​IPE Conference: AP4, AXA IM lament carbon pricing absence

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The head of one of Sweden’s state pension buffer funds and AXA Investment Managers’ chief economist were among panellists in an international pensions debate today expressing regret about the lack of progress on carbon pricing.

At the IPE Conference & Awards 2021 in Madrid, Niklas Ekvall, chief executive officer of the SEK489.8bn (€47.7bn) Swedish national pension fund AP4, described this as a big problem.

“That would be the strongest tool to price emissions and get the market working towards the transition,” he said in a panel discussion, adding that not only would carbon pricing help investors but it would also affect producers, consumers and everyone, giving them the same incentive to change.

Gilles Möec, group chief economist at AXA Investment Managers, gave a glass half-empty verdict on the UN climate change summit in Glasgow last month, saying the summit was disappointing both with regard to countries’ emission reduction pledges and “instruments”.

On the latter, he said there was a “good tangible decision” on methane and a good decision also on forests, but that there was “a gaping hole” in the form of the absence of carbon pricing.

“We need it because as investors we need to be able to evaluate investment positions according to clear metrics,” he said.

The EU had a proper carbon trading system, but “the others are purely experimental”, said Möec.

He lamented the Biden administration failing, because of not having a large enough majority in Congress, to introduce a so-called bonus/malus system for power generation companies according to the carbon intensity of the production mix.

Möec said this was one of the most disappointing things that happened while the COP26 summit was going on, as one of the key ways for the US to deliver on its net-zero by 2050 goal was to get to clean electricity by 2035.

However, Ekvall said there had been quite good discussions at COP26 on coal. “Most countries realised that coal needs to be phased out,” the AP4 CEO said.

“Also there was a good understanding that the countries and regions and sectors which have really had the most negative effect need support to drive the transition in their markets. That’s also about solidarity – if not everyone comes on board then we won’t get the solution in the right way,” he said.

Transition needs economic growth

In order to be successful, Ekvall said the transition had to be combined with a decent level of economic growth.

“Otherwise it won’t be possible to finance the solutions. And growth needs energy, so we need to quickly ramp up our ability to replace existing fuels and to phase out coal,” he said.

Addressing the question of whether it was more effective for institutional investors to divest fossil fuel companies or engage with them to bring about change, Ekvall said engagement was AP4’s preferred method - although via the AP Funds’ Council on Ethics, he said his fund did divest from firms violating legislation, and those with no ambition to improve, for example.

“Our view is not to divest from those sectors, and that if you want to improve things, you need to be in the company in order to bring the change about,” he said.

But Ekvall did say AP4 was reducing the number of companies in the most harmful sectors in order to work with those companies that had a viable plan.