Frameworks for sustainable investments
PFA and the EU’s frameworks for sustainable investments
As part of its work with sustainable economics, the EU has specified frameworks for how to classify, document, advise and communicate about sustainability in relation to one’s financial products, including pension products. These frameworks are described in more detail in the EU’s Disclosure Regulation.
Read moreRead lessHere, ‘sustainability’ must be understood in alignment with the EU rules about when an investment can be called sustainable and, in addition to climate and environmental factors, it also includes considerations for a balanced social and economic societal development. Initially, the EU’s green deal has also resulted in an environmental taxonomy that specifies common standards for when an economic activity can be considered environmentally sustainable..
The EU’s green deal is intended to convert the EU into a modern, resource-efficient and competitive economy by ensuring:
• that there are no longer net emissions of greenhouse gases by 2050 at the latest
• that economic growth decouples from resource consumption
• that no individuals and no areas are left behind
The EU’ frameworks also allow for the use of various degrees of sustainability, ranging from non-sustainable to partially sustainable to fully sustainable financial products. For partially sustainable financial products, they will as a general rule promote environmental or social characteristics in various ways while fully sustainable products have a sustainable investment objective.
So far, PFA has chosen to classify products under both PFA Plus and PFA Climate Plus as partially sustainable financial products. PFA has decided that our products must have a minimum proportion of sustainable investments and report on this as we believe that it supports and confirms the communication of the ambitions that PFA has, particularly in the climate area. In PFA Climate Plus, the minimum proportion in our medium-risk investment profile C is 52 per cent, while in PFA Plus the minimum proportion in the same profile is 6 per cent.
What is a sustainable investment?
The work on classifying whether an investment is sustainable or not can either be done using the rules stated in the EU’s environmental taxonomy or via a method specified pursuant to the Disclosure Regulation which is determined by the manufacturer of a pension product. Currently, PFA has chosen to use the latter solution as it is our assessment that this will provide the truest reflection of sustainability in our pension products when taking into account the product design that we have chosen and the sustainability data that we currently have available about our investments.
For PFA, it is important that our customers can easily see how their investments are used to contribute to addressing the climate challenges. Therefore, the investments’ carbon emissions are the most important measurement point for our methods for the PFA Climate Plus and PFA Plus products pursuant to the SFDR. Beyond this, we also look at our investments’ contributions to realising the 17 UN Global Goals where we have a particular focus on three of the goals: 7, 12 and 13 (read more below). These goals provide a broader framework for sustainability as they do not only take into account the investments’ climate and environmental impact, but also factors such as the companies’ management and contributions to promoting a responsible and socially balanced societal development.
When we use the UN Global Goals to assess the sustainability of our listed investments, this is done using the independent analysis institute MSCI, where the investments are categorised in a 5-point scale from “strongly aligned” to “strongly misaligned” in terms of the 17 UN Global Goals. In relation to the listed investments, we are focused on the following three Global Goals: Affordable and clean energy (Goal 7), Responsible consumption and production (Goal 12) and Climate Action (Goal 13). In order for an investment to be considered sustainable in the PFA Climate Plus and PFA Plus products, it must be “aligned” or “strongly aligned” with at least one of the three Global Goals while also not being “misaligned” or “strongly misaligned” with any of these three Global Goals.
Requirements for climate and environmental impacts when investing in listed shares and corporate bonds
Even though we work with sustainability in a broad sense of the word when investing via the UN Global Goals, the primary focus is, as mentioned, on climate issues and the carbon footprints of companies. To support this, we have designated three types of companies that we believe are particularly relevant in the context of our climate ambitions:
• Solution Leaders: Companies that provide products or services that contribute to reducing climate-related problems. The requirement for these companies is that their positive contribution to the environment amounts to at least 15 per cent of their revenue or that their fixed asset investments and/or operating expenses are a sufficient contribution to the green transition in our assessment.
• Transition Leaders: Companies that contribute to social/environmental goals, have a sustainable source of revenue and are industry leaders in terms of reducing the climate impact of their operations. At the same time, they must either have a CDP score of at least A- (the CDP score specifies the company’s environmental performance) or a Low Carbon Transition Score in the best quintile (which indicates that the company is well-equipped for the green transition in terms of climate risk exposure and climate risk management).
• Carbon leaders: Companies with low carbon footprints. This is measured using MSCI’s Implied Temperature Rise, which estimates which global temperature rise any given company’s activities are associated with. The requirement for these companies is that their carbon emissions need to be low enough to support a maximum temperature increase of 2 degrees Celsius. At the same time, it is a requirement that their carbon intensity is among the lowest 40th percentile on a global level. For banks, a qualitative assessment is also made using external sources such as, for example, the Rainforest Action Network’s analysis of the bank.
It is only companies that match these categories and are also, at minimum, “aligned” with one of the three Global Goals that count as a sustainable investment in the PFA Climate Plus and PFA Plus products. Corporate bonds issued as green bonds that are specifically earmarked to raise funds for climate and environmental products are classified as sustainable regardless of whether the above criteria are met.
Requirements for climate and environmental impacts for other bonds, property and unlisted assets
In addition to listed shares in companies and corporate bonds, our PFA Climate Plus and PFA Plus products also include property investments and securities such as, for example, listed bonds issued by non-corporate entities. To qualify as sustainable, the latter must be issued as a green bond.
In terms of our property investments, the assessment of sustainability is based on whether the properties are sufficiently energy efficient. Energy-efficient buildings are buildings with an ‘A’ energy label. The energy label highlights the building’s energy consumption and shows where it is on an energy labelling scale of A-G, where A is the highest possible ranking.
Beyond real estate, the products also include unlisted investments in things such as infrastructure, transport and renewable energy. The sustainability of these investments is assessed based on whether they are investments in assets that provide products or services that contribute to reducing climate-related problems. For example, this may be investments in wind parks or solar parks.
Assessment of the negative impacts of investments
In order to have a comprehensive assessment of the sustainability of investments, we cannot just look at their positive environmental and social impacts, we also need to consider any potential negative impacts.
In the context of the climate and environment, this is typically about pollution via the emission of carbon or other environmentally harmful substances, the use of scarce natural resources and negative impacts on biodiversity. In the context of social issues, this may include looking at violations of international standards for labour rights or investments in products such as tobacco, controversial weapons or the like that are assessed as being harmful and contrary to the desire for a sustainable societal development. Beyond assessing negative impacts, there is also an assessment of whether the requirements for good corporate governance are met.
For listed companies, we use a number of external data to assess this while for unlisted investments, we mainly use the data and information that we collect ourselves.