The 2017 FOEN climate study in brief, and PUBLICA’s response to it
In the context of the Paris Agreement on climate change, the Federal Office for the Environment (FOEN) and the State Secretariat for International Finance (SIF) invited Swiss pension funds and insurance companies to have the climate compatibility of their portfolios measured free of charge in a voluntary and anonymous study. A total of 79 pension funds and insurers took up the invitation. The tests were conducted by the independent think tank 2° Investing Initiative.
The climate compatibility tests were based on 2°C scenarios. They involved comparing the production plans of the portfolio companies with a course needed, according to the International Energy Agency IEA, to meet the 2°C target. The model was developed by an international consortium involving ten research organisations led by the 2° Investing Initiative.
The 2° Investing Initiative’s analysis focused on the sectors responsible for around 70% to 90% of the indirect greenhouse gas emissions covered by the capital markets. Only listed equities and corporate bonds were considered. Real estate and infrastructure investments were not included. The three relevant sectors – energy, basic goods and utilities – account for just under 7% of PUBLICA’s total portfolio assets. Automobile manufacturers make up approximately 0.8%.
The 2017 study results
Taking account of unlisted infrastructure investments in renewable energies, PUBLICA’s portfolio beats the 2°C benchmark. Among listed investments, PUBLICA has a higher proportion of coal producers than the benchmark, though less than the average of Swiss pension funds.
For the 2° Investing Initiative, the energy sector is a combination of companies from the energy and basic goods industries. As regards energy companies, PUBLICA’s portfolio scores slightly better than the 2°C benchmark overall. Although PUBLICA has excluded coal producers from its portfolio, it still contains a slightly higher proportion of them than the benchmark. This is due to investments in large mining companies that are also involved in coal production. However, since these firms mine a broadly diversified range of materials and most have defined a strategy to address climate risks, they are in a position to adapt their business model to changed circumstances.
Transport sector, in particular automobile manufacturers:
PUBLICA’s portfolio scores better than the average of Swiss pension funds when it comes to the 2°C benchmark, but is significantly underweighted in manufacturers of electric and hybrid engines. This is due to the lack of alternatives among listed investments. Currently, the US firm Tesla is the only manufacturer solely producing cars that do not use internal combustion engines. However, most traditional auto makers have responded to more stringent consumption regulations in the EU and US by adding hybrid and electric vehicles to their ranges. PUBLICA expects this trend to accelerate, leading to a marked reduction in the proportion of internal combustion engines over the coming years. The shift is being driven by a combination of regulatory incentives for electric vehicles, expansion of the power network and technical progress in battery performance.
- PUBLICA has decided to implement the following measures:
- An in-depth analysis of climate-related transition risks will be carried out.
- Based on the Federal Council dispatch on the total revision of the CO2 Act, PUBLICA’s portfolio will be assessed for climate compatibility at regular intervals. The aim is to encourage standardisation of reporting that will, in turn, assist financial institutions in the development, definition and implementation of targets with regard to the 2°C climate goal and in managing the risks associated with decarbonisation of the economy.
- PUBLICA will foster dialogue with companies on the opportunities and risks linked to climate issues. As a long-term investor, it is very much in PUBLICA’s interest for firms to devise and implement strategies and measures to manage transition risks and physical risks.
- PUBLICA Asset Management takes the climate-related risks to the portfolio seriously and is committed to communicating concerns and analyses to PUBLICA’s stakeholders.