanuel Jaclot, executive vice-president, and head of infrastructure in an interview from CDPQ’s Montreal headquarters.

“We’ve got a lot of capital to deploy.”

Crown jewels

The latest addition to CDPQ’s infrastructure portfolio, a 22 per cent stake in Dubai’s Jebel Ali Port, free zone and National Industries Park shows the skills Jaclot’s team now wield. Rather than wait for these crown jewel assets to come up for sale and bid in a competitive process, CDPQ’s close relationship with port operator DP World via existing co-investments in global assets including a container port and logistics park in Indonesia, meant the team knew the state-owned logistics giant was seeking to refinance debt.

CDPQ’s negotiation on price and terms focused particularly on ensuring the deal included a stake in the port and logistical zone. All the while working to ensure the deal wasn’t opened to other investors and remained CDPQ’s to lose.

“We suggested a structure where we buy a stake in the port and logistical zone. At any point they could have opened the process to other investors, but we managed to keep it a bilateral discussion,” says Jaclot. “It is significant that they have allowed a foreign investor to invest in their home port that is such a strategic part of the economy of Dubai.”

Debt vs equity

The C$5 billion deal comprises a C$2.5 billion equity investment alongside C$2.5 billion of debt in a balance Jaclot explains has been key to the process. Particularly keeping the debt levels low enough to ensure the deal remains investment grade and low risk in a climate of rising rates.

“The more debt you manage to raise, the better it looks for the equity return but it also increases the risk level, and we like to keep a low level of risk in our infrastructure portfolio.” Speed of execution during the recently completed debt syndication, important in the context of today’s markets, was also essential.

The investment also captures the key rationale that now drives infrastructure investment at CDPQ. The economics of the port, its revenue and margin, are uniquely tied to Dubai (the Jebel Ali facilities account for almost a quarter of the Emirate’s economy) and the wider region, set to perform well in the coming years boosted by factors like the region’s strong recovery from the pandemic and more recently, the surge in Russians seeking financial haven in Dubai.

The bulk of the imports coming into the port are for domestic consumption and industrial processes in the UAE and neighbouring countries, Jaclot explains.

“Our investment is generally correlated to the GDP of a zone that spans from South Asia to Africa, and we feel there are robust revenues and profits there. The region will have a slightly different growth path in the next few years to America and Europe.”

Wider portfolio

CDPQ’s infrastructure portfolio is playing a key role counter-balancing the impact of rising inflation. A fair portion of contracted assets include indexation to inflation while other regulated assets also comprise forms of indexation to inflation. The portfolio is also protected from rising rates and the cost of debt, he explains. “Fortunately, in most cases we have fixed or swapped interest debt, so we are not hit by rising interest rates in the short to medium term, until we come to re-finance. Net-net, inflation isn’t hurting the portfolio much and CDPQ wants to invest more in infrastructure.”

CDPQ tends to target deliberately large transactions, less competitive than the mid-market space, and is busy expanding into new geographies (investment in DP World was its first in the region) including Latin America while teams in India, Singapore, and Sydney scour for opportunities.

Importantly, the portfolio is also growing thanks to growth in the underlying portfolio companies as they build and develop new projects. A  process epitomised by CDPQ’s investment in companies like fast-growing US renewables developer Invenergy Renewables.

“We like to reinvest the cash-flow and create value within our portfolio companies,” explains Jaclot.

The focus on regions is based on the ability to scale investments and a local presence. For example, recently acquired transmission assets in Brazil, Uruguay and Peru are managed out of the Sao Paulo office, while opportunities in Indonesia are managed out of Singapore. “We are not a huge team so can’t be spread too thin but having our teams close to our assets is essential,” he says.

Decarbonization

Decarbonizing the portfolio is another central seam, part and parcel of CDPQ’s initial target to reduce emissions across its entire C$419.8 billion portfolio by 25 per cent by 2025 linked to compensation, since expanded to target a 60 per cent reduction by 2030. Much of that ambition, keenly watched by carbon bean counters in the actuary and accountancy teams, has fallen on the shoulders of the infrastructure department via increasing exposure to green renewable assets. “We have been ahead of the curve; we got in early in renewables and ahead of the market coming in with higher valuations,” says Jaclot.

