Applying EU rules, Andra AP-fonden ceases investment in fossil fuel companies

Andra AP-fonden (AP2) is one of northern Europe’s largest pension funds, managing assets of just over SEK 360 billion. Our mission is to ensure maximum benefits for the pension system – and to do so responsibly. We have now taken the next step as part of our commitment to sustainability. By divesting companies that derive revenues from the sale of fossil fuels, we are reducing the climate risk from our global investments.

The climate is the key issue of our time and one that must be addressed systematically. It is now five years since the world’s countries agreed in Paris to limit the global temperature rise to well below 2 degrees. To succeed, all nations – and all industry operations – must take responsibility for the reduction of greenhouse gas emissions. This applies not least to asset management. The Paris Agreement stipulates that the world’s financial flows must be made consistent with a road map towards low greenhouse gas emissions to enable us to address the consequences of climate change.

Both the climate issue and our pension systems are based on long-term perspectives. AP2 has worked with sustainability issues for many years. The challenge for us as managers is to successfully create a robust long-term, low-risk yield for the pension capital, while managing fund assets in an exemplary manner through responsible investment and ownership.

The six principles guiding our investments are as follows:

  • We integrate sustainability into all our investment processes.
  • We actively look for investments that contribute to sustainable development.
  • Our work is based on focus areas.
  • We use dialogue as a tool.
  • We apply a scientific approach.
  • We strive to be a leader in sustainability.

As early as 2016, we decided to develop our portfolio in line with the Paris Agreement and have since taken a number of measures to achieve this goal. In the coming years, we need to see a sharp drop in global emissions of gases affecting the climate. For this reason, AP2 has decided to ensure that its portfolio reach net zero by 2045.

Sustainable investments are good investments

There is a major, ever-growing, interest in sustainable investments. This may, in part, be explained by the willingness of some individuals to bring their investments to bear on how society develops. As a pension manager, we have the same mission.

We firmly believe that sustainable investments will prove to be more profitable in the long run than other investments. This is also evidenced by research into sustainability indicators such as gender equality and good working conditions for employees. Global companies prominent in environment-related risk management, social issues, and corporate governance have been shown to provide a significantly better yield on invested capital – regardless of where they are listed.

We genuinely believe that companies with long-term sustainable business models generate a higher long-term value for their owners. This applies to the climate issue, in particular.

Living up to the Paris Agreement is crucial

The EU has developed a number of different climate frameworks as part of its action plan to finance sustainable growth, including the framework intended for public index providers wishing to market their indices as the EU climate index. There are two levels of climate ambition: The EU Climate Transition Benchmark, which is somewhat less ambitious than the EU Paris Aligned Benchmark (PAB).

The criteria for PAB are based on the IPCC’s conclusions and are intended to support the broad societal change needed to achieve the Paris Agreement’s climate goals. This means divesting from certain companies, primarily those involved with fossil fuel operations, while ensuring that we continue to invest in companies that are important for the transition to a low carbon economy.

Consequences for companies that fail to act sustainably, and which will therefore not be admitted to the climate index, will be far-reaching. Their market capitalisation is likely to fall, their costs of capital are likely to increase, and it is likely to have a negative impact on companies’ reputation.

On track to reach net zero emissions by 2045

Not being a public index provider, AP2 is not covered by the PAB rules. That said, we believe that it has clear advantages to use an external regulatory framework, which is based on the science IPCC has compiled and developed by a credible institution as the EU.

We have therefore gradually adjusted our holdings of global corporate bonds and foreign equities over the year. We have done so to ensure that our investments are consistent with the PAB, but without compromising the return and risk characteristics of the index. As far as we know, this portfolio adjustment – to the tune of approximately SEK 200 billion – is unique in that it includes our corporate bonds and equities.

Specifically, this means that we no longer invest in companies that derived more than 1 per cent of their turnover from coal, more than 10 per cent of their turnover from oil, and more than 50 per cent of the turnover from gas. In principle, this excludes the entire energy sector. Nor do we invest in utility companies that receive more than 50 per cent of their revenues from fossil fuels. In total, there are approximately 250 companies that will no longer be included in our portfolio.

The PAB framework states that the carbon dioxide intensity should be reduced to 50 per cent during the first year and then decreased by 7 per cent annually. Given the seriousness of the climate issue, we wish to set ourselves an even more ambitious target. This year already, the carbon footprint of global corporate bonds will be reduced by about 75 per cent, and that of our global equities by about 70 per cent, as measured against market-weighted indices. In the coming years, the annual emission reduction will therefore be less than 7 per cent, but we will reach net zero emissions by 2045.

In order to achieve the global transition, withdrawal of investment from fossil fuels is not enough. AP2 will continue to be part of the solution by investing in companies that contribute to the transition to a sustainable and carbon-efficient society.

Eva Halvarsson, CEO at AP2