Climate
Climate change: a defining challenge of our time
Global warming will affect future generations and have far-reaching consequences for people, communities and economies around the world. For AP2, climate change is important both in terms of its impact on people and the environment and in terms of how the Fund’s investments are affected.
The Fund’s objective is for the entire portfolio to be aligned with the ambition of the Paris Agreement, meaning that greenhouse gas emissions are to be reduced at a pace consistent with limiting global warming to 1.5°C. The Paris Agreement requires net zero emissions to be achieved by 2050. As Sweden has committed to a more rapid transition, reaching net zero already by 2045, AP2 considers the same target for the Fund.
Research indicates that emissions reductions need to occur rapidly, with approximately a halving every decade, to limit global warming to 1.5°C. As AP2 has set a target of achieving net zero by 2045, the Fund also aims to achieve a significant reduction by 2030.
AP2 regularly analyses the portfolio’s carbon footprint and assesses expected developments across different asset classes. The Fund’s climate risks, both transition risks and physical risks, are reviewed and analysed using different methods depending on the asset class. These analyses form the basis for how climate considerations are integrated into the investment process and for prioritising the Fund’s climate-related work.
Listed holdings are analysed based on emissions and transition ambitions in accordance with the criteria outlined in the Net Zero Investment Framework (NZIF) developed by the Institutional Investors Group on Climate Change (IIGCC).
Three pillars of our climate work
Investing in solutions
The transition to a low-carbon society requires substantial investment. AP2 supports this transition through targeted sustainable investments across asset classes. Most of the Fund’s targeted sustainable investments to date focus on climate transition, for example:
- Private equity funds with a specific focus on positive climate impact, investing in companies whose products and services enable resource efficiency, renewable energy and reduced emissions
- Green bonds financing, for example, wind and solar power.
- Forestry assets that meet AP2’s criteria for sustainable forest management.
- Sustainable infrastructure, including renewable energy and energy storage.
Supporting transition
AP2 acts as an active owner to support the transition across its holdings in different asset classes. This work is based on analysis and engagement through dialogue with companies and policymakers.
Changes to the portfolio, for example, divesting from companies with high emissions and acquiring companies with lower emissions can reduce the portfolio’s overall carbon footprint. However, this does not necessarily reduce total emissions in the atmosphere. Global climate risks are therefore not directly affected by the Fund’s trading activities. Emissions in the atmosphere are only reduced when companies lower their actual emissions.
AP2 therefore actively engages with portfolio companies to encourage them to transition and reduce their emissions. This engagement is conducted through dialogue, often in collaboration with other global investors. Companies are expected to disclose climate risks, governance structures, processes and activities in line with the Task Force on Climate-related Financial Disclosures (TCFD). AP2 also exercises its voting rights on these matters at general meetings.
To support the transition effectively, it is important to understand the drivers behind changes in the portfolio’s emissions and to what extent these contribute to actual reductions in global emissions. The Fund analyses this annually using a proprietary model that attributes changes in the carbon footprint. AP2 also conducts more detailed assessments, for example of how portfolio companies are adapting their operations to climate change. The results of these analyses form part of the basis for the Fund’s engagement with public companies.
Using divestment as a measure of last resort
AP2 does not invest in companies that derive more than a specified share of their revenues from coal, oil and/or gas, nor in utilities where more than 50 per cent of revenues come from fossil fuel combustion. The maximum revenue share is 1 per cent for coal, 10 per cent for oil and 50 per cent for gas. In connection with the implementation of the EU Paris-Aligned Benchmark (PAB) for foreign equities and corporate bonds, the Fund divested approximately 250 companies with fossil fuel exposure.
Path to net zero across asset classes
Global equities
- Aligned with the EU Paris-Aligned Benchmark (PAB).
- Exclusion of fossil fuel exposure based on defined thresholds.
- Emissions reduction over time of approximately seven per cent per year.
- Continuous analysis of climate risk exposure.
- Engagement with companies with high climate risk.
Swedish equities
- Assessment and classification of high-emitting companies based on alignment with net zero, using a five-level scale from “not aligned” to “net zero”, in accordance with the IIGCC framework NZIF.
- Portfolio emissions reduced through companies’ emissions reductions.
- Engagement with companies to support transition towards net zero.
Private equity and private credit
- Assessment of managers’ alignment with the IIGCC framework NZIF.
- Net zero ambition included in side letters.
- Annual evaluation and ongoing dialogue with managers.
Government bonds
- Assessment of alignment with net zero based on criteria for country-level transition, using a five-level scale from “not aligned” to “net zero”.
- Engagement through investor networks such as IIGCC and the Investor Policy Dialogue on Deforestation (IPDD), as well as direct dialogue with central banks and finance ministries, primarily in Asia.
Global credit
- Aligned with the EU Paris-Aligned Benchmark (PAB).
- Exclusion of fossil fuel exposure based on defined thresholds.
- Emissions reduction of approximately seven per cent per year.
- Continuous analysis of climate risk exposure.
Real estate
- Commitment to net zero, monitored through emissions and energy consumption.
