Two Nordic pension funds discuss their ambitious climate transition strategies
Carbon-neutral by 2035
Varma’s high-level objective is to achieve a carbon-neutral investment portfolio by 2035. We aim to do that by investing in companies that create solutions for reducing emissions and take the progression of climate change into account in their operations, as well as companies that benefit from climate change mitigation by creating products and services to replace fossil fuels.
Specifically, we compose a climate-friendly allocation from the investments in different asset classes. Our target is for the climate allocation to represent 20% of the investment portfolio by 2025. The next goal is to reduce the carbon intensity of the listed equity and corporate bond investments by 50%, compared with the 2016 levels, by 2027.
We analyse the financial risks and opportunities brought by climate change. The reporting on climate risks is carried out in accordance with the recommendations of the Task-Force on Climate-Related Financial Disclosures (TCFD). We monitor and report on the carbon footprint of our investments using the indicators recommended by the TCFD.
Currently, we do not have a strict policy of gradually phasing out of carbon-intensive investments, but we are committed to exiting from investments in thermal coal by 2025 in listed equity and listed fixed income. A 0% threshold can be difficult to achieve for both revenue and capacity for electricity generation. The market standard has been a 5% limit for both, and we are following that standard. This policy also has a clause for utility companies. We do not plan to just exit these investments now, but we will engage the companies during this five-year period, in order to get them to decommission their coal-powered plants by 2030.
In terms of our engagement efforts, we conduct it with companies through internal staff through service providers and external managers or in collaboration with other asset owners.
Our climate policy applies to all asset classes, from hedge funds to real estate.
Dealing with dilemmas
Since 2019, P+ has assessed and excluded 24 CO2-intensive companies within the oil, energy, cement and steel production sectors, on the grounds that they did not work sufficiently on mitigating their negative impact to the environment and climate.
P+ has also excluded most large oil companies. We are looking into potentially excluding further oil companies and utility companies that use coal. In addition, P+ has excluded investments in companies that generate revenues from coal-extraction activities. In November 2020, P+ took committed to a 2050 net-zero emission target. It also joined the UN-backed initiative Net-Zero Asset Owner Alliance, which has served as a framework for our net-zero long-term goal and mid-term climate ambitions. As part of our membership of the Alliance, P+ is working on developing our mid-term climate targets for 2025.
We have chosen to follow the carbon-accounting methodology provided by the Net-Zero Asset Owner Alliance Protocol. We have started with the asset classes that are prioritised by the Alliance. Although carbon emissions data is not perfect, we need to start somewhere to have an overview of how the carbon emissions of our portfolio are distributed. By following the Asset Owner Alliance’s Protocol, which in our view is a quite specific and ‘hands-on’ approach, we can easily include considerations of other net-zero frameworks such as the IIGCC Net Zero Investment Framework later on.
Choosing whether to continue with active ownership activities or divestment is not an either/or question. These decisions often encompass plenty of dilemmas. We have experienced this complexity when carrying out an in-house qualitative assessment of the largest oil companies at the beginning of 2021. Over the past few months, we have found that some of the oil companies have increased their ambitions in terms of climate neutrality. At the same time, some of the companies have developed ambitious climate strategies that show an intention to live up to the 2015 Paris Agreement. But, in general, we can conclude that they are not quite there yet.
We have tried to navigate through this complexity by analysing some of the most carbon-intensive companies against some criteria that we have defined for each company, and that are necessary to reach a net-zero goal. Based on results of such criteria, which also include considerations on company engagements, we have chosen to either continue engaging with the companies or exclude them.
As part of our climate ambitions, we have increased transparency on our assessment criteria, some of the individual assessments as well as the list of companies that should be monitored closely All this information is available on our web page.
Our climate strategy applies across the different asset classes in our portfolio. We have prioritised defining our mid-term climate goals towards 2025 for our equity investments and direct real estate investments, as recommended by the Asset Owner Alliance Protocol. However, our climate considerations and exclusions apply to corporate bonds and alternative investments, such as private equity and infrastructure as well. Although it may require a larger amount of work and therefore often a slower execution, our climate strategy and exclusions must be consistent across asset classes, and that we must be transparent about it.
Interviews by Carlo Svaluto Moreolo