Aargauische Pensionskasse (APK), the Swiss pension fund for the employees of the Aargau canton, is widening the scope of its climate strategy by planning to shift its emerging market (EM) equities benchmark to the MSCI low carbon target index this year, it said in a financial statement for 2021.

The pension fund has kicked off the implementation of its climate strategy with MSCI low carbon target indices for its equity portfolio, and it has meanwhile added commodities to the scope of its strategy, it said in the statement.

The index is tilted towards a 50-70% lower CO2 emissions compared to a market-weighted index.

With a four-pillar strategy, APK had initially committed to engaging with invested companies, aimed to reduce risks generated by a deviation from capital market indices, sought to conduct an annual assessment of the impact of its climate strategy on investments, and looked to reduce climate risks with a particular focus on equities.

APK has worked with the Swiss pension fund-backed Ethos Foundation to conduct intensive dialogues with greenhouse gas emitters like Nestlé and LafargeHolcim as part of the Climate Action 100+ initiative, it said.

The engagement with LafargeHolcim and Nestlé led to a “Say on Climate” vote at Nestlé in 2021 and a “Net Zero Journey” at LafargeHolcim, which also includes a “Say on Climate” vote in 2022, it added.

AUM on the rise

APK´s assets under management increased year-on-year by CHF900m (€876m) to CHF13bn in 2021 but with a performance record below its benchmark, according to the statement. Its funding ratio improved from 104.2% in 2020 to 108.3% last year.

Last year, the pension fund’s investment strategy generated returns of 7.5% after costs, above the 3.8% achieved in 2020 but slightly below the benchmark of 7.7%, and also below the average annual performance of the UBS pension fund barometer of 8.03%.

APK attributed the lower returns against the benchmark to provisions of CHF29.6m it had to build for taxes on deferred real estate gains on directly held properties. Net returns from directly held real estate properties stood at CHF14.1m in the year under review, and the net performance was 1.53% compared with 6.3% in 2020.

Equities, real estate and commodities were the main drivers of the returns last year. Foreign equities returned 25.8%, Swiss equities 23.3%, commodities (hedged) 15.3%, foreign indirect real estate (hedged) 12.2%, Swiss indirect real estate 7.5%, infrastructure 12.5%, private debt (hedged) 3.1%, according to the statement.

The rise in interest rates led to negative absolute returns on nominal value investments. Only EM bonds in hard currencies made a positive contribution to the performance of the portfolio, returning 2.5%.

APK allocates 2.6% of its assets to cash, 9.5% to Swiss bonds, 2.9% to foreign bonds, 4.9% to foreign corporate bonds, 3.4% to EM debt hard currency, 1.1% to EM debt local currency, 10.2% to Swiss equities, 14.3% to foreign equities, 4.1% to EM equities, 4.9% to mortgages, 7.8% to loans, 6.4% to Swiss direct real estate, 6.2% to Swiss real estate (foundations), 4.6% to Swiss indirect real estate, 4.5% to foreign indirect real estate (hedged), 3.4% to commodities (hedged), 4.3% to infrastructure (hedged), 1.8% to private debt, 2% to insurance-linked securities (hedged), and 1% to other alternative investments (hedged), it said in the statement.

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