Case study by PKA
Denmark’s PKA pension fund (Pensionskassernes Administration A/S) is one of the largest administration companies for occupational retirement schemes in Denmark with about US$ 23 billion in assets under management. Its 250,000 members are mainly employees in the public, social and health sectors and approximately 90% are women. The pension fund does not invest in companies that violate the UN’s conventions on human rights and labour rights, the environment, corruption and weapons.
PKA is one of Denmark’s biggest investors in sustainability themes. About 5% of its assets – close to US$1.2 billion – is invested in the Green Economy. These include allocations to private equity and infrastructure or taking direct stakes in companies such as a US$85 million investment in Genan, a Danish company which recycles tyres, or a US$25 million stake in KK Electronics, which supplies the electronic systems for wind farms.
The fund’s private equity renewables investments include solar energy, alternative fuels and clean technology. Under infrastructure, the fund makes investments in wind power, bio ethanol, water, solar plants, and hydroelectric power stations in India and China.
The fund has been innovative in carving out new green investment opportunities via publicprivate partnerships. In 2011 it partnered with Danish pension fund peer, PensionDanmark, to buy a 50% stake in an offshore wind farm from state-controlled energy firm DONG Energy A/S for around US$1 billion. The funds signed a 15-year contract with DONG for operation and planned maintenance of the farm, which should be able to meet around 4% of Denmark’s annual power consumption needs.
Importantly, the project is underpinned by long-term government support. The Danish government guarantees the price of the electricity, which helped to underpin the deal. This type of energy deal is likely to be popular in Denmark because government policies have made sure it is a viable model. PKA views this as a long-term contract with a reasonable financial promise of about six to 7% returns per annum over 20 years.
Forestry, which it also considered an environmentally themed investment, is a particularly large portion of the fund’s total assets, representing US$600 million, mainly into plantations in North and South America but also countries such as New Zealand and Mozambique.
A newer asset class for PKA has been a move into sustainable agriculture investments in Africa. The fund has committed US$42 million to a private equity sustainable agriculture specialist. PKA has earmarked US$220 million to this area, which should see further investments made into New Zealand and Australia.
One of the reasons for investing in agriculture in Africa is a rising middle class that will need better food supplies thus pushing up demand. PKA believes that this will be an increasingly important market and sees this as an investment opportunity that will yield results in the long term.
In addition, it made its first microfinance investment in 2011 by investing alongside fellow Danish pension fund, PBU, into a Danish semigovernment body called the Investment Fund for Developing Markets. The three parties committed a joint US$67 million, which will be invested via a third-party administrator, to seed micro-finance institutions (MFIs) on the ground. The fund has earmarked investments into Africa and committed to an MFI in India.
PKA’s board and members are strongly committed to seeking out opportunities to generate the financial returns the fund needs while at the same time contributing to meeting sustainability challenges. Sustainability-related opportunities now offer attractive risk/return characteristics that are more difficult to find elsewhere in the current low interest-rate environment.