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Swedish pension fund to ditch $400m in fossil fuels as it moves to Paris alignment

AP1 has already begun exit across all asset classes

Swedish pension fund AP1 has axed all fossil fuels investments from its internally-managed portfolios citing “substantial uncertainty for companies involved in coal, oil and natural gas activities”, and is now working with its asset managers to roll the divestment out across its entire strategy.

The move will also see the SEK366bn (€33.6bn) fund – one of five public ’buffer’ funds in Sweden – develop plans for a carbon neutral portfolio by 2050, more green investments and continued climate engagement with investee companies.  

In a statement issued today, AP1 said its decision was a result of analysis on climate-related financial risks in the economy and its own portfolio. RI understands that the assessment was based on how fossil fuel companies would fare under different climate scenarios. Backtests were also done, to see how portfolios would have performed if they hadn’t included exposure to fossil fuels – the results showed that returns would not have been negatively impacted.

“Our assignment is to manage the fund’s assets in an exemplary way through responsible investments and achieve high returns for the long term, while supporting sustainable developments without compromising the fund’s targeted investment returns,” said AP1’s Chair, Urban Hansson Brusewitz. “An integral part of this ambition is to manage our climate-related financial risk exposure and align it with the overall risk level of the fund. Divesting from fossil fuels is an efficient way for the fund to manage the financial risk associated with a transition in line with the Paris agreement.”

According to Magdalena Håkansson, Head of Sustainable Value Creation at AP1, the fund is defining fossil fuels as “businesses involved in coal, oil and gas per GICS Energy sector” and will use “additional criteria to identify companies involved in coal power generation or large owners of reserves”. All asset classes – AP1 invests globally across listed equities, fixed income, currency, real estate, hedge funds, private equity funds, infrastructure and high yield – will be covered under the pledge, she told RI.

AP1’s Board of Directors signed off on the divestment at the end of last year, and the fund has already exited fossil fuels in its in-house mandates. At the beginning of 2020, it says it held around $0.4bn in fossil fuels companies. “We’re now working together with our external managers to ensure a responsible transition of the remaining positions,” said Håkansson, adding that this “is likely to take some more time”.

On the pension fund’s plans to “develop measurable targets and a roadmap towards achieving a carbon neutral portfolio by 2050”, Håkansson said the project will initially be based on carbon footprint measurements, with a view to investing in companies making meaningful reductions. As an interim target, AP1 is seeking to halve its carbon footprint by 2030.

“In order for us to understand what’s driving change on an aggregate level, we measure changes made by our portfolio companies and changes made by our investment managers, allowing us to follow progress in the real world,” she added.

Alongside its divestment plans, AP1 says it will “promote investments in companies that are actively contributing to the transition and will be part of a profitable and sustainable economy over the long-term”. 

Hansson Brusewitz said the fund would continue to engage with investee companies, and “make clear requirements on portfolio companies and our investment managers to accelerate their agenda for managing the climate risk exposure”.