Stockholm (NordSIP) – Following the endorsement of carbon neutrality targets by the Norwegian government’s Expert Committee on Climate Risk in the Government Pension Fund Global (GPFG), KLP announced it would align its investment portfolio with the 1.5°C global warming target.
This announcement also follows a recent €200 million commitment to a green infrastructure debt fund with Macquarie, and a separate commitment to other renewable energy funds such as Climate Investor One and Copenhagen Infrastructure Partners. “Like many others, we feel it is our responsibility and in our self-interest to contribute to global climate goals, and we recognize that the low carbon transition needs to significantly accelerate,” Lars Erik Mangset (Pictured), chief advisor on climate change at KLP, tells NordSIP.
As of 2019, 46% of KLP’s portfolio was aligned with the 1.5°C target. At the moment, 3 of KLP’s funds classify as Article 6 products under the EU’s Sustainable Finance Disclosures Regulation (SFDR), with another 43 funds as Article 8 and the remaining 9 funds as Article 9.
Asides from the general temperature alignment, Norway’s largest pension company also announced it would increase its green investments by NOK6 billion every year. Among other things, KLP will now invest US$25 million in a fund specialising in direct investments in renewable energy. KLP will also reduce the carbon intensity of the portfolio by 7% per year. Companies will be required to set goals for future emission reductions in line with the 1.5°C target.
Disclosure of Paris Alignment
“We have assessed several standards and frameworks, data from various data providers and observed best practices in the market. Our conclusion is that there is no single standard or indicator we can use to assess our different investments against the 1,5-degree target., Therefore, we have picked from various standards and practices in the market. At the core, we build on the Science Based Targets initiative (SBTi),” Mangset explains.
To comply with this commitment, the Norwegian pension provider will disclose its alignment with the Paris Agreement. “We have defined four categories in KLP’s investment portfolio. We use the best available methods for each category to calculate KLP’s overall Paris Alignment Percentage (PAP). The PAP shows the share of companies in our portfolio that have emissions or emission reductions in line with the 1.5-degree ambition. The definition of these categories is linked to the way we analyse and claim our level of Paris alignment,” Mangset adds.
“Green Investments” are close to zero CO2 emissions, such as renewable energy, sustainable forestry and zero-emission ferries. “High Emitting Sectors”, includes real estate, oil and gas, utilities, cement, steel, car manufacturing and aviation. “Given acknowledged reference pathways defining how each sector should transition in line with the Paris agreement, based on the CREEM and PACTA methodology, we calculate the weighted average performance, which can be translated to what we term the Paris Alignment Percentage,” Mangset says.
“Other investments with data coverage” refers to the remaining part of KLP’s portfolio for which “there are no sector benchmarks or reference pathways that we can apply in practice”, according to Mangset. These investments face a requirement to reduce emissions intensity by 7% on average each year from 2020-2030 and to be aligned with a sustainable temperature path. “Using a combination of an emission intensity indicator and temperature score, we get an assessment on present day performance and the future ambition of a company,” Mangset continues.
Investments with “No Data”, will be assumed to have 0% PAP. “This gives us the incentive to close the data gap, and to potentially increase our PAP by doing so,” Mangset adds.
Oil and Gas
Although KLP will not divest from its investments in oil and gas, cement and steel production or other high-emission sectors, it is aiming to ensure that these investments comply with the Paris Agreement by 2025. “While oil and gas activity can continue, it needs to be significantly reduced the next decades. And there are different pathways for oil and for gas. In KLP’s net zero framework, all our alignment-assessments are based on provisions that are given by third parties, and this is the one reason why we will remain exposed to oil and gas,” Mangset explains.
According to Mangset, it is also arguable whether divestments are always more effective than engagement in pushing the Paris agenda. “Our view is that coal and tar-sand extraction should be immediately stopped, since the carbon intensity is the highest, and substitutes exists. For oil and gas, there are arguments that these companies must play an important role in reaching the Paris agreement. These companies must combine their activities with an increased focus on carbon capture and storage, development of renewable energy production technology (e.g. floating wind structures) and future energy carrier solutions (e.g. hydrogen and ammonia, potentially coupled with CCS). Our view right now is that we should prioritize engaging with these companies,” Mangset says.
“That is why KLP has voted in favour of climate resolutions, and voted against board nominations in oil and gas companies, to pressure the companies to accelerate the transition. We will continue this work, and until further this implies that we will remain invested in the sector. But we cannot rule out the possibility that we in the future only will be exposed to oil and gas companies with a credible transition,” Mangset concludes.