Pension provider calculated that median of IPCC carbon pricing proposals could halve value of equities

The head of Sweden’s largest pension fund, Alecta, has presented an eye-catching calculation to flag up the need for clarity about the real cost of carbon emissions, saying current pricing proposals would wipe out half the value of the fund’s more than SEK300bn (€29bn) of equities.

Though researchers disagreed on the price of CO2 emissions needed to reach the 1.5°C target in the Paris Agreement on climate change, said Magnus Billing, Alecta’s chief executive officer, the pension fund calculated the median of the various proposals in the Intergovernmental Panel on Climate Change (IPCC) report at $870/tonne.

In a comment published on the pension fund’s website, Billing said: “When we apply the increased costs for carbon dioxide emissions in our calculation models, the value of our equity portfolio holdings decreases significantly.”

Using the price of $870/tonne, the value of Alecta’s equity portfolio shrank by 49% in the scenario it used, Billing said. Alecta has a 35% equities allocation in its SEK849bn defined benefit scheme, which accounts for the bulk of its SEK1trn of assets under management.

However, Billing went on to stress that the calculation was highly hypothetical.

“On the one hand, the reduction in value is calculated on the basis that nothing is done to manage carbon dioxide emissions in our portfolio companies, properties and other holdings; on the other hand, as I said, the price of carbon dioxide is difficult to determine,” he said.

“But the calculation highlights the importance of including the carbon price in the risk, and finding a fair carbon price that all investors can use,” he added.

Although the hypothetical depreciation for Alecta was significant in absolute terms, Billing said, it was relatively small compared to other asset managers.

“We have a portfolio that is well adapted for the transition. Even in the worst case scenario, there is no risk that we will not be able to meet our commitments,” he said.

By joining the Net-Zero Asset Owner Alliance, Alecta had committed itself to having a portfolio in 2050 in accordance with the 1.5°C target, Billing noted.

As an institutional investor with no index funds, he said Alecta picked companies it believed would be future winners by analysing their long-term potential.

“But, in order to make correct assessments, we must find out how much in carbon dioxide emissions each company is responsible for,” he said.

“Emissions reporting can no longer happen alongside of the financial assessment, but must be part of it,” the CEO said.

2021 would bring an even greater focus on climate risks, Billing added, saying Alecta would “continue to focus on being at the forefront of the work through careful analyses and by continuously sharing what the analyses show”.  

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