AP2 aligns portfolio with energy transition; forestry focus

AP2, the SEK 440 billion ($44.1 billion) Swedish buffer fund, has drawn up criteria for classifying its forestry assets as a climate investment.

“An investment in forests is not automatically beneficial to the climate and needs to live up to certain criteria in order to be classified as climate investment,” explains chief executive, Eva Halvarsson. “We have therefore drawn up 10 criteria that AP2 considers to be important from a climate perspective and that our forest investments must meet to be classified as a climate investment. By climate investments we mean investments that, in addition to a good risk-adjusted return, aim to contribute to reduced emissions of greenhouse gases and reduce the effects of climate change.”

The ten criteria to which managers must adhere include a comprehensive and externally published policy for responsible investments; that timberland assets must be managed in a sustainable manner that is verified by a third party through certification, and that all managers integrate TCFD in their reporting.

Timberland managers must also maintain or increase carbon sequestration in the forest, and actively contribute to maintaining or increasing biodiversity associated with the timberland in addition to the minimum requirements specified in the conditions of certification and local laws and regulations.

AP2 began investing in forestry back in 2010. The majority of AP2’s investments are in Australia and the US in forest assets that produce saw timber and pulpwood. The latest criteria build on policies and management systems the fund’s forestry managers already have for promoting sustainability as well as conduct analyses to determine whether the forest real estate might be appropriate for inclusion in ‘carbon projects’.

Net Zero

Halvarsson outlined how else the fund is investing in the transition.

At the end of 2020, AP2 announced plans to align its foreign equity and corporate bond portfolios (around half its total AUM) with Paris Agreement 1.5°C goals. The fund introduced the EU Paris-aligned Benchmark (PAB) framework to develop its own multi-factor indices which reduces climate risk, as well as the portfolio’s carbon footprint.

In accordance with the PAB framework, AP2 won’t invest in companies that generate more than 1 per cent of their turnover from coal, more than 10 per cent of turnover from oil and more than 50 per cent from gas. Nor will the portfolio invest in utilities that receive more than 50 per cent of their revenues from electricity produced using fossil fuels. In total, approximately 250 companies will no longer be included in the portfolio in a wave of divestments that don’t compromise the risk and return characteristics of the indices.

Earlier this year AP2 committed to additional investment in Copenhagen Infrastructure Partners, the Danish fund management company focused on renewable energy infrastructure, explains Halvarsson.

“In the first half of the year, AP2 made additional investments in Copenhagen Infrastructure Partners, one of the world’s largest developers of sustainable infrastructure. The focus of the investment is on the production of bioenergy by processing advanced waste products from agriculture and forestry, as well as food production, in different ways, in accordance with EU regulations, without affecting land use.”

Green bonds

In another example of the fund’s ongoing investment in the energy transition, recent green bond investments include NextGenerationEU, a European recovery fund which aims to build a greener, more digital and more resilient future. AP2 has also invested in bonds issued by the International Development Association, part of the World Bank, which supports projects and programmes for sustainable development.