AP2’s climate plan clarifies and summarises how the Fund is to achieve a portfolio with net zero emissions by 2045. The plan describes the Fund’s strategy for net zero and its approach to different asset classes. It contains expectations of both portfolio companies and external managers. The plan also describes how the Fund votes for climate at general meetings.

Goals

AP2 must reach net zero greenhouse gas emissions by 2045 at the latest.

The Fund’s goal is for the entire portfolio to be in line with the Paris Agreement, meaning for the portfolio’s greenhouse gas emissions to decrease at a rate that can limit global warming to 1.5 degrees. The Paris Agreement stipulates that net zero emissions shall be achieved by 2050 at the latest. Since Sweden has committed to a steeper reduction, with net zero emissions as early as 2045, AP2 believes that this target should also apply to the Fund.

AP2’s aims to reduce greenhouse gas emissions by at least 35 per cent by 2025 and by 55 per cent by 2030. According to research, emissions reductions need to come quickly, reducing approximately by half every ten years, to limit global warming to 1.5 degrees. Since AP2 has set the goal of reaching net zero before 2045, the Fund should also aim for a substantial reduction already by 2030. The above goals have a base year of 2019.

Analysis and materiality

AP2 regularly analyses the portfolio’s climate footprint and evaluates expected development within the various asset classes. The Fund’s portfolio is also screened and analysed for climate risks, both transition risks and physical risks, using different methods depending on the type of asset. Thisanalysis forms the basis for the integration in investment processes, and for priority setting in the Fund’s climate engagement work.

The listed holdings are analysed based on emissions and ambitions in accordance with the criteria in the Net Zero framework from the Institutional Investors Group on Climate Change (IIGCC).

Integration

The climate work is carried out by:

• Investing in solutions.
• Supporting change.
• Divesting from unwanted exposure.

Investing in solutions

Creating a low-carbon society requires large investments, and AP2 supports the transition through targeted sustainability investments within various asset classes. Most of the targeted sustainability investments that the Fund has made so far are focused on climate change, for example:

• Private equity funds with a special focus on positive climate impact, which invest in companies whose products and services enable resource-efficient solutions, renewable energy, and reduced emissions.
• Green bonds that, among other things, finance wind- and solar power.
• Timberland assets that live up to AP2’s criteria for sustainable forestry.
• Sustainable infrastructure, including renewable energy and energy storage.

Supporting change

AP2 works as an active owner to support the transition within its holdings in various asset classes. This work is based on analysis and engagement work in dialogue with companies and decision makers.

The carbon footprint of a portfolio can be reduced by shifting the assets of the portfolio – for example by selling companies with large carbon emissions and buying companies with lower emissions. However, this does not lead to any change in the total emissions of carbon into the atmosphere, i.e. the climate risk for the world is not affected by the investor’s buying and selling. It is only when companies reduce their actual emissions that the level of emissions in the atmosphere can be reduced, and climate change can be mitigated. . AP2 therefore engages as an active owner to influence portfolio companies to reduce their carbon emissions. The engagement work includes dialogues with portfolio companies, often in collaboration with other global investors, where companies are expected to report their climate risks as well as governance, processes and activities to manage these risks in accordance with the Task Force on Climate-Related Financial Disclosures (TCFD). AP2 also uses its vote at general meetings to support strong climate agendas.

In order to support the transition and carry out engagement work, it is important to understand the portfolio’s emissions , the drivers of change in emissions and to what extent these contribute to actual reductions in global emissions. The Fund analyses this annually using an internally developed model that shows what drives the change in carbon footprint. AP2 also makes more detailed assessments, for example looking at how the companies in the Fund’s portfolio work with climate adaptation of their operations. The outcome of this analysis is, among other things, the basis for the engagement work that funds conduct towards listed companies.

Divesting from unwanted exposure

AP2 does not invest in companies that have more than a certain percentage of their sales from coal, oil and/or gas or in power companies where more than 50 percent of the revenue comes from burning fossil fuels. The maximum share of revenue from coal is 1 percent, from oil 10 percent and from gas 50 percent. In connection with the Fund’s implementation of the EU Paris-Aligned Benchmark (PAB) for global equities and corporate bonds, the Fund divested from approximately 250 companies with fossil fuel exposure.

The road to net zero in AP2’s different asset classes

The Fund has different methods to reach net zero depending on the asset class and has reached different stages in the process of developing and implementing these asset class specific action plans. The below illustration shows how far AP2 has come in the work of adapting its portfolio towards net zero. Asset classes marked with a check mark have defined plans, as described below. Many of the methods applied are supported by the IIGCC Net Zero Investment Framework.

The Fund will have an action plan for all asset classes by 2025 at the latest.

