15 December 2020
Andra AP-fonden (AP2) has aligned its internal indices and portfolios for foreign equities and corporate bonds to meet the 1.5 degree target of the Paris Agreement. This means, among other things, withdrawal of investment from companies that generate revenues from selling fossil fuels. This also reduces the climate risk from the Fund’s global investments and further reduces its carbon footprint.
During the autumn, AP2 has adjusted the holdings of global equities and corporate bonds it manages internally to ensure they are consistent with the Paris Aligned Benchmark (PAB), but it has not compromised the return and risk characteristics of the indices.
“As far as we know, this makes us unique because it includes both corporate bonds and equities worth approximately SEK 200 billion, which is half of our total portfolio. Our ambition is eventually to align other parts of our portfolio with the PAB, too”, says Eva Halvarsson, CEO of AP2.
The fact that AP2 is managing its holdings in keeping with the PAB means that the Fund does not invest in companies that generate 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 their turnover from gas. In principle, this excludes the entire energy sector. Nor does the Fund invest in utility companies that receive more than 50 per cent of their revenues from fossil fuels. In total, approximately 250 companies will no longer be included in the Fund’s portfolio.
“Actually, we are moving beyond the PAB requirement for halving the carbon footprint in the first year because we are already reducing the carbon footprint of our global corporate bonds by about 75 per cent and that of our global equities by about 70 per cent, and we aim to reach net zero emissions by 2045”, says Eva Halvarsson.
In 2013, AP2 began analysing financial climate risks for fossil energy companies moving on to analyse companies generating electricity from coal. Because of financial climate risks, AP2 has previously withdrawn investment from shares and corporate bonds in a total of 80 companies. The Fund decided as early as 2016 to develop its portfolio in keeping with the Paris Agreement and set a target of net zero emissions by 2045 for its portfolio.
This alignment with the PAB is in step with climate regulations developed by the EU as part of its action plan to finance sustainable growth. Said rules, which are intended for public index providers who wish to market their indices as the EU climate index, provide for two levels of climate ambition: The EU Climate Transition Benchmark, which is somewhat less ambitious than the EU Paris Aligned Benchmark (PAB). Since AP2 is keen to align its portfolio with the Paris Agreement, the Fund has opted for the Paris Aligned Benchmark regulations.
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 pulling investment out of certain companies, primarily those involved with fossil fuel operations, while ensuring that we continue to focus on industries that are important for the transition to a low carbon economy.
“I think that AP2 has taken a huge step towards a net zero world with the first asset owner in-house implementation of Paris-Aligned benchmark (PAB) indices, for both global equities and corporate bonds. The indices follow an aggressive path with the exclusion of fossil fuels, while at the same time being responsible in other social and sustainable aspects. Hopefully this can also inspire other asset owners around the world”, says Andreas Hoepner, Professor of Operational Risk, Banking and Finance at University College Dublin’s Smurfit Graduate Business School and a member of the EU’s Platform on Sustainable Finance and formerly of the EU’s Technical Expert Group.Source: AP2
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