Using bonds to accelerate the green transformation

Jonne Sandström: Aktia was established as a local bank in 1826 and has since undergone substantial transformation and growth. In Finland today, we operate as a publicly traded company specialising in banking, asset management and life insurance. When I started in the asset management business in 2005, we were still a relatively small company with perhaps six to eight portfolio managers who primarily specialised in equities. We now have 15 portfolio managers in fixed income alone.

As a fund boutique, we currently manage EUR 13.5 billion for our clients. This includes EUR 3.5 billion in assets managed by our corporate bond team.
That sounds like quite a transformation, doesn't it?

Sandström: Certainly! Back in 2006, we began channeling more resources into our fixed income business. Although traditionally we have focused on equities, we gradually expanded into fixed income over the years. We have since developed various strategies and built significant expertise in emerging market debt (EMD).

Outside of EMD, we have expanded our offering to include investment strategies in government, corporate and high yield bonds. This expansion has driven significant growth of asset under management in recent years, particularly within fixed income.

At first, we primarily operated locally, but it was not long before we attracted considerable attention internationally. We have collaborated with Universal Investment for a while now, working on various fund products to expand across Europe. Just a year ago, we jointly introduced the UI – Aktia Sustainable Corporate Bond Fund to the market, which is now also accessible to German investors.

What sets your specialised bond boutique apart and what advantages can you provide investors? Do you have the agility to invest in niche bond areas that many larger asset managers and their flagship funds cannot access?

Aapo Alenius: Exactly! We are much more flexible and agile than larger asset managers. Additionally, with our small team, we can respond to smaller issuances without the complications of a large investment committee. We also have a certain regional preference towards Nordic companies when selecting corporate bonds. In fact, our allocation to Nordic companies has been a source of excellent returns. The market is significantly smaller, with fewer investors and less research available. Consequently, our analysis provides genuine added value in an inefficient market.

This means you can offer unique value to German investors and their portfolios. I presume not many of them have a significant allocation to Nordic bonds?

Alenius: Yes, that is correct. At present, Finland represents almost 12 percent of our UI – Aktia Sustainable Corporate Bond Fund, making it our largest country allocation. This is ahead of Germany at 11.7 percent and France at 11.6 percent. Consequently, we have a notable overweight in Finland compared to the benchmark, where Finland has a weight of just 2 percent. We also overweight Sweden by about four percentage, Norway by around 2 percentage, and Denmark by approximately 1.5 percentage. In total, Nordic countries constitute about 29 percent of our portfolio. Nevertheless, we do not offer a purely Finnish and Scandinavian fund and still maintain a broad level of diversification concerning country allocation.

We have already discussed the added value of the fund and how it differs from other strategies. But what is the overall investment philosophy of the UI – Aktia Sustainable Corporate Bond Fund?

Sandström: As the name suggests, we invest in sustainable corporate bonds. We have three main categories: green bonds, sustainability bonds and social bonds.

We are permitted to invest across all these categories. We also do norm based screening to exclude companies with breaches of the UN Global Compact principles. Additionally, we have certain exclusion criteria, not just for our sustainable corporate bond fund but for our corporate bond funds in general. For instance, we make exclusions in sectors such as weapons, gambling, cannabis, alcohol, pornography and tobacco.

Sandström: When assessing the impact of all companies we look at, we partner with a Finnish firm called Upright Project, which precisely measures the net effects on society, education, health and environment that companies make and then assigns a specific value to each one.

Both the issuer and the bonds can be individually analysed and measured, so two ratings are always assigned. A fundamental criterion for us is that each bond we invest in must yield a positive impact. For instance, when analysing a green utility provider, both the company itself and its bond would typically receive a positive sustainability rating and have a favorable impact.

However, there are instances where we may not invest in a company at the issuer level due to its negative impacts, such as utilities that still focus on fossil fuels. However, we can consider bonds from these companies if they are transitioning towards for instance, more green energy production. If these companies during their transition, release a bond specifically for green energy expansion, then we are open to investing in those bonds.

Looking at the entire portfolio, every combination of company and bond must achieve a positive net impact score for us to invest. It is also crucial for us to recognise companies that are genuinely committed to transformation and to actively support their journey.

How important is it generally to support companies and invest in their purpose-driven bonds to advance the green transition and transformation of the economy?

Sandström: Supporting companies in their sustainability efforts is crucial for the companies, for us and of course for the fund product. Our fund, classified as an Article 9 under the EU Disclosure Regulation, is committed to two key approaches: investing in companies that are already sustainable and aiding those on their transformative journey towards sustainability. While it might be simpler to solely back established green companies, there is value in identifying and investing in those firms genuinely striving for positive change. One of our most significant challenges for us as investors and the society is to guide major energy companies through this sustainable transformation.

Wouldn't diversifying, rather than focusing solely on green companies, be more beneficial when building a portfolio?

Alenius: Exactly, diversification is key. While there is a significant presence of green bonds in the market today, it is essential to ensure we have a well-diversified portfolio in terms of issuers. That said, we do have a sizable weighting towards utilities and financials. As it stands, the financial sector makes up close to half of our portfolio, and utilities represent about 30 percent.

Alenius: Surprisingly, the real estate sector constitutes nearly 15 percent of the benchmark, making it the third largest. However, our exposure here is currently just around 7 percent, and we maintain a cautious stance overall. We are all aware of the prevailing challenges in the real estate domain, and we are not convinced these issues will be resolved in the short term. Our underweight position in real estate proved advantageous last autumn in 2022, even though the sector has seen a recovery this year despite the many challenges it faces. Given the myriad of problems confronting this sector, we anticipate a decline in the number of bonds associated with real estate.

But overall, are we seeing a rise in the number of issuers and bond offerings?

Alenius: Yes, absolutely! It has now become significantly easier for us to construct a broadly diversified portfolio. This is one of the reasons why we only launched our sustainable fund a year ago rather than four or five years earlier. Currently, we have ample opportunities to select bonds and issuers that are positive in terms of sustainability while also offering attractive returns. After all, with our focus on sustainability, we aim to achieve positive performance for our investors. And in this area, we see an increasing number of attractive investment opportunities.

You have mentioned a focus on sustainability. Do you believe that investing in bonds has a more tangible impact on companies and their trajectory than investing through the public equity market?

Sandström: It is indeed more straightforward with bond investments. Let me illustrate this with an example. Suppose there is a utility company that is currently heavily focused on fossil fuels, but it genuinely wants to transition to become a green provider. As an equity investor with strict exclusion criteria, we might not be able to invest in this company, even if doing so would make sense. However, as a bond manager with our investment philosophy, even though the issuer might not initially have a sustainable setup, the bond issued for the transformation process serves a genuine sustainable purpose. This allows us to invest and support that company in its green transformation, while potentially benefiting from the performance as well.

You conduct both credit and ESG analysis. Are they equally important when it comes to the final decision when investing in a bond?

Sandström: For us, both are important and relevant. However, there is still a claim that achieving sustainable goals leads to reduced performance. That is not the case – quite the opposite, in fact. The ESG analysis is especially crucial for risk management. As such, we combine the ESG analysis with the credit analysis. But it's also clear! We invest with the goal of earning returns; we are not a charity.