1. Global equities	– Follows the EU Paris-Aligned Benchmark (PAB). – Exclusion of fossil exposure according to limit values. – Emissions decrease by around seven percent per year. – Ongoing analysis of climate risk exposure.
2. Private equity	Under development.
3. Swedish equities	– Evaluation and classification of high-emitting companies in the portfolio based on adaptation towards net zero, according to a five-point scale, from “not adapted” to “reaches net zero”. The process is based on the IIGCC Net Zero Investment Framework. – The portfolio’s emissions decrease in line with the companies’ reduced emissions. – Dialogues with companies to support their work towards net zero.
4. Government bonds	– Net zero assessment based on criteria for states’ adaptation towards net zero emissions according to a five-point scale, from “not adapted” to “reaches net zero”. – Engagement work for this asset class is primarily carried out via investor networks such as the IIGCC and Investor Policy Dialogue on Deforestation (IPDD). The Fund also holds direct dialogues with central banks and finance ministries, mainly in Asia.
5. Global credits	– Follows the EU Paris-Aligned Benchmark (PAB). – Exclusion of fossil exposure according to limit values. – Emissions decrease by around seven percent per year. – Ongoing analysis of climate risk exposure.
6. Unlisted credits	Under development.
7. Green bonds	Targeted sustainability investment, in line with the Paris Agreement.
8. Real estate	Commitment to net zero, followed up with tracking of emissions and energy consumption.
9. Timberland and farmland	– Follow-up of emissions, which have been stable for several years. – Defined by the Fund as targeted sustainability investments, based on an assessment based on eight criteria that must be met. – Maintained or increased carbon sequestration and maintained or increased biodiversity in timberland. – Reduced negative environmental impact compared to conventionally cultivated land in the Fund’s farmland investments.
10. Sustainable infrastructure	Classified as targeted sustainability investment, with an expected positive impact on greenhouse gas emissions, primarily through renewable energy and avoidance of emissions.

Engagement

The Fund’s engagement work aims to support portfolio companies and external managers towards net zero. The work takes place on several levels, partly through dialogues with companies, partly through support of political measures required to make the transition possible. Dialogues are held partly independently but also together with other investors in various investor networks such as Climate Action 100+ (CA 100+) and Net Zero Engagement Initiative (NZEI). Together with other investors within CA 100+ and NZEI, AP2 is leading the dialogue with, among others, AB Volvo, Sandvik, Holmen, Essity and Assa Abloy.

AP2’s dialogues are followed up with several KPIs (Key Performance Indicators) in order to monitor and compare progress in the dialogues.

To support the transition, political measures and commitment are also required, where institutional investors such as AP2 have an important role to play. In connection with the climate summits of recent years, AP2 together with more than 500 international investors supported a statement, Global Investor Statement to Governments on the Climate Crisis, which was published by the IIGCC. The statement calls on governments to increase their climate policy measures and, among other things, more direct climate regulations are demanded for both the financial sector and real economy companies. This is an example of engagement work of a political nature.

Expectations of portfolio companies

AP2 expects companies to report their ambitions towards net zero and commit to reducing their emissions in line with the Paris Agreement. Companies are expected to reduce their greenhouse gas emissions in line with these ambitions and report both total greenhouse gas emissions (scope 1-3) and emission intensity. Furthermore, the companies are expected to report on their transition, indicate the share of green revenue and be transparent about how much capital they plan to invest in order to reach net zero.

Expectations of external managers

AP2 expects the Fund’s external managers to commit to net zero goals and to have a plan to reach net zero emissions both for themselves but also in their portfolio companies. The external managers are also expected to report on their own and their portfolio companies’ greenhouse gas emissions (scope 1–3) according to the Task Force on Climate-Related Financial Disclosures (TCFD).

Voting

For significant high-emitting companies, AP2 votes for climate as follows:

• Net zero commitment by 2050.
• Intermediate target for reduced greenhouse gas emissions.
• Measure and report greenhouse gas emissions in accordance with the GHG protocol (Green house Gas Protocol).
• TCFD reporting.

Collaboration

Through its membership in the IIGCC, AP2 collaborates with other European investors on the climate issue. The goal is to bring forward the investors’ voice on the issue and to engage with companies, authorities and other investors to draw attention to long-term risks and opportunities arising from climate change. The IIGCC is an effective platform for advancing investors’ wishes in the climate area. The organization is also a platform for collaboration with other investors both in terms of dialogues with companies and development of methods and tools for investors.

Other important memberships include the Principle for Responsible Investments (PRI) and the ESG Data Convergence Initiative (EDCI). See also under Memberships and initiatives.

Transparency

For AP2, transparency is an important part of the Fund’s mission. The Fund’s sustainability policy sets out the overall framework for AP2’s work with climate issues.

AP2 reports in accordance with TCFD. The recommendations are aimed at both companies and investors, and since 2018 the Fund has annually published a climate report in accordance with TCFD’s recommendations.

AP2 also reports in more detail on this year’s work with climate in the Fund’s sustainability report.