Varma wants to invest in companies with sustainability targets set and met

Commitment to sustainability targets aligned with the Paris Agreement is what Varma wants to see in the companies we invest in. Growth in the issuance of sustainable bonds is a positive development, but the focus should be on committing to science-based targets.

Varma encourages companies to commit to scienced-based emission targets. One of Varma’s focus areas when it comes to sustainability is climate change mitigation. Our main goal is to have a carbon-neutral investment portfolio by 2035.

In aiming for a carbon-neutral investment portfolio, we at Varma have set targets for a climate-friendly investment allocation. We therefore have a strong preference to invest in companies with clear strategic and science-based targets of reducing greenhouse gas emissions.

Scienced-based targets as part of strategy

A stated vision, a strategy and targets to get there are what we as investors expect from every company. It has become very clear that sustainability needs to be part of that vision and strategy. We all know that setting targets is not easy – we want them to be relevant and ambitious, but also achievable and measurable, and they should guide us in the right direction. For many companies, climate change is not at the core of their business, but it still it needs to be considered in their strategy.

So what does “science-based” mean? It means that the targets are in line with what the latest climate science deems necessary to meet the goals of the Paris Agreement. The Science-Based Targets initiative (SBTi) is a partnership that defines and promotes best practices in emission reduction and net-zero targets in line with climate science. Through the initiative, companies are provided with a roadmap for reducing their emissions at the pace and scale that science tells us is necessary for a 1.5°C world.

Over a thousand companies globally have already committed to scienced-based targets through the initiative. But a lot of companies still do not have any targets, and many companies with targets lack Paris alignment. This is also the case for listed companies in the Nordics.

The development and understanding of sustainability and climate change have evolved significantly in recent years. We need to set ambitious targets but also commit to adjusting the targets if necessary as we learn more. We need to accept that the targets are moving. The climate policy for Varma’s investments was updated in 2019, and we feel that it is time again to review it.

Action needed

Once the targets have been set, we need to take action to make the change happen. Companies may not be used to finding the right actions to fight climate change and reduce emissions, but they are used to being confronted with new challenges in our ever-changing world – so it should be like any other challenge the company is facing.

Emission targets and actions to fight climate change just have to be put on the agenda. Inaction is a missed opportunity. As the hockey player Wayne Gretzky put it: “You miss 100% of the shots you don’t take”.

Sustainable bonds are the cherry on the cake

We have seen strong growth in the issuance of ESG bonds. The sustainable debt market is still dominated by green bonds. In a green bond, the funding is earmarked for climate or environmental projects. Last year, the issuance of sustainability-linked bonds (SLBs) advanced strongly, and SLBs are gaining a considerable market share. Almost a hundred billion dollars of SLBs were issued in 2021.

In an SLB, the company explicitly commits to sustainability targets. The sustainability objectives are measured through key performance indicators and assessed against predefined sustainability performance targets. If the sustainability objectives are not met, this will have financial implications for the company, usually through slightly higher interest payments.

We see SLBs and the inclusion of a commitment to improvements in sustainability outcomes as a positive development. However, it is crucial that the targets are material, quantitative, pre-determined, ambitious, regularly monitored and externally verified, as guided by the ICMA Sustainability-Linked Bond Principles. To be ambitious enough, the targets need to be science-based.

After all, it is all about setting ambitious sustainability targets and taking action to achieve them. That is what we want to see from the companies we invest in. Commitment is shown through targets and actions. These can be celebrated and communicated by financing with a green or sustainability-linked bond. Like a nice cherry on the cake.

Ann Brännback

Senior Portfolio Manager

Ann Brännback works as a Senior Portfolio Manager in the Fixed Income team at Varma. She is responsible for the investment grade credit portfolio. Ann has been working with credit for more than 15 years. She is interested in long-term sustainable investing, company analysis and also economic and social development more broadly. ESG has been an important focus area for her for many years already.

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