Since 2015, AP6 has played an active role in promoting an increased focus on climate change in PE. Climate change is a threat to future economic prosperity, since it undermines the stable climate required for human activity. AP6 is part of the Swedish pension system, with the mandate of securing pensions for many generations to come. As such, climate change is a prioritized topic. Managing pension assets requires a long-term perspective and understanding that the earth‘s resources must be shared with future generations. Also, climate, nature and ecosystems must be in balance.
Companies that AP6 invests in both impact, and are impacted by, climate change. The scope of this includes how the companies’ operations are affected by extreme weather and higher temperatures, as well as changes in taxes, fees and other legal requirements. The transition to a climate-neutral economy also creates opportunities such as higher energy efficiency, innovation and new business areas.
AP6‘s Code of Conduct states that “AP6 is committed to ensuring that the companies and funds it invests in take action on climate-related risks and opportunities”. Climate-related targets have been estabished by the AP6 Board of Directors. AP6 reviews how climate-related risks and opportunities could impact the investment decision or ownership plan. Examples include evaluating a partner’s views on investing in fossil fuels or promotion of energy efficiency in the portfolio companies. Another example is asking relevant questions on the impact that climate change has on fixed assets or raw materials that a company is dependent on, since this could have a major impact on delivery capacity and costs. In the end, all of it affects the return that can be generated for investors.
AP6 also monitors climate change related aspects after investment. Since 2016, climate is part of the annual ESG evaluation. 2019 is the first year where the results of the climate section have been compiled and communicated to the participating funds. A new trend among the funds in the portfolio is attempting to quantify climate risk in accordance with various climate scenarios. Companies in the fund holdings are also striving to meet new and more stringent requirements on both measuring and reporting carbon emissions. As of right now, however, very few funds offer their companies support with strategies for transitioning to renewable energy or designing plans to reduce emissions in line with global goals on greenhouse gas emissions.
Climate related risk and opportunity – an integral part of the investment process
- AP6’s Board of Directors has established goals for AP6’s climate efforts.
- The AP6 Code of Conduct states that, “AP6 shall actively strive to ensure that the companies and funds in which AP6 has invested, identify and take action on climate-related risks and opportunities”.
- AP6 has also integrated climate change related aspects into its assessment of new investments and reviews the climate related risks and opportunities that could impact the investment decision or plan for ownership.
- Questions about the climate related risks and opportunities are included in the template for the annual sustainability assessment of fund managers in AP6’s portfolio.
- AP6 strives to demonstrate the importance of climate issues from an investor perspective. It also strives for more transparency in reporting of environmental impact.
Carbon Footprint – for more transparency
- AP6 calculates the carbon footprint of the investment portfolio on an annual basis using the latest available carbon data. Together with the other Swedish AP Funds’, AP6 has agreed upon four carbon footprint indicators to report on. The Swedish AP Funds have concluded that the carbon footprint is one of several ways to continuously assess investments from a climate perspective. From AP6’s perspective, measuring carbon footprint is a way of requestingmore transparency from unlisted companies and PE funds. It is also a way of increasing awareness of climate issues in the private equity industry on a broader perspective. When it comes to assessing climate related risks or climate impact, the carbon footprint has its limitations.
- For an investor in unlisted companies with a limited number of investments, the divestment of a company in one sector, and the acquisition of another company in a different sector can significantly impact the carbon footprint. A carbon footprint also has other limitations. As an example, for Scope 1 and 2, reported emission data from companies is not complete and needs to be estimated in varying degrees, only certain asset classes are covered, savings in emissions through products and services are not included and information about fossil fuel reserves and physical climate risks are not included.
- Compared to listed companies, it is not as common for unlisted companies to report their carbon emissions. To a certain extent, it is due to a lower level of public reporting. Furthermore, unlisted companies face different sets of requirements (from their owners, consumers, interest groups and other stakeholders) when it comes to measuring and reporting carbon emissions. Because it is relatively unusual for unlisted companies to report their carbon emissions, access to such information is limited. In order to calculate the carbon footprint of AP6’s unlisted portfolio, the information reported on portfolio companies’ carbon emissions has been combined with estimated carbon emissions.
- Given its mandate and focus, AP6 seldom invests in resource extraction. AP6 has very few investments in the energy sector (as of 2019-12-31, 1.5 % of total managed assets). Most such companies in the portfolio provide services/support to extraction industries. In this segment, there are also examples of companies that are increasingly deriving revenues from renewable energy sources, such as offshore wind power. In general, AP6 avoids investments in fossil fuels and has, on various occasions, declined such opportunities. The reason for this is the negative climate impact associated with fossil fuels and the risk of stranded assets (i.e. assets that are no longer possible to extract due to the limitation of a global carbon budget). There are other financial risks to consider as well.