Climate change drives fund allocation changes

One of Sweden’s biggest institutional investors the AP1 pension fund (Första AP-fonden) is to allocate more to agricultural land and forestry in response to a report into climate change recently published jointly by Mercer and other global institutional investors.

The report – Climate Change Scenarios – implications for Strategic Asset Allocation, launched on 15 February – raised the possibility that investors could face multi-trillion-dollar challenges associated with asset allocation decisions affected by ongoing responses to climate change. Responses include not only the effects felt on the ground, such as increased risks of flooding or drought, but also in areas such as policy responses from politicians, which could lead to further regulations, skewing the values of certain assets.

Första AP-fonden is one of Sweden’s biggest pension fund managers, with assets of about Sek218bn (€24.8bn) invested globally in equities, fixed income, currency and alternative assets.

Andrejs Landsmanis, head of Strategic Asset Allocation at Första AP-fonden, said the results of the report had spurred the provider on to implement further investments in agricultural land and forestry.

“Part of our strategic review consists of an environmental analysis and to the extent that this analysis indicates that we should realign our investments, we will do so,” Landsmanis said

“We have already indicatively determined that we can invest more in agricultural land and timberland. It is consistent with the overall profile we are aiming for and the findings in the report underline this conclusion. We have thus been given an even better argument and basis for making these investments.”

The fund will not, however, become an estate owner of individual properties, he stressed.

Looking forward, the fund will increasingly be taking climate change into account in its allocation decisions.

“We are taking position to the extent that we see climate change as a genuine risk that we need to be aware of our strategic discussions and future investments.”

“It is possible that the cost of oil extraction will increase as a result of higher taxes or stricter requirements in many countries, and the oil companies need to plan ahead so that they can manage these changes and continue earning money. But it is too early to say in detail how this will affect our investments in individual sectors.

“It is part of a large-scale analysis of how the oil companies affect the climate and whether we should take this into account in asset pricing and risks in our portfolio.”

Första AP-fonden has also joined the Institutional Investor Group on Climate Change (IIGCC) a forum for collaboration on climate change for European investors.

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