Sweden’s AP7 said the most effective way for asset owners to achieve real cuts in portfolio companies’ greenhouse gas (GHG) emissions is by targeting the largest emitters they invest in – regardless of how large or small their stake is.
The finding is one of the conclusions of new work the SEK905.2bn (€79.35bn) national pension fund has described in its climate transition theme report, published yesterday.
Summing up the main conclusions drawn from the work – the latest theme the pension fund has been tackling in its programme of research – AP7 said: “In order to achieve real emission reductions as an owner, you should focus on the largest emitting companies in your portfolio”.
Since a relatively small number of companies account for a large part of global emissions, targeted active ownership against these companies can be very efficient, it said, concluding work done between 2020 and 2022.
This was an important lesson in other areas too, such as biodiversity, said the fund, which runs the default option in Sweden’s premium pension system – the smaller of two elements in the state pension.
“It also answers the question of how global owners with limited shares in thousands of companies can achieve effects in the real economy.
“If you want to achieve real emission reductions, it is more important to prioritise the portfolio companies that have the largest emissions or climate impact than to look at a company’s market value or portfolio weight,” the pension fund said in the report.
“It is also more important than looking after one’s ownership share, as the best result is achieved through effective cooperation between several owners in the same company,” said AP7.
A transition that led to reduced climate risks in the real economy was, of course, in the interests of the entire financial sectors, said the Stockholm-based pension fund, which invests in more than 3,000 companies globally.
“But many actors are forced to limit their focus to financial risks of more concentrated portfolios,” it said.
AP7 also pinpointed areas warranting more research.
The spotlight had increasingly been on the role of company boards in the climate transition in recent years, AP7 said, adding that increasingly, asset owners were now starting to make demands of individuals on those boards regarding the firm’s transition.
“We will continue to explore the role of boards in good corporate governance and active ownership, as well as the responsibilities of board members,” the pension fund said.
The question of which active ownership strategies produced the best results was another interesting area, it said.
“Above all, in what ways and in what order should different ownership tools be combined to have an effect; also, how tools such as dialogue, voting, shareholder proposals and legal processes could possibly interact or counteract each other,” it said, adding that there was very little research available in this area.
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