Why is climate change an increasingly prevalent investment issue?
Climate effects are becoming visible to companies and investors across asset classes. Companies are losing revenue because of climate impact. However, with the transition to a low carbon economy there are opportunities and a market for new products and clients because consumer preferences are changing. People are generally worried about it. It would be strange if it wasn’t in focus.
And for AP6 specifically?
Climate change is an important question that spans the portfolio. AP6 and our owner, the Swedish state, see this as a priority area. For us, sustainable development is fundamental to the well-being of future generations, and to our ability to generate a long-term economic return for future pensioners.
At our most recent structured stakeholder engagement, which included our owner, portfolio companies, GPs, students and others, climate change stood out as an important issue. It is very much on the agenda in Sweden, and not just due to Greta Thunberg. It’s important to us to promote the focus on climate change within the industry.
How do you address it within your portfolio?
We invest through funds and directly in companies as a minority investor. In all investments, climate change is integrated into both the due diligence of new investments and how we monitor and follow up.
Since 2015, we’ve been calculating the carbon footprint of our private equity portfolio annually, using a combination of reported and estimated carbon data. Over the years, we’ve noticed that GP responses have shifted.
Initially many GPs said they didn’t collect carbon data because it didn’t make sense for the assets in their fund. We suggested it was good to monitor at the company level and to compare with peers and benchmark within the sector. We’ve continued to ask for emissions numbers and see GPs increasingly collecting that data, although we’d like more transparency at private companies.
We also realised carbon emissions and the impact on the climate was not the only issue. The other side is how climate change impacts portfolio companies. That’s been a big change in how we look at climate impact and diligence it.
How do you measure impact; what do you take into account?
It’s really difficult. We ask GPs in due diligence and our annual ESG monitoring: if they have seen any impact in their portfolio; if they conduct a forward-looking analysis on possible impacts; how this is based in policy and risk assessments; and how integrated climate change is into their due diligence and monitoring of investments. We also ask if they ask their portfolio companies for carbon emissions reporting.
At the same time, we’re aware that there is a huge spread of maturity among companies and understand the need to be flexible regarding the specificities of different sectors. Carbon emission data is tangible and quantifiable but it’s also just one piece of the puzzle.
Has GP behaviour changed since you became more active on climate change?
In our 2019 ESG assessment, we aggregated our portfolio climate change data for the first time. It revealed that a number of GPs carry out climate-related risk assessments based on forward looking scenarios. We haven’t seen this before.
They are talking to their portfolio companies about it to understand the physical risk and the effects of the transition to a low carbon economy, looking at both regulatory risk and changes in consumer behaviour. Overall, the focus has become more forward looking, less about historic emissions data.
Would you ever decide not to invest in a GP due to climate-related issues?
That could definitely happen. When we conduct due diligence, the GP needs to score sufficiently high on all parameters for us to commit capital. In the past, we have declined to invest based on ESG more broadly. We have also declined an investment that had a fossil fuel exposure we couldn’t get comfortable with.