By Hamlin Lovell, NordicInvestor

“Climate change risks remain our top priority for resources and have been for the past five years. Whether temperatures rise by 2 or 3 degrees has a huge impact on capital markets, clients and asset owners,” says Gjermund Grimsby, Chief Advisor on Climate Change at Norway’s largest private pension fund, KLP.

He is prioritizing ambitious and credible short term targets for an overall 45% emission reduction by 2030 versus 2022.

There are also asset class specific targets: for instance real estate emissionsshould be reduced by 37% by 2030 and 60% by 2035 relative to 2022 levels.

Other targets

Meanwhile, nature and biodiversity are even more challenging given the specificities around measurement and understanding. “We have nonetheless recently set targets and measures for the major risks,” says Gjermund. “Social responsibility also remains a high priority for our investors” he adds.


Ambitious SBTI Targets

KLP has a net zero target and is working proactively for positive change, collaborating with institutional investors, companies and governments. The strategy has been revised to focus more on transition.

The KLP board has approved the most proactive climate policy: to eventually invest all of the hold-to-maturity bond portfolio in bonds issued by companies with credible science-based targets, or other companies that are clearly part of the solution space, such as renewables. This will take time as the bonds are reinvested upon maturity and it may take 10 years to fully invest NOK 250 billion (EUR 22 bn.) in companies who are approved by Science-Based Targets initiative (SBTi), but the policy is sending a clear signal to companies and markets.

The most important climate metric used is the SBTI and it applies beyond bonds to the whole portfolio. “We want to have 55% of our portfolio companies with SBTI by 2030, and 100% by 2040” says Grimsby.

The SBTI do allow for variations between industries. “We benchmark companies against the best in class in their industry. Some industries have the technology available to cut more rapidly than others,” explains Grimsby.

Engagement

On the engagement side, 35 high emitting sub-sectors accounting for 60% of financed emissions are prioritized. “We may divest if they do not have credible transition plans, and switch to others in the same sector with better transition strategies”.

Engagements are important, especially in relation to Gaza. For example, KLP has unilaterally engaged with Caterpillar, asking them to cease selling to Israeli settlements in the West Bank, which have been declared illegal under international law. Since the engagement has not succeeded, the firm has excluded Caterpillar, because its vehicles are used in the West Bank to clear land for settlements. KLP published an explanation of its decision.

Exclusions –weapons, coal, oil and gas, lobbying and alcohol

“We are active owners. We always choose dialogue before divestment, which is a last resort. Our philosophy is to encourage positive change, and we only divest if we see no will to change,” says Grimsby.

In weapons, KLP excludes controversial weapons that violate basic humanitarian principles, such as cluster bombs and nuclear weapons.

Coal and oil sands were excluded 10 years ago. “We can invest in oil and gas but find hardly any companies aligned with international climate targets. When we divest from the firms which are worst in class, we generally look for better performing companies in the same sub-sector. Since it is challenging to find companies in the oil and gas sector with credible transition plans, we will likely reduce our exposure over time”.

Regardless of SBTI, lobbying activity can rule out some companies: for example, KLP excludes Saudi Aramco because of their close ties to the Saudi Arabian government and their active role against climate policies.

Companies earning above 5% of their income from production of is excluded because KLPs’ owners in municipalities and public health see it as a risk to public health.

Exclusions are reviewed quarterly. If companies develop a credible transition strategy they may become investible again.

External data and reporting

KLP is very dependent on external data and finds that coverage is improving. They focus on forward-looking metrics and ambitions. Data on capital spending is already part of the EU taxonomy and is also getting better.

Web scraping is increasing coverage, but the data also needs to be checked and verified.

“We would like to see a minimum baseline of standardization for data, but this should leave room for additions and other sorts of data,” says Gjermund.

Reporting standards include TCFD, and CSRD is being closely watched. Companies’ self-reported data should improve with CSRD.

“Emissions through the value chain need a lot of work to improve. Uncertainty around supplier emissions increases uncertainty in reported emissions so data quality is a challenge,” points out Gjermund.

Positive impact and outlook

In terms of positive impact, KLP sees “green steel” based on hydrogen as one good example. Elsewhere, high emitters in cement, aviation and maritime industries have more potential to reduce emissions through better technology.

The top two priority areas are transition for high emitting sectors and gradually restricting the bond portfolio to SBTI companies. “We are also looking at financing solutions that target a net increase in nature-based solutions, especially in emerging economies,” says Gjermund