Finland’s Varma said it is now sharpening its climate policy by adopting a target for reducing the emissions of its investment portfolio on an absolute basis, rather than its current goal of cutting carbon intensity.
The €58bn pensions insurer is also making all its assets subject to the new target to cut emissions by 25% from 2021 levels by 2025 and 50% by 2030. Up to now, the emission reduction targets have applied only to listed equities and corporate bonds.
Hanna Kaskela, Varma’s sustainability director, said: “Reducing carbon intensity alone is no longer enough: emissions must also be reduced in absolute terms.”
Varma said in its announcement today that setting absolute emission targets for an entire investment portfolio was rare both in Finland and globally.
Kaskela said achieving a carbon-neutral investment portfolio by 2035 required significant cuts in greenhouse gas (GHG) emissions within all asset classes.
“In addition, the share of investments classified as carbon sinks, such as forest investments, should be significantly increased in the portfolio,” she said.
Varma said it had already cut emissions, with the carbon intensity of its listed equity investments – i.e. the ratio of GHG emissions to companies’ revenue – down by 30% at the end of last year from the 2016 baseline, and that of its corporate bond investments having fallen by 23%.
Another part of the updated climate policy is introducing stricter criteria for negative screening, Varma said.
“We do not make new investments in companies that rely on coal-based operations for more than 10% of their revenue, production or production capacity,” Kaskela said, adding that the previous corresponding figure had been 30%.
Varma would not finance coal-based projects, nor invest in companies planning new coal-based investments, she said.
“We are committed to exiting from all thermal coal investments by 2025 and oil exploration investments by 2030,” she said.
However, Varma said coal and oil exploration did not play a strategic role in its investment, and at the end of last year, only 2.6% of its investments in listed equities had been in firms relying on coal for more than 5% of their business, with 0.4% of its investments being in companies depending on oil exploration for more than 5% of their business.
The Finnish investor also said it aimed to ramp up its “climate-friendly” investment allocation to 25% of the portfolio by 2025 – an increase from the 18.4% climate allocation it had at the end of 2021.
Varma said its updated climate targets were already reflected in the sustainable US and European equity funds it had developed, as the investment policy for both ETFs was being aligned with the Paris Agreement on Varma’s initiative.
“The emissions of both ETFs are at least 50 smaller than ordinary funds, and their emissions will decrease further at a rate of 7% per annum” said Vesa Syrjäläinen, responsible investment analyst at the Helsinki-based pension provider.
At the beginning of this month, due to changes in the funds, all companies producing coal and companies that relied on oil for more than a tenth of their revenue were excluded from the portfolios, he said.
Varma said it had more than €1.5bn in these two funds at the end of last year, having gone into them in 2019 after helping develop the ETFs in conjunction with Legal & General Investment Management and index investment company Foxberry.
Announcing the implementation of the Paris alignment of the Foxberry Sustainability Consensus index family, David Sahlin, chair of Foxberry’s sustainability committee, said the panel had always been concerned with offering a responsible and dynamic approach to sustainable investing.
“I am pleased to see the investment criteria getting stricter as we move towards net-zero,” he said.
Investment in Paris-Aligned ETF
Varma has invested in BlackRock’s newly-launched exchange traded fixed income fund (ETF) that aims to help investors align their portfolios with the objectives of the Paris Agreement.
The iShares € Corp Bond ESG Paris-Aligned Climate UCITS ETF is designed to mitigate exposure to transition and physical climate risks, capture opportunities arising from the transition to a lower-carbon economy, and screen out exposure to businesses involved in activities such as oil and gas, thermal coal, controversial weapons, high carbon electricity generation and social norm violators, it was announced.
This fund will track a newly-designed Bloomberg MSCI index which offers investors a differentiated, fixed income specific methodology. The index tilt issuer weights to maintain diversification while achieving the Paris Aligned benchmark regulatory standards as well as improving the overall ESG profile.
Ann Brännback, senior portfolio manager at Varma, said: “This launch helps us in our continued efforts to achieve a carbon-neutral portfolio by 2035, which is one of Varma’s key sustainability targets. We appreciate the combination of a strong Bloomberg MSCI methodology and BlackRock’s fixed income and sustainable investing expertise. The dual purposed features of both meeting Paris Aligned Benchmark regulatory standards and ESG integration make the ETF very interesting for our credit portfolio.”