Climate policy for Varma’s investments

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:

1. investing in companies that enable a change towards lower emissions and whose business offers solutions for resolving climate-change issues
2. fostering collaboration in the financial markets in order to promote climate change mitigation and adaptation
3. focusing on analysing the financial risks of climate change in the investment portfolio
4. 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.

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.

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.

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
• utilities
• automobiles
• metals & mining
• construction materials
• transportation
• forestry and
• chemicals.

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.

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.

We reach for carbon neutrality by identifying new investment opportunities brought by climate change and by creating a climate-friendly investment allocation, in which we include companies and projects:

• whose business benefits from actions to mitigate climate change
• whose projected emissions from operations are aligned with the Paris Agreement
• that have a clear strategic and science-based target of reducing emissions to help limit global warming to 1.5 degrees Celsius
• whose operations offer carbon sinks or carbon capture.

Our target is for the allocation to represent 25 per cent of the investment portfolio by 2025.

The IPCC’s 2021 climate report states that by 2030, global greenhouse gas emissions should be cut by 50% from the 2016 level. At the same time, methane emissions must be cut by a third. Emission-reduction targets and increased reporting on the financial impacts of climate change are creating new regulation-based risks for investors. We believe that carbon-efficient companies that are reducing their emissions are in the best position to succeed. Limiting global warming to 1.5 degrees Celsius above the pre-industrial level requires not utilising all of the already discovered fossil fuel reserves.

Achieving a carbon-neutral investment portfolio by 2035 requires significantly reducing greenhouse gas emissions within all asset classes. At the same time, the share of investments classified as carbon sinks should increase in the portfolio. We have set targets for reducing the absolute emissions in Varma’s entire investment portfolio for 2025 and 2030.

Our goal is to cut the absolute scope 1 and 2 emissions in Varma’s entire investment portfolio compared to 2021 by:

• -25 per cent by 2025
• -50 per cent by 2030.

We also intend to add investments classified as carbon sinks to our portfolio.

We recognize differences in the quality of climate change related data between listed and unlisted investments. Besides increased transparency, listed investments offer the investor better liquidity than unlisted investments, which means the portfolio can be adjusted quickly even in the short term.

Our goal is to reduce, in the short term, the carbon intensity of listed equity and corporate bond investments, i.e. the greenhouse gas emissions in relation to revenue, as follows:

• -30% by 2023
• -40% by 2025
• -50% by 2027.

We focus on companies whose business benefits from climate change mitigation and who have a smaller risk of being exposed to the impacts of climate change. Investments in companies that operate in the oil & gas, utilities, automobile, metals & mining, transportation, construction materials, chemical and forestry industries and which offer alternative products or services to fossil fuel use present the most significant opportunity for mitigating climate change. We also favour companies that increasingly use renewable energy and whose operations are resource efficient in terms of the use of raw materials and other production inputs.

We utilize a low carbon roadmap for electricity generation. This means that

• investments in fossil-based electricity generation decrease at the same rate or faster than the roadmap requires
• the share of renewable energy grows in accordance with the roadmap, and our target is for it to account for at least half of electricity generation investments by 2030.

The roadmap requires, e.g., that renewables account for 50 per cent of electricity generation investments by 2030, and that gas accounts for 22–25 per cent by 2030. The roadmap also requires exiting from other forms of fossil production. In the roadmap, we make use of the climate scenarios produced by the Network of Central Banks and Supervisors for Greening the Financial System (NGFS).

Carbon dioxide emissions from real estate are mainly caused by the energy consumption arising from electricity and heating, which can be reduced by improving the energy efficiency of the buildings. Our goal is to reduce the carbon dioxide emissions of our direct real estate investments by switching to fossil-free heating and electricity by 2030 and 2025 respectively.

A significant proportion of Varma’s portfolio has been outsourced to fund managers. We strive to control our exposure to industries with inherent climate risks by selecting managers and funds that are aligned with our climate policy. We choose fund managers that recognise the investment opportunities related to climate change mitigation and adaptation. We steer away from funds that are significantly exposed to the risks brought by climate change.

Due to the long investment horizons of private equity and infrastructure investments, it is very important from an investor’s point of view to take into account the changing operating environment that results from the progression and mitigation of climate change. Our aim is to focus on investments that have clear emission-reduction targets in their operations.

In fund investments, our goal is to increase the share of funds that take climate change explicitly into account to 50 per cent of all fund investments by 2025.

We do not make new investments in companies with coal-based operations accounting for more than 10% of their revenue, electricity generation or generation capacity. The exception to this general rule is companies that have a set science-based target of reducing emissions to help limit global warming to 1.5 degrees Celsius. We do not finance coal-based projects, nor do we invest in companies that are planning new coal-based investments.

We are committed to exiting from all thermal coal investments by 2025. We are also committed to excluding oil exploration from our investments by 2030. These commitments cover Varma’s entire investment portfolio. Investments in coal and oil exploration do not play a strategic role in Varma’s investment operations.

Our plan is to engage companies that still use coal in order to accelerate the decommissioning of coal-based operations. Our goal is to have these companies decommission their coal plants by 2030. Otherwise, we will exit the investment. We see no future for coal-based electricity generation.

We regularly review the climate actions of our investments’ value chain and we do not, for example, use counterparties for which fossil fuel companies form a significant part of their generated fees from clients. Our objective is also to develop, together with fund managers, the underlying companies’ disclosures on energy use and the carbon footprint.

We are working to combat climate change on our own, together with other investors and, for instance, through a third party as part of a larger group of investors. Voting in Annual General Meetings is one of our tools for promoting climate change mitigation and adaptation and climate-related disclosures.

We encourage all our investees to disclose their financial risks and opportunities related to climate change 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.

Varma’s Board of Directors approves the climate policy for investments. We monitor the research on climate change, and we update our climate targets at least every three years.

Updated: 6/2022