Varma tightens up coal policy, switches €1.5bn to Paris-aligned benchmark ETFs

Finnish fund expands net-zero target to all asset classes and sets target of halving absolute emissions by 2030.

The €58 billion Finnish pension fund Varma has tightened up its climate targets, broadening the scope of its emission reduction goals to all asset classes including unlisted investments, as well as cutting the revenue threshold for coal investments and expanding the scope of exclusions.

The firm, which had already set a target of net-zero emissions for 2035, will now seek to slash the emissions from its holdings across both public and private markets by 25 percent by 2025 and by 50 percent by 2030.

Hanna Kaskela, the fund’s sustainability director, said it was important that Varma set absolute emissions targets instead of intensity goals. “Reducing carbon intensity alone is no longer enough,” she said, adding that Varma was looking into increasing its investments into carbon removal and carbon sinks such as forestry.

In the asset classes previously covered by Varma’s climate goals, it is already well on the way to decarbonisation. The carbon intensity of its listed equity investments was down 30 percent at the end of 2021, while the intensity of corporate bond holdings was down 23 percent, both against a 2016 baseline.

As well as setting expanded emissions targets, the fund – one of Finland’s largest – has tightened its screening policy for coal investments, cutting the revenue threshold for new investment into a company from 30 percent to 10 percent. Companies with coal exposure will also be required to have a science-based target to be eligible. The fund had previously sought to completely end its thermal coal investments by 2025 in equity and bond portfolios and has now also expanded this to unlisted investments.

At the end of 2021, 2.6 percent of Varma’s listed equity investments were in companies with more than 5 percent revenue from coal, while 0.4 percent was in oil exploration companies, which the fund has previously committed to phase out by 2030.

To help the fund meet its climate goals, two ETFs covering Europe and the US in which it has €1.5 billion invested have been switched to Paris-aligned benchmarks. Varma first invested in the ETFs, managed by LGIM and with tracking indexes from Foxberry, in 2019, and the methodology was updated earlier this month. Varma said that the US fund had the majority of the €1.5 billion, and that it was the third largest US-focused Paris-aligned ETF.

On Wednesday, Varma also announced a €50 million commitment to a corporate bond ETF launched by BlackRock, which tracks a Paris-aligned index.