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Alecta board gives thumbs up to 2°C scenario analysis

Pension fund to develop portfolio management tools on the back of new model

The board of Sweden’s largest pension fund has given the green light for it to undertake 2°C climate scenario analysis annually, as part of its risk assessment for the national regulator – making it one of the world’s first movers on the high-profile topic.
Alecta has developed a methodology and a 50-page report to enable it to assess the transition risk exposure of its credit, public equities and real estate holdings, which together represent almost its entire SEK765bn (€75bn) portfolio. Currently, the fund will not look at physical risk, and its assessment of climate transition risk will centre on carbon pricing.
“If the carbon price is €140 [per tonne] in 2040, which is what is estimated, then what does that actually mean for our current investments, and what discounts and costs do we have do consider? That’s what we’re trying to establish through this exercise,” explained CEO Magnus Billing.
Scenario analysis is one of the “key recommended disclosures” proposed by the Taskforce on Climate-related Financial Disclosures in 2017. The influential group, launched by the Financial Stability Board in 2015, said in its final report that this should focus on “resilience of an organisation’s strategy, taking into consideration different climate-related scenarios, including a 2° Celsius or lower scenario”.“The Task Force recognises the use of scenarios in assessing climate-related issues and their potential financial implications is relatively recent and practices will evolve over time, but believes such analysis is important for improving the disclosure of decision-useful, climate-related financial information.”
Alecta’s report was presented to its board in December, as part of its self-performed risk assessment, which it is legally obliged to perform annually as part of its duties to the Swedish pensions regulator. Having secured approval from the board, this assessment will now include the 2°C assessment each year.
Notably, the methodology has been developed by the fund’s risk department rather than its ESG team, and it will provide the basis for investment and engagement tools for Alecta’s portfolio managers and analysts, including discount models and new data points. Alecta runs all its money in-house.
“The objective is to strengthen our portfolio, and part of that is providing tools to our portfolio managers for use in day-to-day decision making,” Billing told RI. “That bit was very important to us, because we may all be able to agree that responsible investment is a very good thing, but the question then is: what kind of tools can we provide to our teams to enable them to actually make it happen?”
For more details on the approach that Alecta has taken, see our analysis.