1 March 2021
Varma has phased out fossil fuel investments from its EUR 50.2 billion investment portfolio. Coal mines and coal-based electricity generation have been excluded, as have oil exploration companies. Excluding fossil-based investments is part of Varma’s journey towards establishing a carbon-neutral investment portfolio.
Varma has dramatically cut the share of fossil fuels in its investments in order to achieve a carbon-neutral investment portfolio by 2035. As part of its climate goals, Varma is committed to exiting from investments in thermal coal by 2025 and excluding oil exploration by 2030.
Varma reached the final stretch of its goal to exit fossil investments already in 2020, as there were only a handful of such investments remaining.
At the end of 2020, there were no coal mining companies in Varma’s portfolio.
Besides coal producers, oil exploration and electricity producers whose operations rely on coal were also excluded. At the end of 2020, the shares of oil exploration companies only accounted for 0.5 per cent of Varma’s direct equity investments and exchange-traded funds (ETF). Of equities and ETFs, 1.6 per cent was invested in companies that rely on coal for more than 5 per cent of their operations.
Varma’s goal is to accelerate the phasing out of coal power plants such that the coal plants of companies in Varma’s portfolio are decommissioned by 2030 at the latest.
“Otherwise, we will exit the investment. We see no future for coal-based electricity generation,” says Varma’s Director of Responsible Investment, Hanna Kaskela.
Coal and oil exclusions concern direct investments, such as equities and corporate bonds; for example, in active equity funds, Varma only invests in low-carbon funds.
Excluding fossil investments is responsible and good risk management
For a pension investor, exiting fossil investments is both responsible and in line with its mandate of investing profitably and securely.
“Mitigating climate change requires us investors to operate in a way that leads to a reduction in the use of fossil fuels. We don’t want to support the kind of business that puts the survival of future generations at risk,” says Kaskela.
At the same time, climate-smart investment is part of risk management. From a climate perspective, risky investments are not suitable for pension investors with a long investment horizon, also in terms of returns.
“Fossil fuels hold a hidden risk of becoming stranded assets or a carbon risk, which means that not all existing fossil reserves are likely to be utilised if the ultimate goal is to stem global warming. Causing emissions is becoming increasingly costly as the price of emission allowances rises,” Kaskela points out.
Climate change poses risks for investors, but it also presents opportunities.
“We believe that carbon-efficient companies that are reducing their emissions also have the best chance of success,” says Kaskela.
During the year, Varma assembled a special investment package, a climate allocation, made up of companies whose business benefits from actions to mitigate climate change and who have a clear target of reducing greenhouse gas emissions. The climate allocation accounted for 12.4% of the entire investment portfolio at the end of 2020.
“Different industries offer numerous opportunities, and renewable energy, for example, has often proven to be a good investment. If you look at Texas, wind power already accounts for a quarter of the state’s electricity generation, clearly more than coal,” recounts Kaskela.
In order to reach its climate goals, Varma is gradually reducing the emissions of different asset classes. Good progress has been made in this area in recent years: for example, the carbon footprint of equity investments has shrunk 29 per cent in five years and that of real estate as much as 47 per cent.
“We have reduced our ownership in the most carbon-intensive companies and chosen ‘cleaner’ companies in specific sectors. In our real-estate investments, we have adopted emission-free district heat and electricity, and geothermal heat is being used in our rental flats, for example,” concludes Kaskela.Source: Varma
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