Danish pensions giant ATP has highlighted the importance of the European Union’s work on sustainable financing and categorising green investments, saying the former will have a huge effect on how markets work with climate and other issues.
In its 2020 climate report – just released in English – ATP said: “The EU’s work with sustainable financing will impact how the financial markets work with climate and other sustainability issues in a major way, and therefore we will be monitoring the developments on this area in 2021 closely.”
The DKK960bn (€129bn) statutory pension fund said that historically, it has been reticent about calculating its investments in green technologies.
“This is not because the data basis was lacking, but mainly because there are different perceptions of what should actually be categorised as ‘green’,” the fund said.
But with the EU’s taxonomy for sustainable investments, it would now be possible to measure green investments because there would be an authoritative definition of what was regarded as ‘green’ in an investment context, ATP said.
The taxonomy would have a major influence on the market for green bonds in the future, as would the EU’s standard for green bonds, ATP said, which was partially based on this taxonomy.
“We have therefore taken part in the hearing process for the new standard and we have told of our experiences with transparency and reporting,” it said.
“In our ongoing dialogues with issuers of green bonds, we have also asked them how they will integrate the new EU requirements,” the pension fund said.
ATP also took issue in the report with some use of CO2 emissions – or carbon footprints – as a climate impact measuring tool.
Though a critical management tool for companies to optimise their operations, ATP said it was careful about concluding that a reduction of a company’s carbon footprint was the same as an actual CO2 reduction in practice.
“And as an investor, looking at carbon footprints is associated with some challenges,” it said adding that the main challenge was that carbon footprints were also applied to dynamic portfolios.
“If a portfolio’s carbon footprint has decreased by 5% in a year, it is impossible to say whether this is because of real reductions of CO2 emissions from the underlying companies or whether it is due to sectoral issues or due to the portfolio’s changed composition – for example, if the portfolio replaces a CO2-intensive sector such as transportation with a less CO2-intensive sector such as the IT sector,” ATP said.
Other problems with using carbon footprints as a measure were, the pension fund said, that the data was still incomplete and did not cover all asset classes, as well as the distribution of emissions between shareholders and bond owners.
There were also the problems of double counting – because an energy company’s Scope 1 emissions could be another company’s Scope 2 emissions – and that carbon footprints were a backward-looking metric, where the data was generally up to a year old and said nothing about a company’s future emissions, ATP said.