Rather than selling – and choosing not to buy – carbon emitting infrastructure assets, CDPQ has embarked on a slightly different path. Last autumn it created a $10 billion transition envelope to support decarbonisation in the main industrial carbon-emitting sectors.

“I’d much rather keep or take ownership of the asset and decarbonise it. We could sell our CO2 emitting assets, but someone else just ends up buying them,” says Jaclot. News regarding assets bought specifically to decarbonise will be announced shortly; elsewhere the fund  has shut down coal plants and replaced production with gas and solar in concrete decarbonization.

Still, the challenge of decarbonizing infrastructure like airports (CDPQ has a 12 per cent stake in London’s Heathrow alongside others including USS, GIC and China Investment Corporation) given most emissions come from the aircraft is increasingly front of mind. ““North of 95 per cent of emissions at most airports come from the aircrafts but human beings need to meet and travel to some extent. We are pushing to find solutions, even though they come at a higher cost such as sustainable aviation fuel. Heathrow is at the forefront of this initiative.”

Investing with DP World has also bought CDPQ’s commitment to the S and G of the ESG under scrutiny. The company attracted widespread criticism when it fired 800 British-based crew from its P&O ferries business.

“To be frank, the news of workers at P&O Ferries made us look even deeper for reassurance and we took comfort in the reaction,” he said, noting the subsequent settlement DP World reached with workers. He is also encouraged by the growing diversity of DP World’s workforce and improving health and safety at the company.

 

Temasek, Singapore’s state-owned investment company, scaled back investment in China in favour of buying local assets in its last financial year.

According to its 2022 Review the giant fund’s allocation to Singapore-based assets now comprises 27 per cent of the S$403 billion portfolio, up from 24 per cent a year earlier. Meanwhile exposure to China has dropped to 22 per cent from 27 per cent in the same period.

“China may face challenges achieving its 2022 growth target of 5.5 per cent given weakness in its growth so far this year,” said Rohit Sipahimalani, Temasek’s chief investment officer.

“Policy agencies are likely to maintain a supportive stance to buffer headwinds from soft property activity and pandemic restrictions.”

The last time Singapore holdings took the top ranking in Temasek’s portfolio was in 2018 when it accounted for 27 per cent.

Temasek has been investing in China for 20 years and for the last decade China has been its best performing market, offering investment opportunities that fit well with its key investment themes around Digitisation, Sustainable Living, Future of Consumption, and Longer Lifespans which together now amount to around 30 per cent of the portfolio compared to just 13 per cent in 2016.

For example, despite the impact of the pandemic keeping much of China closed and US China decoupling trends continuing to worry investors, Temasek’s recent investments in China include a focus on new consumption patterns, sustainability and innovation. Like VX Logistics, a dry warehouse and cold chain developer and operator; Shanghai Hydrogen Propulsion Technology, a hydrogen fuel cell developer and Whale Technologies, a digital marketing tech company.

Temasek’s giant portfolio rose S$22 billion to S$403 billion for the financial year ended 31 March 2022 returning 5.81 per cent compared to 24.5 per cent last year. The fund’s TSR since inception in 1974 was an annualised 14 per cent compounded over 48 years, while 20-year and 10-year TSRs were 8 per cent and 7 per cent compounded annually, respectively.

Developed economy bias

Despite the portfolio remaining anchored in Asia (63 per cent) Temasek continues to grow its portfolio exposure in the Americas (21 per cent) and in Europe, Middle East and Africa (12 per cent), in line with emerging trends and opportunities. Underlying exposure to developed economies, including Singapore, North America, Europe, Australia and New Zealand, increased to 65 per cent compared to 55 per cent in 2011.

