Stockholm (HedgeNordic) – Danish pension provider ATP, Europe’s fourth-largest pension fund, has announced plans to sharpen its climate ambitions to contribute to the global green transition. “We simply cannot afford not to,” said ATP’s CEO, Bo Foged, in October. As part of its longer-term objective of having DKK 200 billion in green investments by 2030 and half that by 2025, ATP has embarked on a process of shifting its U.S. high-yield credit bond exposure to investments in European green corporate bonds.

ATP runs a hedging portfolio and an investment portfolio, “with the hedging portfolio taking care of the guarantees that we have and the investment portfolio generating returns on top of the guaranties,” explains Christian Kjær (pictured), Head of Liquid Markets at ATP. ATP has long been housing green bonds within its hedging portfolio, which oversees DKK 753 billion in assest under management as of the end of June.

“When we started looking at green bonds for the first time, we focused on our hedging portfolio,” says Kjær. “The hedging portfolio is huge and we have a lot of capital there to hedge our guarantees, a big part of which is invested in bonds,” continues ATP’s Head of Liquid Markets. “We have long been working on getting green exposure into the hedging portfolio.” At the midpoint of the year, ATP’s holdings of green bonds amounted to DKK 36 billion. “The hedging portfolio needs very strong credits, therefore, the green bond exposure within this portfolio is limited to the sovereign and quasi-sovereign green bonds,” explains Kjær.

“We are in the process of replacing our U.S. high-yield credit bond exposure with investments in European green corporate bonds.”

This year, however, the Danish pension fund added green corporate bonds for the first time in its investment portfolio worth DKK 423 billion, which reflects leverage from borrowing from the hedging portfolio. “We are in the process of replacing our U.S. high-yield credit bond exposure with investments in European green corporate bonds,” Kjær tells HedgeNordic. “That is one of the transitions within our portfolio. We are building up, quite slowly actually, our green corporate bond portfolio.”

Green Bond Exposure in Investment Portfolio

ATP’s investment portfolio predominantly builds its credit exposure using credit default swaps (CDSs), which give credit exposure to multiple entities at once without holding the underlying bonds. “We have some credit bonds within the portfolio, but we actually prefer the CDS indices in order to preserve capital and get liquidity,” says Christian Kjær. “We are not able to get a specific green exposure with the CDS indices, because they are simply indices.” In its efforts to contribute to the global green transition, the team led by Kjær decided to replace its traditional corporate bonds with green corporate bonds.

“We are not able to get a specific green exposure with the CDS indices, because they are simply indices.”

“We decided to take the bonds within our investment portfolio and do whatever we can in terms of the green agenda and get exposure to the green transition,” explains Kjær. “We shift as much cash as possible from the credit side within the investment portfolio to the green transition. That is why we started looking at green corporate bonds this year.”

Green Washing

As not all bonds called green are actually green, the ATP team has opted for a slow, measured and careful approach in transitioning a portion of its corporate bond portfolio to green bonds. “There are not that many issuers to analyze on the sovereign and quasi-sovereign side, which makes it much easier to make sure that there is no greenwashing,” argues Kjær. The corporate bond market, on the other hand, is more difficult to navigate for a green bond investor. “There are a lot of issuers on the corporate side, so it is a little bit more difficult to make sure there is no greenwashing.”

“There are a lot of issuers on the corporate side, so it is a little bit more difficult to make sure there is no greenwashing.”

“ATP has been among the first investors in the world to start demanding closer communication with green bond issuers to ensure the greatest possible transparency about the projects they would be used for,” says Kjær. “We have been a very active investor in green bonds, being in ongoing discussions with the issuers, which was new to us and to some extent new in the financial market in that the buy-side actually approached the issuers trying to improve the framework, trying to mitigate greenwashing by expressing what our needs would be.” ATP has maintained good cooperation with issuers such as the European Investment Bank (EIB), whose Head of Sustainability Funding, Aldo M. Romani, said earlier this year that “ATP has become a strategic business partner in the development of best practice when it comes to how to handle green investments.”

“We are very aware of the dangers of greenwashing. We have a large team that helps us in the efforts to detect greenwashing. Every single bond is screened in order to minimize the risk of greenwashing.”

“We are very aware of the dangers of greenwashing,” points out Kjær. “We have a large team that helps us in the efforts to detect greenwashing. Every single bond is screened in order to minimize the risk of greenwashing,” he continues. “We have put together a set of screening criteria, which allow us to assess the quality of the issuance and ensure transparency. We need to feel confident that the bonds that we think are green are actually green.” Therefore, ATP continues to be in close dialogue with the issuers of green bonds to ensure that the pension fund is investing sustainably.

The green bond market has been growing significantly in the past few years, reaching a new global supply record in 2020. The global green bond issuance for 2021 is expected to exceed the previous year’s level. “The market is growing exponentially in size, but it is also maturing in terms of what is green and what is not green, and all these things around it,” says Kjær.

Two Sides of a Coin

Green bonds tend to offer investors slightly lower yields compared to conventional non-green bonds, with this yield difference known as the green bond premium or greenium. Christian Kjær and his team have also analyzed the green bond premium in the market, with the analyzis showing that “green bonds are priced very similarly to traditional bonds,” according to Kjær. “You are more or less paying the same on average compared to other bonds.”

“Green bonds are priced very similarly to traditional bonds. You are more or less paying the same on average compared to other bonds.”

Green bonds, however, may also exhibit slightly lower risks compared to their non-green counterparts. “As risk-focused investors, we have seen in our analysis that green bonds actually performed better on the risk side,” points out Kjær. “It seems they have a bit more patient investors who do not want to sell that much,” he continues. “There are two sides of the coin. The return side seems to be very similar. The other side of the coin is that they seem to be less risky than traditional corporate bonds. Risk mitigation is really important to us. Green bonds with lower risk than other bonds have tangible value to us.”

This article features in HedgeNordic’s 2021 “Alternative Fixed Income” publication.