The transition to a low-carbon economy is not the only change institutional grantees are facing right now, both in terms of risks and opportunities.
Speaking at a panel Friday at the Pensions and investments WorldPensionSummit in The Hague, Netherlands, leaders said the transition to a high interest rate environment and spiraling inflation were also major considerations.
“I think the biggest transition is the change in the interest rate environment,” said Paul Colonna, president and CIO of Lockheed Martin Investment Management Co. “It’s the end of a 40-year cycle …and we broke a long-term trend globally.”
From an investment perspective, this changes “everything we do”. Now is the first time, probably since the global financial crisis but possibly before 2008, that “you have the ability to think about debt and equity markets on an equal footing…in terms of relative value, and I think that changes It changes the way you assess risk markets,” Colonna said.
For Mr. Colonna, who manages more than $80 billion in defined benefit and defined contribution plan assets for Lockheed Martin, “that means…more debt and more fixed income in the future, which that we traditionally didn’t” because executives felt there wasn’t a lot of value there because of low interest rates.
Executives are looking for ways to gain exposure across the portfolio, including in credit strategies and to capitalize on a struggling environment, he said. It also means a shift to more value investing from growth, with opportunities offered in part by reduced central bank intervention in the markets.
There are also more opportunities to hedge long-term liabilities in the future – which was not very attractive with interest rates at 2%.
“I think it will be an opportune time to … accomplish some of our missions for the company,” Colonna said.
Rasmus Bessing, managing director and chief operating officer of PFA Asset Management, agreed that interest rates and inflation “are super important”, but said the big picture of the transformation in terms of passing to a low-carbon world from a high-carbon world is the biggest investment theme for him.
“We believe the climate crisis is an investment risk,” Bessing said. The managers of the manager, which manages the assets of the PFA pension of around $ 80 billion, in Copenhagen, “are transforming and we are pushing the energy companies in which we have invested”.
PFA narrowed its investment universe to energy companies “in order to be credible” and active with its portfolio companies.
The transition is also broader than just energy companies, Bessing said. “It’s investing in the companies that will be winners… because they will understand that their business model is threatened by” the transition. “It’s basically a disruption comparable to digitization,” he added.
From a global perspective, the energy transition is top of mind, said Rebecca Manuel, Managing Director, Global Partnerships at Caisse de Dépôt et Placement du Québec, Montreal.
Last year, leaders of the C$400 billion ($293.9 billion) fund refreshed a 2017 decarbonization portfolio, with a plan to reduce the carbon footprint by 60% by 2030 by compared to 2017 figures. Leaders also aim to reach around C$54 billion in low-carbon assets by 2025, Manuel said.
The fund has also changed its decarbonization strategy in terms of working to help “big carbon emitters actually meet” the transition target. As such, the CDPQ created a C$10 billion energy transition “bucket” last year to invest across all asset classes and target large carbon emitters that are essential to the transition.
“We’re potentially going to see some increase in our carbon footprint in the short term, (but) the long term (goal) is to help achieve a bigger impact in terms of overall decarbonization pathways, which we think is obviously very, very critical,” Ms. Manuel said.