Still, Sipahimalani sounded a note of caution ahead. Flagging slowing growth prospects and the uncertain outlook ahead he said: “Taking into account the reasonable likelihood of a recession in developed markets over the next year, we maintain a cautious investment stance while staying focused on constructing a resilient portfolio underpinned by the structural trends we have identified.”

During the year, Temasek invested S$61 billion and divested S$37 billion.

Unlisted allocation

He said that the portfolio remains liquid, even as holdings in unlisted assets have grown steadily over the years – up around four times from S$53 billion a decade ago to S$210 billion (52 per cent of AUM) today.

Over the last decade, the unlisted portfolio has generated returns of over 10 per cent per annum comprising returns earned when unlisted investments are listed or sold, as well as from the strong performance of the underlying companies like steady dividends from Temasek’s stake in companies including Mapletree, SP Group and PSA.

Unlisted assets include investments in unlisted Singapore companies (36 per cent); other private companies including early stage companies (26 per cent); Temasek’s asset management businesses (20 per cent) and private equity and credit funds (18 per cent).

Early stage companies give valuable insights into innovation in technology and business models, enabling the investor to better assess future opportunities and segments, as well as gain a deeper understanding of potential implications for the broader portfolio. Early stage companies make up less than 10 per cent of the unlisted portfolio.

Investments in unlisted assets are subject to the same investment discipline as other investments, centred around intrinsic value and Temasek’s risk-return framework. The investor applies an illiquidity risk premium, and for early stage investments, adds a venture risk premium to the risk-adjusted cost of capital test applied as part of the investment assessment.

Carbon

Elsewhere the Review stated how Temasek is  progressing on its target to reduce net carbon emissions of the portfolio to half the 2010 levels by 2030 as it aims for net zero carbon emissions by 2050.

Temasek internalises the cost of carbon in its investment decision making. An internal carbon price of US$42 per tonne of carbon dioxide equivalent has been lifted to US$50 this year. “We expect to increase this price progressively to US$100 by the end of this decade. A portion of our staff’s long term incentives will be aligned with our 10-year carbon targets,” the Review concludes.

Climate change is a seemingly intractable problem. With partial metrics that limit our understanding of real impact and agency actors fragmented, it seems the industry won’t make progress despite its best intentions.

They say madness is doing the same thing over and over again and expecting different results. Is that what we’re doing here?

In his seminal lecture series: Beyond ESG: systems solutions for sustainability, Duncan Austin likens our activity to being in quicksand. The more effort you make to get out, the more it sucks you in further.

Anthropologist George Bateson, in the 1950s, referred to this as a ‘double bind’ problem where what we do, seems to make things worse and this is where frustration and powerlessness sets in. Austin argues that this is a signal from our brain, indicating our rational behaviour is failing to break us out from some unrecognised or unacknowledged deeper problem.

This is what is happening with current attempts to address the climate challenge – whether we call it ESG, SRI, CSR, or impact investing, with the associated slogans ‘win-win’, ‘shared value’ and ‘doing well while doing good’.

While these strategies have been somewhat helpful in triggering important innovations and accelerating greater awareness of the climate challenge, the uncomfortable truth is that emissions continue to rise.

There remain unhelpful tensions between current ESG market behaviours which are profit-led and growth based, and ecological needs which are demand-reducing. If we fail to, as in the case of the quicksand analogy, get help from higher ground, we are doomed to at best have minimal impact, and at worse, dig ourselves into a deeper hole which, one climate tipping point later, we are unable to exit. It seems we need a massive re-think and help from higher ground.

Regulatory change and strong organisations

What does this look like? The obvious starting point is supportive regulation and policy intervention. Systemic problems often need systemic rule changes.

In its October 2021 statement, GFANZ noted: ‘Now we need governments to help get the job done, by setting the ambitious policies that can unlock, accelerate and help direct investment to where it’s needed most.’

We intuitively know that markets can’t solve this alone. But while this remains a work in progress, there are important roles for the investment ecosystem to play. To paraphrase, Teddy Roosevelt, we need to do all we can with what we’ve got. And this includes petitioning regulators for greater clarity on key areas such as fiduciary duty.

