Sixth Swedish National Fund AP6 Case Study
AP6 - Climate & investment case study
Objective: AP6 chose South Pole's Bespoke Analysis of Investment Climate Impact solution, which included the development of a methodological framework for measuring the climate impact of private equity investments. The aim was to measure the absolute and relative carbon footprint of a majority of holdings in AP6's investment portfolio, in relation to AP6's ownership.
The Sixth Swedish National Fund (AP6) is one out of six Swedish National Pension Funds. It manages a portfolio worth SEK 23.6 billion (almost USD 3 billion). AP6's mission is to create high long-term returns to the benefit of Swedish pensioners by investing in unlisted companies through a risk-balanced approach. The investments are made either directly in the companies or indirectly through funds. The majority of investments are made mainly in mature companies in the Nordic region. AP6 is an active owner and has an integrated approach to sustainability, which is expressed through ownership control.
What is the context?
AP6 regards climate change as a key sustainability challenge. It aspires to gain
a better understanding of its portfolio's exposure to carbon risk. As a first step, the pension fund wanted to understand the availability of emissions-related information and to quantify the amount of carbon emissions from various portfolio holdings. As part of AP6's integrated approach to sustainability, the pension fund strives to create a return for Swedish pensioners by investing in a sustainable and responsible manner. This means that their holdings should grow and create returns through efficient use of resources, minimum environmental impact, and by promoting social development and fair working conditions.
What was the challenge?
Within the private equity sphere, few companies measure and report their carbon emissions. Intuitively, AP6 assumed that only a limited amount of companies they invest in have carbon footprint data readily available. Another challenge was that as a private equity investor, AP6 could not share information about the value of their holdings.
How did AP6 proceed?
AP6 conducted a market research of carbon footprinting providers and selected a handful for further probing. The selected providers were asked to suggest a procedure for how AP6 could measure the carbon intensity of their private equity investment portfolio. Important parameters in the selection process were experience from the private equity sector, as well as experience of analysing Nordic companies. AP6 was looking for internationally recognised experts in the field of investment climate impact assessments that could meet a short delivery timeline. Furthermore, AP6 was seeking a provider with a solution that could address the anticipated lack of available data and circumvent the confidentiality issues they had, without compromising quality.
What solution did AP6 choose?
AP6 chose South Pole's Bespoke Ana- lysis of Investment Climate Impact solution, which included the development of a metho- dological framework for measuring the climate impact of private equity investments.
The aim was to measure the absolute and relative carbon footprint of a majority of hol- dings in AP6's investment portfolio, in relation to AP6's ownership. In order to perform an investment carbon footprint, the underlying carbon footprint of each investee needed to be established, both for direct and fund invest- ments. Then, the greenhouse gas emissions were allocated in relation to the respective ownership of AP6. For the underlying green- house gas information, a bottom-up and a top-down analysis approach were combined, in order to establish a trustworthy output at a reasonable effort. South Pole used the carbon data provided by the companies in the portfolio who measure and report their emissions. Approximations were made for the companies that do not report or measure their emissions. Those were based on over 800 sub-sector specific evaluation models, applied to a proprietary greenhouse-gas adjusted sector classification system.
The output was a climate impact report, an analysis tool that AP6 can now feed and gradually enhance with new data, as well as a half-day workshop on investments and climate impact with AP6's investment team.
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