What is driving Ilmarinen’s shift to ESG ETFs?

The Finnish pension fund has been responsible for seeding five ESG ETFs over the past two years.

Tom Eckett

a man and woman smiling

Ilmarinen has had a major impact on the ESG ETF landscape in Europe over the past two years with the Finnish pension fund playing a key role in driving assets towards sustainable strategies and increasing the number of products on the market.

While there is a plethora of ESG ETFs available today, the situation was entirely different a few years ago when Ilmarinen first considered incorporating ESG ETFs within its €50.3bn pension fund.

Highlighting this, there were just 65 ESG ETFs available in Europe at the start of 2018, according to data from Morningstar, compared to the 72 that were launched just last year, as at the end of October.

In particular, Juha Venäläinen (pictured right), senior portfolio manager, cross asset allocation, at Ilmarinen, said the firm made the decision to allocate assets to MSCI’s ESG Leaders indices but found there were no ETFs that tracked the range.

“This was a bit of a problem as the MSCI Leaders framework suited us well,” he stressed.

This, Venäläinen said, was primarily because ‘leaders’ indices exclude 50% of market cap in each sector.

For Ilmarinen, MSCI’s SRI indices, which exclude 75% of the parent index, would have created concentration risks while the ‘universal’ range, which operated a lighter touch ESG screen, would not have had the sustainable impact required.

In response to this dilemma, Ilmarinen went straight to the ETF issuers to see if something could be done about this.

The first ETF issuer the Finnish firm approached was French asset manager Lyxor. This partnership resulted in the launch of the $1.1bn Lyxor MSCI Europe ESG Leaders UCITS ETF (ESGE) in February 2019.

Ilmarinen subsequently seeded two US ETFs, the Xtrackers MSCI USA ESG Leaders Equity ETF and the iShares ESG MSCI USA Leaders ETF which listed on the New York Stock Exchange (NYSE) in March and May 2019, respectively.

Emerging markets was the next exposure the firm wanted in an ESG ETF format. This led to a $600m investment into BlackRock’s US-listed iShares ESG MSCI EM Leaders ETF when it launched on 7 February 2020 before the firm piled €500m into the $973m Amundi MSCI Emerging ESG Leaders UCITS ETF (SADM) last June.

While Ilmarinen had the option to invest in index funds instead of ETFs, Venäläinen highlighted the importance of attracting other investors to the strategies which could be easier to achieve through the ETF wrapper.

Furthermore, Venäläinen said the bigger the assets in the ETFs, the more liquidity there would be for Ilmarinen if it wants to tweak positions or even sell.

“It is important there are big ETFs in the market that attract other investors as this creates more awareness about ESG investing.

“If the ETFs are successful and have big assets then there is a bigger influence on company decisions.”

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Overall, the Finnish pension fund has invested around €5bn into ESG ETFs which accounts for 90% of the passive segment of its fund and around 33% of the equity bucket, as of December 2020.

Karolina Lindroos (pictured left), head of responsible investment at Ilmarinen, explained the increase in ESG ETF exposure was part of a wider move to sustainable investments.

This shift to ESG ETFs is part of our aim to integrate ESG across all asset classes and contributes also to Ilmarinen´s goal of carbon neutral portfolio by 2035,” Lindroos added.

“This move is in line with our earlier decision to use benchmarks that include ESG considerations in the active listed equity investing.”