At an organisational level, we need to start with a strong vision. COP26 reinforced an already widening shift in purpose – from a previous sole focus on investment returns to contributing net positives to multiple stakeholders and the climate challenge. It served as a strong signal to those in the financial sector to come on board and focus attention to where capital should be moving.

This new purpose and vision will require substantial changes within our organisations and for that we will need leadership coalitions, disciplined change processes and business models that have true commitments to net zero, change capabilities and an effective culture.

We also need stronger and more robust investment framing. Systems thinking suggests a number of alternatives by helping us to better understand complex systems and avoid carbon tunnel vision.

As Tina Jensen from the Global Reporting Initiative (GRI) noted: ‘If we achieve net-zero emissions yet overlook human rights, or fail to safeguard biodiversity, what will this mean for the wellbeing of people and planet?’ One such framing is the shift from conventional risk/return metrics with an ESG ‘add on’ to allocating capital to 3-D mandates that focus on risk, return and real-world impacts. This is an idea whose time has finally come. It will necessarily involve organisations allocating significant amounts of primary investment to achieve these real-world impacts. Investors also need to ensure that they have the staying power discipline, and long-term horizon mindset to remain on course.

We need a rise in strategic engagement, with industry and policy-level engagement playing a bigger part. Here, the word ‘strategic’ emphasises the active part, with voting regular proxies considered mere table stakes. For a better-balanced value chain, there needs to be significant transformation in active ownership from the more common approach of a 1-2 per cent spend of investment resources on stewardship to more like 10 per cent. This rallying call may seem ambitious. But like the front-end loaded nature of net-zero pledges, it can act as a sensitive intervention point where disproportional benefits in climate action are achieved through motivating funds to be more committed upfront.

In addition, we need more strategic partnerships to support innovation and idea generation. Greater collaboration is necessary to unleash the real power of capital to address climate change at speed and scale. This is where the finance sector, can punch above its weight by working with people (through democratised finance), with corporations (through enlightened ownership) and with policymakers (through empowering regulation). In other words, while the current model thinks alpha, the future model thinks about value creation from more sources. And these sources also include working with coalitions, such as GFANZ, PRI, IIGCC & CA100+ who are moving the needle.

Finally, and perhaps most importantly, we need to recognise that deeper cultural changes are required. We need to move beyond admitting that our activities create externalities to accepting the sheer scale of their effects on our planet.

Austin calls this ‘sustained acceptance’ which is distinct from ‘mere theoretical admission’. We are becoming experts at ever increasing disclosure reporting but ‘acceptance will really show itself when impacts that we have long ago measured become widely and meaning.

Marisa Hall is the co-head of the Thinking Ahead Group, an independent research team at Willis Towers Watson and executive to the Thinking Ahead Institute.

The board at $14 billion San Bernardino County Employees’ Retirement Association, SBCERA, has just approved a staff and consultant recommendation to increase the allocation to US equity (13.2 per cent of total AUM as of July 2022 with a target allocation of 17 per cent) away from international developed market equity and emerging market debt.

The asset allocation changes are an attempt to address a world where supply chains realign due to macro political factors and a de-globalization trend away from China, explains Donald Pierce, chief investment officer of SBCERA which he joined as an investment analyst back in 2001.  “Each asset allocation change also attempts to focus on resource-rich countries and lean away from net commodity importers,” he explains from the fund’s southern Californian base.

Elsewhere, current strategy is focused on income generation in a lower return environment and keeping cash on hand (currently 7.4 per cent of total AUM) for opportunities in down markets. “We continue to find spots to invest with attractive yield, and patiently wait for buying opportunities,” he says. SBCERA received a 33.3 per cent net return on investments for the 12-month period that ended June 30, 2021. It is also ranked in the top 1 per cent of US public funds with a 20.6 per cent investment return for calendar year 2021.

