KLP Goes Coal Free and Watches Palm Oil Producers

    Stockholm (NordSIP) – The Norwegian mutual insurance company KLP which is responsible for the pension management of Norwegian municipalities, health enterprises and businesses with public-sector occupational pensions, decided recently to go goal free. This means that KLP and the KLP funds will exclude companies that derive more than five percent of their revenues from coal-based activities. We caught up with Lars Erik Mangset (pictured), Senior Advisor Responsible Investment at KLP, who explained how the decision came about and what he is watching out for.

    “In 2014, one of our owners, Eid municipality in Norway, required that KLP should take a stricter stand on coal investment,” starts Mangset. “Their request was adopted, and KLP decided to exclude companies with more than 30 percent of its revenues from coal in 2014.”

    “Since 2014, global GHG emission has steadily increased, and we observe growth in power production capacity for coal. This is a major concern since researchers from Oxford University show that current coal plants already takes more than their share of the carbon budget. There is a need for stronger climate action by everyone, and this realization made KLP go a long step further and become coal-free in all our investments.”

    KLP’s decision to become coal-free sent a strong market signal. Yet Mangset stresses the importance of employing other measures to make an impact on global warming. “Our key possibility to make a difference is through our engagement work. We continuously seek to influence companies in our portfolio to reduce their emissions and to reduce their contribution to the loss of natural sinks such as deforestation.”

    Mangset provides an example of recent engagement efforts KLP was involved in. “In the recently held AGM of Equinor, Norway’s largest company and an internationally sizeable integrated oil and gas company, KLP voted for a resolution which would require the company to set emission targets for scope 1 emissions (direct company emission, primarily gas turbine emission from production fields), scope 2 emission (indirect emissions, primarily use of electricity) and scope 3 (other indirect emissions, resulting from the use of oil and gas by other legal entities).”

    For KLP, exclusions are the last resort when engagement can no longer change the course of companies’ activities, but it doesn’t mean the efforts stop there. “It is never a good day for us, or anyone else when we decide to exclude a company,” says Mangset. “Our investment philosophy is to invest broadly, which implies that we can still engage with the companies that we have excluded, to include them again in our investment universe.”

    “Specifically for coal, once a company does not fulfil our exclusion criteria, i.e. that they have less than five percent of their revenues from goal, has less than 10 GW installed power production capacity and less than 20 million ton production, they will qualify to be removed from our exclusion list,” he says. “We see that many companies in the utility sector are reducing their reliance on coal, and increasing their investment in renewable energy. We hope to engage with companies to accelerate this process.”

    In addition to fossil fuels, KLP is increasingly looking into food and agriculture. “Our concerns relate to direct emissions from the sector, such as methane, but also impact on deforestation and biodiversity,” says Mangset. “Until now, the fossil energy industry has received most of the attention related to climate change, but this is now changing, with increasing concerns on the relationship between deforestation and loss of biodiversity. For some years already, we have engaged with companies in the palm oil supply chain, with the expectation that palm oil production should not lead to any new deforestation or destruction of peatland. It will be natural for us to expand our focus to other commodities, such as soy.”

    In this example of engagement, KLP co-operated with another manager. “KLP, in collaboration with Sumitomo Mitsui Trust Asset Management, Asia’s largest asset manager, is engaging with banks in Malaysia with sizeable interest in the palm oil sector,” adds Mangset. “Our goal is to put pressure on the banks to require that their clients within the palm oil industry avoid deforestation and peatland conversion.”

    For now, according to Mangset, no other sectors are set to join the coal industry on KLP’s blacklist, but the organisation remains vigilant and proactive. “Generally speaking, producers of fossil energy and large consumers of energy, such as industry and transportation, are natural focus areas for us,” he explains. “Our approach so far has been to only exclude the most carbon-intensive producers of energy, i.e. coal and oil sand. We engage with integrated oil and gas companies on their involvement in other carbon intensity extraction forms, such as shale. And in more general terms, we engage with companies in many sectors regarding their commitment to renewable energy, from the perspective of R&D (e.g. hydrogen solutions), investments and capacity increases (e.g. offshore wind) and procurement of renewable energy (e.g. long-term PPA’s).”

    “An important consideration is that the benchmark for acceptable emissions will become significantly more stringent next year,” adds Mangset. “Climate scenarios show that we need to reduce emissions drastically to meet with the ambitious targets set by the Paris agreement.” To illustrate his point Mangset shares the graph below.

    “Tools such as science-based targets and those offered by the 2-degree investment initiative enable stakeholder to assess whether individual companies and investors such as KLP are aligned with the Paris agreement. In so far, being fairly well aligned has not been a major challenge, since the climate scenario typically does not show dramatic mitigation before 2020. Hence, from next year and onward, it is likely that more companies will become misaligned with what science recommends to avoid the most dangerous forms of climate change. For KLP, this reality implies that we will strengthen our climate strategy in the near future, which will primarily influence how we engage with companies, but potentially also further exclusions.”

    Picture courtesy of CIMB

    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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