The transition toward a low-carbon economy is not the only shift that institutional allocators are having to grapple with right now — both in terms of risks and opportunities.
Speaking on a panel Friday at the Pensions & Investments WorldPensionSummit in The Hague, Netherlands, executives said the transition to a high-interest-rate environment and spiraling inflation were also major considerations.
"I do think the biggest transition is the change in the interest-rate environment," said Paul Colonna, president and CIO at Lockheed Martin Investment Management Co. "It is the end of a 40-year cycle … and we've broken up a long-term trend globally."
From an investment standpoint, that changes "everything that we are doing." Now is the first time, arguably since the global financial crisis but perhaps prior to 2008, that "you've got the ability to think about debt and equity markets on a fair playing field … in terms of relative value, and I think that changes everything. It changes how you evaluate risk markets," Mr. Colonna said.
For Mr. Colonna, who manages more than $80 billion of defined benefit and defined contribution plan assets for Lockheed Martin, "that means … more debt and more fixed income going forward, which is something we haven't been doing traditionally" because executives felt there wasn't a lot of value there due to low interest rates.
Executives are looking for ways to gain exposure across the portfolio, including in credit strategies and capitalizing on a distressed environment, he said. It also means a shift to more value investing from growth, with opportunities afforded in part by the paring back of central bank intervention in markets.
There is also more opportunity to hedge long-term liabilities going forward — something that wasn't hugely attractive with interest rates at 2%.
"I think it's going to be an opportunistic time to … accomplish some of our missions for the corporation," Mr. Colonna said.
PFA Asset Management's Rasmus Bessing, managing director and chief operating officer, agreed that interest rates and inflation "are super important," but said the big picture of transformation in terms of moving to a low-carbon from carbon-intensive world is the biggest investment theme for him.
"We believe that the climate crisis is an investment risk," Mr. Bessing said. Executives at the manager, which runs the assets of the about $80 billion PFA Pension, Copenhagen, "are transforming and we are pushing the energy companies that we have invested with."
PFA has narrowed down its investment universe of energy companies "in order to be credible" and active with its portfolio firms.
The transition is also broader than just energy companies, Mr. Bessing said. "It is investing in the companies that will be winners … because they will understand that their business model is threatened by" the transition. "It is basically a disruption comparable to digitalization," he added.
From an overarching perspective, the energy transition is the focus, said Rebecca Manuel, managing director, global partnerships at Caisse de Depot et Placement du Quebec, Montreal.
Last year, executives at the C$400 billion ($293.9 billion) fund refreshed a 2017 decarbonization portfolio, with a plan to lower the carbon footprint by 60% by 2030 vs. figures as of 2017. Executives also aim to reach about C$54 billion in low-carbon assets by 2025, Ms. Manuel said.
The fund also altered its decarbonization strategy in terms of working to help the "heavy carbon emitters actually achieve" the transition goal. As such, CDPQ last year created a C$10 billion energy transition "bucket" to invest across asset classes and target heavy carbon emitters that are essential to the shift.
"We're going to potentially see some increase in our carbon footprint in the near term, (but) the long-term (aim) is to help achieve greater impact in terms of the overall decarbonization pathways, which we think is obviously very, very critical," Ms. Manuel said.