Pierce’s comments on key market themes are similarly expressed in quarter ending March 2022 fund documents, where the investment team highlight the transition away from China as a prevalent risk. “Sanctions on Russia highlight the global sensitivity to a USD-based system, potentially increasing the likelihood of separate spheres of influence between the U.S. and China. The regulatory reset and similar top-down initiatives may incite further volatility on the country’s long transition path, creating a tail-risk for market and economic contagion,” documents state.

Re-balancing act

Pierce attributes much of SBCERA’s success to a rebalancing strategy first broached in 2003. Back then the fund was busy navigating negative equity markets after a spate of strong equity returns in the late 1990s. “At the time, the Board was receptive to moving away from just relying on the equity market for results,” he recalls. That thought process led to discussions around the feasibility of a new balancing approach that finally came to fruition in 2006 when SBCERA partnered with Mcube Investment Technologies, a pioneer of smart rebalancing and developer of Alpha Engine, a quantitative modelling software. “They had a web-based application to help plan sponsors with rebalancing,” says Pierce.

Asset allocation decisions contribute 80-90 per cent of total fund risk and good governance requires active measurement, monitoring, and management, he explains.
“At SBCERA, we call this approach informed rebalancing.  Since going live in July 2006, the program has added over $1 billion in profits to the Plan.  This translates into over 1 per cent of excess return versus a traditional +/- 3 per cent range-based rebalancing SBCERA had prior to the implementation of Informed Rebalancing.”

It’s no secret that dynamic markets can cause a portfolio to drift around its strategic asset allocation, he continues. “When approving an asset allocation policy, a Board will generally approve policy ranges before a rebalancing of investments is triggered. Instead of letting our portfolio drift due to market movements until the trigger occurs, we’ve developed an explicit, rules-based approach using market relationships rather than just market price changes to trigger a rebalancing of investments.”

Moreover, by developing its own internal model and dynamically managing its asset allocation the strategy has survived staff departures and knowledge has been institutionalised in SBCERA’s 6 strong investment staff. In a paper written in 2018, Pierce, together with Sanjay Muralidhar and Arun Muralidhar of Mcube Investment Technologies and AlphaEngine Global Investment Solutions, argued that fiduciaries may have “overlooked a very simple and lucrative source of expected returns, that innovative pension funds captured with no change in policy or manager line-up.”

Governance

Pierce also attributes SBCERA’s success to another crucial seam: SBCERA’s governance, in place for well over a decade, ensures the investment team remain nimble enough to make quick decisions and take advantage of market opportunities that could have been lost if the team waits for its next board meeting.

SBCERA’s board has broadly delegated investment decisions to the SBCERA investment team, while retaining the authority over which investment managers it should engage with, and the approval of staff and consultant-recommended asset allocation.  “This important partnership between board, investment consultant, and investment staff has given proper oversight, while allowing our team to be nimble enough to make quick decisions to take advantage of market opportunities that may have been otherwise lost if we had to wait for the next scheduled board of retirement meeting.”

ARR

Unlike other US public pension funds SBCERA has not lowered its assumed rate of return, keeping a target to meet or exceed a 7.25 per cent actuarial assumed rate of return over the long term. “SBCERA recognizes how important it is to effectively execute our fiduciary responsibility and fulfil the long-term commitment our members are counting on.  We are committed to finding appropriate opportunities to achieve our investment return goals—no matter what the economic climate brings,” says Pierce who believes that the fund’s long-term strategy is testimony to its remarkable resilience in times of global economic stress.

“Over the last 10 years, we have earned an 8.8 per cent annualized return with 30 per cent less volatility than similarly situated pensions, and over the last 40 years, we’ve earned an average annual return of more than 8 per cent, a period which includes numerous recessions and other economic disruptions. While our fund is not immune to short-term volatility, our proactive strategy helps SBCERA provide retirement security to our members now and well into the future.”

His last word on success? “For a program to be successful, we need the board, CEO, investment consultants, and investment staff all working together cohesively, toward agreed upon goals. We’re not perfect, but I’m proud to say this is certainly the case at SBCERA,” he concludes.

