01 April 2015
Pension funds are generally staid and conservative. But as CEO of the Fourth Swedish National Pension Fund (AP4), Mats Andersson has not been afraid to stick his head above the parapet.
The softly spoken Swede has been a driving force behind the Portfolio Decarbonisation Coalition (PDC), which aims to significantly reduce the carbon intensity of $100 billion of institutional investors' investments, and disclose the carbon footprint of $500 billion of investments by the Paris climate summit in December.
The initiative is a partnership between AP4, Europe's largest asset manager Amundi, NGO the CDP (formerly known as the Carbon Disclosure Project), and the UN Environment Programme's Finance Initiative (UNEP FI), all of which deserve recognition for their work.
But it is Andersson who scoops this year's award, for his active role in promoting the initiative.
He used Ban Ki-moon's September Climate Summit to launch a rallying call to the wider investment community.
And he has put AP4's SEK276 billion ($38.6 billion) of assets under management where his mouth is, by beginning the process of decarbonising all of its equities portfolio.
AP4 measured the carbon intensity of its equities portfolio at the end of 2014, and found it was 28% lower than the MSCI World.
AP4's work was acclaimed by renowned economist Nicholas Stern. Speaking at a Bank of England conference, he described its approach as "a much more intelligent way of motivating behaviour than divesting out of oil, which is like a blunderbuss".
AP4's work was acclaimed by renowned economist Nicholas Stern
If the PDC meets its target ahead of the Paris climate change summit, it would play an important role in helping to demonstrate that the finance community is 'stepping up to the plate'.
Andersson feels confident the target can be met, and the PDC is scaling up. Investors with $35 billion of assets have so far signed up.
"We are getting there slowly but surely, new members are coming in," Andersson tells Environmental Finance. "We are doing our best to shed some light on what we are doing when we meet other pension funds."
Andersson makes the case that decarbonisation is in-keeping with fiduciary duty. The carbon intensity of portfolios can be reduced without significant sacrifice to performance, he argues.
And decarbonisation has the potential to safeguard portfolios against significant downside risk that fossil fuel assets are left 'stranded' by the shift to a lower carbon economy. In other words, that carbon intensity is not currently being adequately priced into valuations, and a correction in the market could hurt investors.
Andersson likens decarbonisation to a free option that carbon is currently mispriced.
At the end of last year, AP4 had more than $1 billion of its global equities portfolio in low-carbon strategies. Emboldened by their solid performance, Andersson has announced his intention to move AP4's entire $20 billion of equities into similar strategies, hopefully "within two or three years".
AP4 started to decarbonise in 2012, by using the S&P500 index and excluding on a sector-neutral basis one third of all companies using data from environmental analysis firm Trucost.
The results, so far, have been promising. A fund launched by BlackRock to track the portfolio of 'carbon efficient' US firms has outperformed the wider S&P500 by 10 to 15 basis points since inception, says Andersson. The tracking error of the US portfolio is 0.7%.
In October 2013, Chicago-based fund manager Northern Trust was asked to repeat a similar strategy for AP4's emerging markets portfolio.
It will next be rolled out to AP4's shares in 'Asia Pacific excluding Japan' and then to Europe.
After decarbonising its equity portfolio, Andersson will turn his attention to fixed income. EF