New Exclusions and Rules at AP2

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Stockholm (NordSIP) – As momentum continues to build on sustainable investments, asset owners adopt increasingly stringent standards for their investments. As a sign that is its embracing a more muscled approach to climate change mitigation, Eva Halvarsson, CEO at AP2, announced this week that the Swedish public pension fund will no longer invest in fossil fuel companies.

New Exclusion Criteria

The rule will apply with different thresholds across the different fuels. While companies that derive more than 1% of their turnover from coal will be excluded, the limit for turnover from oil was set at 10%. For gas companies, only those deriving over 50% of their turnover from that fossil fuel will be blacklisted. AP2 will also not invest in utility companies with more than 50% of their revenues from fossil fuels.

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Halvarsson is confident of the impact of these new rules. “In principle, this excludes the entire energy sector,” Halvarsson says of the new rules. In total, these measures blacklist approximately 250 companies from AP2’s portfolio and will result in a portfolio adjustment worth approximately SEK200 billion.

Ambitious New Rules

The new exclusion criteria are motivated by the adoption of a new climate framework by AP2. “The EU has developed a number of different climate frameworks as part of its action plan to finance sustainable growth, including the framework intended for public index providers wishing to market their indices as the EU climate index,” Halvarsson explains. “There are two levels of climate ambition: The EU Climate Transition Benchmark, which is somewhat less ambitious than the EU Paris Aligned Benchmark (PAB).”

“Not being a public index provider, AP2 is not covered by the PAB rules. That said, we believe that it has clear advantages to use an external regulatory framework, which is based on the science IPCC has compiled and developed by a credible institution as the EU,” AP2’s CEO adds.

The adoption of the more stringent criteria for PAB is motivated by the fact that they 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.

According to the PAB framework, CO2 intensity should be reduced to 50% during the first year and then decreased by 7% annually. However, AP2 has decided to go beyond. “This year already, the carbon footprint of global corporate bonds will be reduced by about 75%, and that of our global equities by about 70%, as measured against market-weighted indices,” Halvarsson says. This frontloading of the adjustment will allow AP2 to take a smoother annual reductions path than what is prescribed by the PAB with emissions cuts of less than 7% per year, while still on track to reach the goal of net-zero emissions by 2045.

“In order to achieve the global transition, withdrawal of investment from fossil fuels is not enough. AP2 will continue to be part of the solution by investing in companies that contribute to the transition to a sustainable and carbon-efficient society,” Halvarsson concludes.

Image Courtesy of Climate Action

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