 

 

Recent initiatives suggest a growing sophistication amongst Africa’s sovereign wealth funds as they seek to conform to international governance practices and pledge to boost co-operation and co-investment across the continent and around the world.

African funds with a collective $12.6 billion asset under management have formed the African Sovereign Investors Forum (ASIF). The new club combines investors with shared goals and missions, focusing on the internationalisation of companies, the promotion of economic and social development and pledging to increase investment in Africa.

“ASIF is expected to be a game changer for the continent. This dimension of collaboration will catalyse Africa’s anticipated growth,” said Uche Orji, managing director and chief executive officer of the Nigeria Sovereign Investment Authority, NSIA, speaking at ASIF’s launch. “Co-investing by sovereign investors has capacity to unleash growth opportunities across the continent.”

The alliance doesn’t include Libya’s Investment Authority or Botswana’s Pula Fund. But it does include two fledging African funds from Ethiopia and Djibouti. Ethiopian Investment Holdings (EIH) was founded in January 2022 as a holding company under local law. Its primary mandate is to unlock the value of the government’s assets through commercial management and optimisation and ready them for privatisation as well as acting as a reliable local partner for foreign direct investment. EIH is modelled on Temasek and Khazanah.

Djibouti’s Fonds Souverain de Djibouti (FSD), set up in March 2020, is also in the club. Its multidimensional mandate is focused on investing locally, regionally and internationally to catalyse sustainable and inclusive economic growth for the diversification of Djibouti’s economy, the creation of jobs and building reserves for future generations. Strengthening corporate governance is a key enabler to successfully partnering with domestic and foreign private sector participants and ultimately achieving its mission.

In other developments the Gabonese fund, FGIS, founded in 2012, recently make a formal commitment to net zero. FGIS manages around $ 1.7 billion of which 78 per cent is invested in the domestic economy.

Record breaking year

Africa’s ascendancy into the world of SWFs marks a record-breaking year for investment by SWF’s.  According to a June report from the International Forum of Sovereign Wealth Funds, IFSWF, the global network of sovereign wealth funds from over 40 countries, three key themes dominate investments over the last year.

2021 broke records for the number of direct investments made by sovereign wealth funds, jumping from 316 in 2020 to 429 in 2021, a 50 per cent increase year-on-year, and a 60 per cent increase in the average number of deals in any of the previous five years. The value of those deals also climbed in 2021, reaching $71.6 billion, up from $67.8 billion in 2020. In 2021, sovereign wealth funds not only invested in digital technologies but also put more capital into hard assets.

Sovereign wealth funds have been increasing allocations to unlisted assets for the best part of a decade. But now, rather than distinguishing between listed and unlisted assets, sovereign wealth funds seek to generate real durable value by backing less mature companies instead of recycling existing wealth and boosting returns by occasionally making contrarian bets in times of market dislocation.

The report also highlighted the link investors are finding between real assets and real returns. Infrastructure assets play an important role in diversifying sovereign wealth fund portfolios. COVID-19 has had a range of effects on infrastructure. For some sub-sectors, such as passenger-linked transport assets, 2020 and 2021 were difficult years. For others, such as digital infrastructure and renewables, they were standout. Sovereign wealth funds have backed these trends, which will benefit from the energy transition and rising demand for digital services.

“The COVID-19 pandemic fundamentally changed the global economy and the investment environment. Our data reveals that sovereign wealth funds have been foresighted and looking to generate robust long-term returns by taking advantage of the effects that the pandemic has had on a range of secular megatrends,” said Duncan Bonfield, IFSWF chief executive.

 

Last June, Norway’s NOK 786 billion ($78 billion) Kommunal Landspensjonskasse (KLP), the fund for local government employees and healthcare workers, excluded 18 companies from its passive equity portfolio due to their links with Israeli settlements in the occupied West Bank. A few months later, Kiran Aziz, KLP’s new head of responsible investment took the helm, stepping into a contentious ESG debate that captures the divide between US and European shareholders over Israel and Palestine.

