In 2013, AP2 began analysing climate-related financial risks for fossil energy companies and then continued with coal-based electricity companies. A key starting point for this work was that the climate-related risks facing the companies are not correctly priced by the market. The Fund’s work to analyse climate-related financial risks for these sectors was focused on regulatory risks.
Since AP2 has implemented equity and credit indices that are in line with the EU Paris-Aligned Benchmark (PAB), the Fund has concluded this analysis of climate-related financial risks for fossil energy companies and coal-based power companies. AP2 recognises that there is significant value in being able to align its indices to the goals of the Paris Agreement, based on a scientifically validated framework established by the EU.
The aim of this regulatory framework is not only to reduce greenhouse gas emissions and achieve net zero emissions by 2050, but also to benefit companies that make a positive contribution to the climate transformation. The fact that AP2 has now implemented PAB entails that the Fund does not invest in companies which achieve more than a certain proportion of their sales from coal, oil and/or gas, or in power companies which achieve more than 50 per cent of their revenue from combustion of fossil fuels. The maximum proportion for coal is 1 per cent, for oil 10 per cent and for gas 50 per cent.
This has resulted in a total of 250 companies no longer being included in the Fund’s portfolio. The framework also includes requirements concerning the index’s carbon footprint, which may not exceed 50 per cent of the equivalent market-weighted index. Furthermore, the footprint must be reduced by 7 per cent per year, with the aim of achieving net zero emissions by 2050. For AP2’s portfolios of global equities and corporate bonds, the reduction was 70 per cent, on taking account of Scope 3 emissions in accordance with the criteria for PAB.