The analysis, calculated according to the International Energy Agency’s (IEA) 2-degree scenario, takes a look at how compatible various sectors, companies and investor portfolios are with the target of the Paris Agreement, i.e. limiting the increase in global warming to 2 degrees.
For two years now, Varma has conducted a 2-degree scenario analysis on its direct equity investments in those industries for which data is available: electricity production, fossil fuels and the automobile sector. The most recent results concern the portfolio’s situation at the turn of the year.
The results reveal that Varma’s portfolio is very much in line with the 2-degree target in our investments in both electricity production and fossil fuels.
“The positive outcome can be explained by the high proportion of renewable energy in the electricity production of the companies in our portfolio. We have also excluded from our investments energy companies who rely on coal for more than a third of their electricity production, and we have not invested in coal mining operations,” explains Varma’s Specialist in Responsible Investing, Pirta Wentzel.
In the automobile sector, Varma’s investments in combustion-engine cars exceed the 2-degree scenario, which means that, in future, Varma should increase the share of its investments in electric cars.
“Investors interested in electric cars have had little choice in the automobile sector thus far. The situation will change, however, as major car manufacturers begin shifting their production also to hybrid and electric cars,” Wentzel reckons.
Scenario analysis helps investors look ahead
In addition to the scenario analysis, another tool for monitoring climate targets is calculating the carbon footprint of different asset classes. Varma has also performed this analysis since last year and the results have been encouraging: for example, the CO2 footprint of direct equities shrank 23% in a year. The CO2 calculation reveals the concentration of the portfolio’s direct and indirect emissions, but the data is inevitably backward-looking.
“The advantage of the 2-degree analysis is that it aims to be forward-looking. It also gives portfolio managers a snapshot based on the IEA’s 2-degree scenario. I believe it will be important in future to extend the 2-degree analysis to several sectors and also to other scenarios,” concludes Wentzel.
Varma Mutual Pension Insurance Company is the most solvent earnings-related pension company and largest private investor in Finland. The company is responsible for the statutory earnings-related pension cover of some 873,000 people in the private sector. Premiums written totalled EUR 4.7 billion in 2016 and pension payments stood at EUR 5.3 billion. Varma’s investment portfolio amounted to EUR 44.4 billion at the end of March 2017.
Pirta Wentzel, Specialist, Responsible Investing, tel. +358 40 700 7172
Katri Viippola, Senior Vice-President, HR, Communications and Corporate Social Responsibility, tel. +358 400 129 500
WWF study “The Largest European Asset Owners: an Assessment of the 2 C Alignment of Equity Portfolios”