In 2022–2035 we will develop our portfolio towards carbon neutrality
Investors must be prepared for the major changes brought by climate change. Greenhouse gases from human activities have already changed the climate and caused financial risks for investors. The operating conditions of many industries and companies are on the verge of a change. In several industries, such as electricity generation and the automobile and mining industries, the change has already begun.
Mitigating climate change calls for substantial emission reductions. The goal of the Paris Agreement is to limit the increase in the global average temperature to 1.5 °C above pre-industrial levels. This requires a global transformation to a low-carbon economy as well as an appreciable reduction in the use of fossil fuels.
We support actions to mitigate climate change and make adapting to the change possible.
Varma has, since 2016, committed to aligning its investments and investment processes with the Paris Agreement. In 2022–2035 we will develop our portfolio towards carbon neutrality by:
- investing in companies that enable a change towards lower emissions and whose business offers solutions for resolving climate-change issues
- fostering collaboration in the financial markets in order to promote climate change mitigation and adaptation
- focusing on analysing the financial risks of climate change in the investment portfolio
- transparently disclosing the impacts of climate change on our investments and the impacts of our investments on the climate.
We aim for a carbon-neutral portfolio by 2035, provided that the investment environment allows it.
1. We invest in solutions that help mitigate climate change
We guide our investment portfolio towards carbon neutrality by selecting investees that recognise the opportunities related to climate change mitigation and adaptation. We steer away from investees that are significantly exposed to the risks brought by climate change.
Our climate policy is an integral part of our investment process and investment decisions. Our other tools for controlling climate-related financial risks include negative screening, active ownership and engagement. Building a carbon-neutral portfolio calls for major emission reductions within all asset classes. By investing profitably and securely we also reduce the greenhouse gas emissions of our investments.
2. We work together with other investors
Sustainability is a strategic focus for Varma, and mitigating and adapting to climate change are among our key sustainability targets. We promote collaboration within the financial markets in order to mitigate and adapt to the effects of climate change, while also taking part in the public debate on the impacts of climate change at events and through collaborative initiatives. We are involved in developing business and investment strategies that reduce the greenhouse gas emissions of our investments.
Particularly in externally managed funds, our aim is to develop collaboration between investors as a tool for mitigating the effects of climate change. Our goal is to influence, independently and with other investors, how fund managers take climate aspects into account as part of their responsible investment practices. We encourage funds to disclose their financial risks and opportunities in accordance with the Task Force on Climate-related Financial Disclosures (TCFD) framework, to set science-based emission-reduction targets (Science Based Target initiative), and to assess the emissions of their portfolio in accordance with the reporting standards of the Partnership for Carbon Accounting Financials (PCAF) initiative if their emissions data is otherwise unavailable.
3. Identifying and managing climate-related risks
From an investor’s perspective, climate change causes both physical and transition risks, which have an impact on the value of investments. Physical risks are divided into acute and chronic risks, which refer to the challenges that climate change poses to companies and society, such as sudden destruction caused by extreme weather events or the depletion of natural resources in the longer term. Transition risks refer to changes, for example, in regulation, technology and consumer behaviour that the transition to a lower-carbon economy entails. Transition risks can also include energy security and self-sufficiency requirements.
Just transition to a low-carbon economy requires societies to promote, among other things, job opportunities in new and transitioning industries, retraining and an affordable and secure supply of energy.
Varma addresses climate-change risks in its risk and solvency assessment and in the reports of the Board of Directors and executive management. Every quarter, the allocation group of Varma’s Investment Operations reviews the climate change-related financial risks that our investment portfolio is exposed to.
We have defined industries that, in terms of climate change, both offer the greatest opportunities for emission reductions through their business and are also significantly exposed to transition risks caused by climate change mitigation.
These industries are:
- oil & gas
- metals & mining
- construction materials
- forestry and
In addition to the above-mentioned industries, we also analyse climate change-related transition risks that our real assets are exposed to in order to identify and assess the significance of the key political, technology, market and reputation risks.
In our assessments of physical risks we focus especially on evaluating the climate burden of our real estate and infrastructure investments, and we look at, among other things, the weather resistance of properties as well as sea flood risks and rainwater run-off risks. The assessments highlight a review of broader geographic areas as well as an analysis of very local climate impacts.
We assess the risk of fossil reserves in our investments as part of the climate change risk assessment. When the aim is to limit global warming, stranded assets pose significant financial risks to investors.
4. Reporting on our climate actions
We are preparing for the financial risks of climate change by developing TCFD reporting and the assessment of the financial risks brought by climate change. We use forward-looking data, such as climate scenarios, when assessing and disclosing the climate-related risks of our investments.
A carbon-neutral investment portfolio must be backed by strong scientific data and the latest information, as well as tools for developing the investment process. We make use of the latest scientific data and tools when assessing the impacts of climate change.
In our disclosure of the carbon dioxide emissions of our investments, we comply with the recommendations of the Partnership for Carbon Accounting Financials (PCAF) initiative, and we report the figures in our Annual and Sustainability Report.