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Alecta's Billing: A crisis carries opportunities – we can't let them go to waste

The post-pandemic recovery needs to focus on sustainability, and pension funds are in a great position to play a part in the transition to more green investing, Alecta CEO Magnus Billing says in Climate Action's latest Sustainable Investment Forum.

Global societies are still in the midst of the Covid-19 pandemic, which has left "considerable scarring across the board" and led to global GDP contracting -3.4 percent.

Not only is the pandemic affecting all countries financially, it has also dealt major setbacks to the progress of sustainable development goals, Swedish occupational pension insurer Alecta CEO Magnus Billing said during the first day of Sustainable Investment Forum Europe's latest web conference.

"An additional 95 million people fell below threshold of extreme poverty last year. The inequality gap continues to grow as capital markets continue to disengage from the real economy. Last year the S&P 500 gained more than 16 percent return," he said.

Significant measures have been taken to mitigate the impact of the pandemic, among these being unprecedented liquidity measures taken by central banks. However, as many countries are still in the midst of the crisis, which also has a very uncertain outcome, continued policy actions are needed.

"Until we start to see meaningful control of the virus on a global scale, there will be a need for continued fiscal support and monetary accommodations. All other things being equal, and with the caveat of the high level of uncertainty, this should continue to serve as tailwind for investors of risky assets, despite the already frothy valuation levels," Billing said.

Hopes for the recovery

Billing hopes that societies will exit the crisis phase by mid-2021 and enter the phase of recovery. This recovery will, however, require a balancing act of reverting to an economy founded on market forces and efficient capital allocations.

"An abrupt transition risks providing increased impetus for cemented long-term unemployment and a steep increase in corporate defaults, due to unsustainable indebtedness. Especially for corporates in sectors which have been systematically scarred by pandemic, such as the travel and tourist industries. The challenge for us will be to transition recovery in such a granular way that a distinction can be made between so-called "zombie firms" and firms with sustainable, viable business models for the long-term," he says.

The third phase will be to start catching up with the sustainable development goals. Billing says that the reduction of carbon emissions in 2020 was only 4 percent, which he claimed is not a lot considering most economies were brought to a standstill during the year.

He added that emissions are now starting to increase again and that we need to "step up" if the net-zero emissions goals are to be reached. For that to happen, higher prices for carbon emissions are needed and more investments in green energy and infrastructure are needed.

Never let a crisis go to waste

Pensions funds such as Alecta are well positioned to play a part in the transition by making more green investments while fulfilling their fiduciary duties to customers. Billing's message was that crises carry opportunities and that we need to learn from them in order to become more resilient. Quoting Winston Churchill, he said:

"You should never let a serious crisis go to waste," he said and added:

"We've seen very strong efforts made during the pandemic, and I see no reason why these measures can't be used to combat climate crisis as well. The climate crisis is approaching us at a concerning speed. But the incentives for pension funds today are strong. I expect that we will be one of the main ones frontrunning this development, but this needs to be joined by stakeholders and policy holders to be successful. The message from members is clear though. There is a strong impetus for us to accelerate this journey," Billing said.

Steady investor

He concluded by saying that Alecta didn't make any major changes to its allocation during the outbreak of Covid-19. Acting in panic is never good for a long-term investor.

"One big mistake is you can make is to change strategy significantly. We have a strong balance sheet and we will leverage that position in the recovery phase. But the direction of the portfolio will be towards sustainability," he said.

This is not the first time Billing has spoken at a Sustainable Investment Forum Europe event. When doing so in September 2020, he said that one learning experience for Alecta during the pandemic was that companies with higher ESG ratings seem to be tomorrow's winners.

One Swedish pension player with which the statement might resonate is the Swedish Pensions Agency.

In November 2020 it made the equity portion of its traditional portfolio (the portfolio managing pensions being paid out to retirees) fossil free and saw an immediate effect on returns. The fossil-free equity portion has so far outperformed the benchmark, according to Erik Fransson, department head of the fund platform Fondtorget.

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