Sweden’s AP2 maps out TCFD scenario analysis plan for climate risks and opportunities

Influential €35bn investor amongst first to tackle scenario analysis

Andra AP-fonden (AP2), the second of Sweden’s four state pension buffer funds – has revealed plans to use scenario analysis to help identify climate risks and opportunities as it seeks to align itself with the Task Force on Climate-Related Disclosure’s (TCFD) recommendations.
The Gothenburg-based fund – responsible for assets of SEK346bn (€35bn) – outlined its intent in its recently published TCFD inspired climate report , which communicates its climate change efforts following the disclosure framework that was published last summer.

AP2 outlines its intention, this year, “to develop an analysis of how resilient the fund’s strategic portfolio and underlying investment strategies are on the basis of various climate scenarios and also potentially to include climate scenarios in the selection of the overarching strategic allocation of assets”.
Scenario analysis was a key recommendation of the Financial Stability Board’s TCFD working group, referring to it as “an important and useful tool for understanding the strategic implications of climate-related risks and opportunities”.

Christina Olivecrona, Senior Sustainability Analyst at AP2, told RI that the fund has been looking at scenario analysis as part of a working group with the Institutional Investors Group on Climate Change (IIGCC), which Olivecrona co-chairs with Vicki Bakhshi of BMO Global Asset Management.
Conceding that it is “complicated to do scenario analysis”, Olivecrona said it is a necessary tool to if AP2 is to fulfil its ambition to align with the Paris Agreement’s 2°C target.
Last year, 79 Swiss asset owners participated in a Swiss government-backed voluntary 2°C scenario analysis of their equity and corporate bond portfolios.
The anonymised analysis revealed that the country’s asset owners were closer to a 4-6°C scenario and subsequently faced pressure from NGOs, political parties, and church groups to disclose their results.AP2’s decision to use scenario analysis is part of its wider adoption of the TCFD’s framework, which the fund sees as offering a more holistic way to approach climate risks and opportunities.
RI was told that the “on-going” implementation of the framework – which started in the autumn of 2017 – has already helped AP2 identify the gaps in its own approach and what its next steps are.
The focus so far has been on climate-related risks and opportunities around AP2’s listed equities but the fund will also start to look at other asset classes in 2018.
AP2 has also revealed that it is set – this year – to introduce new ESG factors to the model it uses to construct comparative indexes. Olivecrona said: “When these new indices have been implemented we will be able to analyse and compare how the different indicators behave due to the portfolio changes. This will hopefully give us insights to determine which indicators we should use.”
The climate report – which is believed to be a first of its kind – also mentions AP2’s project considering whether sustainability should become a separate risk area in its own right – currently, climate related-risks are not integrated into the AP2’s overall risk management process.
It also states AP2’s support for a price on carbon that “reflects the external costs”.
The publication of the climate report coincides with that of the Swedish version of AP2’s annual report/annual sustainability report. It demonstrates how the fund is contributing to the UN’s Sustainable Development Goals through its investments, which includes a $20m investment in a social bond issued by the Inter-American Development Bank (IADB), financing loans for projects in Latin America and the Caribbean that counter poverty by improving quality of children’s education (SDG 4). And, a $30m investment in Women Entrepreneurs Opportunity Facility (WEOF) designed to increase the availability of capital for female entrepreneurs in emerging countries (SDG 5).