SWEDEN - Andra AP-fonden (AP2), the Second Swedish National Pension Fund, is in the process of calculating the "carbon footprint" of its holdings in around 2,700 companies, in an attempt to better understand the impact if companies are forced to pay for carbon emissions.
In its annual corporate governance report for 2008/09, AP2 said the project has been launched ahead of the Copenhagen meeting in December 2009 which will discuss an extension of the Kyoto protocol on reducing the emission of greenhouse gases.
Tomas Franzén, chief investment strategist at AP2, noted in the report: "We face a situation that in some respects mirrors the challenges faced during the oil crises of the 1970s, but one in which the long-term effects are much more difficult to predict. This places real demands on a pension fund like the Second AP Fund."
Therefore AP2 has launched a project to assess the level of CO2 emissions generated by the firms in its investment portfolio - its 'carbon footprint' - which involves a number of different steps including the collation of data from all portfolio companies using sources including Trucost and the Carbon Disclosure Project.
This data is then analysed to get a total 'footprint' using new software and methodology developed by AP2.
The highest emissions were found in the power generation and energy industries, and commodities and general industry sectors.
Franzén said: "Once gathered, we must analyse this data to determine the scale of the costs these companies may expect to incur, as the cost of CO2 emissions increases, and how well-prepared they are to meet this challenge."
AP2's governance report stated the project has led to a "more profound understanding of the cost of carbon emissions" as it claimed if companies are forced to pay for emissions it will impact profits and cash flow, this will then be considered by the stock market and may impact market valuations.
Franzén added: "Sharp increases in carbon costs could potentially affect the way we structure our strategic portfolio. However, the main impact will be on the approach we adopt in the active management of our investments. It would involve adding the environmental factor to our valuation models."
Going forward, AP2 admitted the difficult part will be developing models to identify price inefficiencies that can be exploited to ensure pensioners receive the highest possible return on invested capital, and to spot the companies able to take advantage of new opportunities.
But Franzén suggested that although it is "always difficult to forecast the future, analysing the combined carbon footprint of our investments is an important first step".
Eva Halvarsson, chief executive of AP2, noted: "This link between economic development and environmental responsibility is one of the greatest long-term challenges we face as pension fund managers. The way these two factors are so inextricably linked has never been more obvious."
"This also marks the first economic downturn when environmental issues have not been swept aside by other priorities. This also places demands on those of us who work at AP2, to ensure we stay in the forefront when it comes to evaluating the sustainability policies of portfolio companies," she added.
The report also revealed that the Swedish buffer fund exercised its voting rights at the annual general meetings of 42 Swedish companies and 60 global companies in the year to June 2009. (See earlier IPE article: AP2 corporate goverannce targeted 115 AGMs)
On the issue of voting at foreign AGMs, it suggested the trend for pension funds to take more responsibility for corporate governance of portfolio companies will increase in the wake of the financial crisis.
In an effort to maintain quality and share resources, AP2 has joined with AP1, AP3 and AP4 in a "pilot project to establish a neutral central voting facility", which establishes guidelines for fund actions at foreign AGMs.
The way this works in practice is every fund is assigned a separate account and the central facility informs individual funds, or managers, about "dubious or commercially-motivated issues". The fund managers then instruct the central facility as to how they will vote on the issue. An analysis of foreign voting will be conducted by AP2 later in the year.
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