While KLP was pulling out of investments in the West Bank, a swathe of US pension funds ratcheted up a different campaign. When Unilever-owned Ben and Jerry’s ice cream also decided to pull out of Palestine citing the same human rights concerns as  KLP, pension funds including Arizona, Florida, New Jersey and New York called on companies to continue operating in occupied Palestinian territories – or get added to their own blacklists

Bubble

“The financial industry is often in its own bubble, disconnected from reality on the ground. I have seen for myself what human rights violations are – and also how climate change is affecting people,” insists Aziz’s, a qualified lawyer  who joined KLP with skills honed to argue and build a case following nine years at the International Commission for Jurists, the NGO that defends human rights and the rule of law. A board member of the Norwegian Refugee Council, a role that takes her to refugee camps to meet people forced to flee, she is resolute that investors have a responsibility to protect human rights.

And the legal profession has taught her about the need to stand firm and persist. “You need to have the courage to raise your voice, even if the company doesn’t engage. Many companies don’t want investors to interfere or tell them what to do, but investment is based on trust and companies should live up to certain standards.”

Facts

Aziz particularly applies her legal expertise to reflect on the purpose of regulation. It’s an approach that helps bring clarity given the frequent grey areas in law, particularly between international and local laws and if the institutions that are meant to uphold laws are weak. “You must think why is the law there, and who is it trying to protect,” she says. “Studying law, you learn about protecting rights and seeking justice. In many ways it’s the same in responsible investment because you are looking for the facts that could lead to the wrong investment.”

In the West Bank, those facts were most recently laid out in a 2020 list compiled by the UN High Commissioner for Human Rights which named 112 corporates with operations linked to the Israeli settlements in the occupied Palestinian territory. KLP was invested in 28 of the 112, and Aziz began contacting names on the list, trying to engage in a mostly fruitless process that ended up in a decision to divest from 18. “Only two or three companies where open to dialogue. We had to ask ourselves if there was a breach in human rights and if we were contributing to it.”

Divestment marks the end of the road for KLP effecting positive change via stewardship and engagement. But it can also grab attention, helps build knowledge in society around the ethical dilemmas of corporate activity and investment and puts new issues centre stage. KLP also continues to engage in dialogue with excluded companies.

Still, KLPs lack of progress engaging with corporates in the region reflects one of the key challenges of the process: the pension provider is not mandated to engage with governments. The only indirect access it has to governments is if they are also shareholders in listed companies.  “It is difficult holding companies accountable for what governments are doing,” she says, adding: “Often their behaviour is linked, especially when governments are big shareholders in a company.” It has led her to believe that political risk will become increasingly important in investment decisions. In an important new seam to strategy she is increasingly focused on screening companies up front before they enter the index.

KLP monitors and cajoles 7000 companies across 50 countries tracking MSCI and Barclays’ equity and bond indices, of which it currently excludes over 200. “As an owner of 7000 companies globally you have quite a unique opportunity to set expectations and make sure companies have underlying economic activity that is responsible and sustainable,” she says. “We rely on publicly available information, and our expectations are levelled at boards and  management.”

KLP uses data providers to access information and get an indication of the level of risk. She is less focused on  ESG ratings but takes a keen interest in how a company is doing within its sector, using monitoring tools and working with other investors, stakeholders and civil society. “It is best to try and follow a company over time to see progress and if they are willing to make an effort and listen to shareholders expectations. We have a long-term perspective on our investments.” She is in dialogue with around 300 companies annually.

ESG is applied across the whole portfolio where strategy is focused on index portfolios offering broad market exposure and low cost, efficient asset management.  Last year KLP sold €3.6 million of investments in firms involved in activities related to coal, oils sands, gambling, alcohol and environmental damage. KLP has 21.4 per cent allocation to equities, 16.5 per cent to bonds, 30.6 per cent to bonds held to maturity, 14.2 per cent to lending, 13 per cent in property  and 4.3 per cent to other