Real Assets – Forestry, renewable energy & science based targets

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This article is part of NordSIP Insights – ESG Integration Case Book 2020. Read or Download the entire publication here.

AMF is a Swedish mutual occupational pension fund for private company employees, with the aim to provide the best quality returns at the lowest cost with high regard to sustainable investment practices across all activities. The fund currently manages about SEK 670 billion (€61.4 billion) and the portfolio includes a mix of shares, bonds, real estate and other alternative investments, with high weight on domestic investments. As a result, AMF is one of the largest owners of the companies listed on the Stockholm stock exchange and commercial properties in Sweden.

The benefits of a long-term mindset

- Promotion -

Jenny Gustafsson, Head of Responsible Investments at AMF, explains how being a long-term investor offers opportunities to invest directly in real assets, something that can help build a more sustainable future from both an environmental and a societal perspective. “We have a long-term mindset and we are well-capitalised, hence we have the opportunity to make direct investments in infrastructure, for example, when it provides an attractive risk-adjusted return for our customers,” she starts. “We are well-positioned to take advantage of the shift that will take place in the economy towards a more sustainable society. We face attractive investment opportunities while contributing to global solutions, all at once.”

Bergvik Skog Öst

AMF primarily invests directly in infrastructure (such as wind power) and forestry assets. “Today, we are one of Sweden’s largest forest owners through our ownership stake in Bergvik Skog Öst,” Gustafsson explains. The pension fund acquired 89.9% of the shares in the forestry company from the Swedish paper and pulp company Billerud Korsnäs in August 2019, which came with more than 317,000 hectares of forests in central Sweden (almost 17 times as large as the entire Stockholm area). Having retained a minority ownership, Billerud Korsnäs continues to manage the forests, while AMF supports the company at a strategic level.

“Forestry is a great fit into our portfolio, as we are aiming to increase the share of alternative investments in our asset allocation. Together with other investments, we have made in wind power and other types of infrastructure, forests can provide a stable return at low risk for a long period of time. This type of uncorrelated asset complements well the traditional investments in equities and bonds, especially given the current low-interest rate environment,” Gustafsson continues.

Swedish forestry is an interesting long-term example of an investment that will benefit from the transition to a more sustainable society. “Firstly, the forest itself acts as a carbon sink, that is to say, it absorbs carbon dioxide from the atmosphere, as it grows,” Gustafsson explains. “Second, sustainable and active forest management also allows for products based on renewable raw materials to replace fossil fuels or other finite resources, which also drives society to lower its carbon footprint,” says Gustafsson.

Stena Renewable

The pension fund also invests directly in wind power, primarily through Stena Renewable and acquired a 35% stake in the company. The company’s powerplants account for about 4% of Sweden’s total wind power production. “Despite the difficult economic climate triggered by the ongoing pandemic, Stena recently made a record investment in a new wind park for SEK 2.2 billion (€200 million), which reflects the long-term nature of these projects,” Gustafsson comments.

Exeger & Northvolt

AMF has had the opportunity to invest in and co-own other types of unlisted companies. “These ventures give us the opportunity to make long-term investments or to facilitate future IPOs,” adds Gustafsson. “We find that it is a great way to invest in the solutions that will enable the world to change as well as providing attractive investment opportunities. This is particularly important in areas such as new technologies that enable the transition to a more climate-smart society, where time horizons are often long.”
Examples of such investments include photovoltaic company Exeger, a Swedish innovative venture that develops and produces flexible photovoltaic cells that can be integrated into computers or tablets, for instance. AMF also agreed to invest up to SEK 700 million (€64 million), the equivalent to a 5% stake, in the battery producer Northvolt. “The investment round aims to finance the construction of Europe’s first large-scale production plant for sustainable batteries in Skellefteå, a municipality in the North of Sweden,” Gustafsson explains.

Science-based targets in portfolio companies

Meanwhile, the real estate arm is dominated by AMF Fastigheter, a wholly-owned subsidiary of AMF that constitutes about 14% of the traditional pension insurance portfolio. Sustainability is naturally a strong focus for the business and environmental issues are a major part of the work, as real estate properties affect the environment throughout their life cycle: from construction to management and operation, to conversion and finally to demolition.

In 2019, AMF Fastigheter joined the Science Based Targets Initiative (SBTi), a global initiative that allows companies to set climate targets required for the achievement of the Paris Agreement. SBTi is a cooperation between the Carbon Disclosure Project (CDP), the United Nations Global Compact (UNGC), the World Resource Initiative (WRI) and the World Wildlife Fund (WWF).

“In the past, we already had targets to reduce our energy consumption, but now we are going a step further in our climate-related work,” explains Michael Eskils, Head of Sustainability at AMF Fastigheter, in the pension’s annual report. “We want to set science-based targets to reduce our climate impact throughout the value chain. We have chosen to join the SBTi in order to seek help in developing a relevant and ambitious climate target. We have committed ourselves to set the objective and the road map within two years. SBTi experts will then validate the targets we have set.”

Today, Eskils explains, AMF has already started work on mapping the climate impact of the real estate portfolio, in the business as well as in the supply chain. “Building materials play a major role in new buildings and transformations required to meet our tenants’ needs,” Eskils comments. “We remain humble about the work ahead of us, but see the transition towards a sustainable and profitable business environment as a great opportunity. In the long term, I believe that it will be difficult to conduct a profitable business without being fundamentally sustainable.”


 

Science Based Targets & the role of financial institutions

Driving Systemic Transformation

To decarbonize the global economy in alignment with the Paris goals, all businesses need to reduce their direct greenhouse gas emissions quickly enough to stay within the carbon budgets established by climate science.

These emissions don’t occur in a vacuum. They are part of a broader economic and regulatory system that creates a complex web of incentives and disincentives for actors in the real economy to reduce emissions. Every actor in a given value chain influences the emissions of other actors and therefore shares responsibility for reducing them.

The Science Based Targets initiative (SBTi) makes the shared, cross value-chain responsibility between actors explicit by requiring companies to set targets not only for their direct emissions, known as scope 1, and emissions from the electricity they buy, known as scope 2, but for all significant emissions across the value chain, known as scope 3. This practice builds on decades of corporate emissions accounting through the use of the GHG Protocol Corporate and Value Chain Accounting and Reporting Standards.

The private sector is stepping up to embrace this shared responsibility. Over 90% of the 339 companies with approved science-based targets have set ambitious scope 3 targets, setting off positive ripple effect across a wide circle of companies around the world.

The Vital Link

Financial institutions are the vital link in enabling the kind of system-wide change we need. By lending and investing, they have the power to redirect capital to the sustainable technologies and solutions of the future and to the companies doing the most to prepare for a net-zero emissions economy. Through the finance they provide, financial institutions can influence companies to reduce their greenhouse gas emissions, even without direct control over those reductions.

The Science Based Targets initiative’s framework for the finance sector works to enable financial institutions to accelerate the transformation required by aligning lending and investment portfolios with the level of ambition required by science. This approach leverages financial institutions’ shared influence and responsibility to provide the capital needed to finance the net-zero transition.

Source: the Science Based Targets initiative

Photo by Geran de Klerk on Unsplash

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