- Assessment of managers’ alignment with the IIGCC Net Zero Investment Framework (NZIF).
Agriculture and forestry
- Monitoring of emissions, which have been stable over several years.
- Defined as targeted sustainable investments with ten criteria, including enhancement of net carbon storage in forestry and maintained or enhanced biodiversity.
- Reduced environmental impact compared with conventionally managed farmland.
- Assessment of managers’ alignment with the IIGCC Net Zero Investment Framework (NZIF).
Sustainable infrastructure
- Classified as targeted sustainable investments, with expected positive impacts on greenhouse gas emissions, primarily through renewable energy and avoided emissions.
- Assessment of managers’ alignment with the IIGCC Net Zero Investment Framework (NZIF).
Engagement on company and policy level
The Fund’s engagement efforts aim to support portfolio companies and external asset managers in the transition to net zero. This work takes place at multiple levels: through direct dialogue with companies and through engagement to support the policy measures required to enable the transition. Engagement is conducted both independently and in collaboration with other investors, including initiatives such as Climate Action 100+ (CA100+) and the Net Zero Engagement Initiative (NZEI). AP2 leads engagement initiatives with several companies within these collaborations.
Engagement activities are monitored using a set of indicators to track and compare progress.
Supporting the transition also requires policy action, and institutional investors such as AP2 play an important role. One example of this work is AP2’s support for the Global Investor Statement to Governments on the Climate Crisis, published by the IIGCC in connection with recent UN climate conferences. Alongside more than 500 international investors, AP2 has endorsed the statement, which calls on governments to strengthen their climate policies and actions. Among other things, the statement advocates more direct climate-related regulation of both the financial sector and companies.
How AP2 votes on climate issues
For companies with significant emissions, AP2 votes in favour of:
- A net zero commitment by 2050
- Interim targets for emissions reduction
- Measuring and reporting greenhouse gas emissions in accordance with the Greenhouse Gas Protocol
- Reporting in line with TCFD
Investor partnerships
Through its membership in IIGCC, AP2 collaborates with other European investors on climate-related issues. The aim is to represent the investor perspective and engage companies, policymakers and other stakeholders on the long-term risks and opportunities associated with climate change.
IIGCC provides an effective platform for influencing climate policy and for collaboration among investors, both in engagement with companies and in developing methods and tools.
Other key memberships include the Principles for Responsible Investment (PRI) and the ESG Data Convergence Initiative (EDCI). Further information is available under Memberships and initiatives.
Expectations of portfolio companies
Commitment and targets
- Net zero commitment by 2050
- Targets for emissions reductions
Emissions
- Disclosure of absolute emissions for Scope 1, 2 and 3
- Disclosure of emissions intensity for Scope 1, 2 and 3
Transition plan / climate plan
- A clear climate strategy outlining how emissions reductions will be achieved
- Disclosure of the share of green revenues and a plan to increase this share
Capital allocation
- Clear disclosure of how capital allocation supports achieving net zero by 2050 (in the EU, this is typically reported as Green Capex under the taxonomy framework)
Corporate governance
- The board should ensure that climate risks and opportunities are integrated into strategy and risk management
- The company should ensure that its direct and indirect climate policy engagement is consistent with the goals of the Paris Agreement. The company should disclose its principal climate policy positions and memberships of relevant industry associations, and take appropriate action where the engagement activities of those associations are not aligned with the company’s climate commitments.
Transparency
- Reporting in line with TCFD
Expectations of external managers
Commitment and targets
- Long-term net zero target for the portfolio (2050 or earlier)
Transition plan
- A robust plan for achieving net zero, aligned with SBTi or equivalent
- Provide assurance that portfolio companies have credible transition plans
Emissions
- Disclosure of absolute emissions for Scope 1, 2 and 3
Transparency
- Reporting in line with TCFD (encouraged, although not mandatory)
Reporting in line with TCFD
AP2 has reported in accordance with the TCFD framework since 2018. The framework is relevant for both companies and investors. The Sustainability Report includes an index showing where the various indicators are disclosed, as well as a detailed description of the Fund’s climate work and key developments over the past year.
Governance
A The Board’s oversight of climate-related impacts, dependencies, risks and opportunities.
B Management’s role in assessing and managing climate-related impacts, dependencies, risks and opportunities.
Strategy
A Climate-related impacts, dependencies, risks and opportunities identified by AP2 in the short, medium and long term.
B Effects of climate-related risks and opportunities on AP2’s investment strategies.
C Resilience in AP2’s strategies for risks and opportunities in various climate scenarios.
Risk management
A Process to identify climate-related impacts, dependencies, risks and opportunities.
B Process for managing climate-related impacts, dependencies, risks and opportunities.
Targets and metrics
A Metrics used to assess climate- and nature-related risks and opportunities.
C AP2’s targets for managing climate-related impacts, dependencies, risks and opportunities, and outcomes in relation to these.
Measurement of portfolio emissions
AP2 began analysing the carbon footprint of its public equity portfolio in 2009. Since 2014, this analysis has been conducted annually. By collecting data from all portfolio companies based on the Fund’s ownership share, the total emissions attributable to the portfolio are calculated.