2024 Canadian Pension Climate Report Card
Andra AP-fonden (AP2)
OVERALL SCORE
A-
Climate Urgency
A
Climate Engagement
A-
Climate Integration
B
Fossil Fuel Exclusions
A
Interim Targets
B
Paris-Aligned Target
A-
The 2024 Canadian Pension Climate Report Card analyses, assesses and ranks the progress made by eleven of Canada’s largest pension managers and two international pension managers in their approach to climate risk and investment decisions as they relate to the climate crisis. The report is based on publicly available information to December 31, 2024.
AP2 is one of five AP buffer funds in the Swedish national pension system, which together manage any surplus in the system contributions after that year’s pensions are paid. The purpose of the buffer funds is to make the pension system more stable and bridge short-term imbalances over time. AP2 exposes that surplus to the financial markets, investing in a diverse range of assets globally, and is known for its commitment to sustainable investment practices.
Assets Under Management (AUM) by APG: SEK 445.84 billion ($57.39 billion CAD) (June 30, 2024)
Based on improvements in a number of areas, AP2’s overall score increased from B+ to A- since Shift first analysed the fund for the 2022 Canadian Pension Climate Report Card.
AP2 is a member of the Paris Aligned Asset Owners (PAAO) and has committed to a net-zero portfolio by 2045, setting ambitious absolute reduction targets for 2025 and 2030. The addition of interim emissions reduction targets has increased AP2’s score on the Paris-aligned Target and Interim Targets indicators.
AP2 had previously implemented the EU Paris-Aligned Benchmark (PAB) in its public equities and corporate bonds portfolios. These portfolios target a 7% reduction in emissions intensity each year.
Despite not having an explicit public financial target for green investments, AP2 has reported SEK 38.9 billion (approximately $5 billion CAD) invested in “targeted sustainability investments”. A public allocation target would improve AP2’s accountability on this front.
AP2 clearly communicates that it is embracing its role and responsibility as a major asset owner in achieving a safe climate. In 2024, AP2 increased its score on Communication of Climate Urgency through its clearer articulation of double materiality: that its investments and stewardship decisions are affected by climate outcomes, and that its investments and stewardship decisions can affect climate outcomes.
AP2 sets strong expectations for external managers and through its proxy voting guidelines, and has increased its score on Climate Engagement through clarity on these expectations. AP2 has yet to disclose a timebound and escalatory process for its climate engagements.
AP2 has exclusions, based on revenue thresholds, for coal, oil and gas companies and the fund excludes power companies that generate more than 50% of their revenue from fossil fuel combustion.
AP2 is a member of the Paris Aligned Asset Owners (PAAO) and has committed to achieve a net-zero emissions portfolio by 2045, including scopes 1, 2 and 3. By setting interim targets and planning to achieve real world emission reductions, AP2 has increased its score to an A on this indicator.
For a comparison of AP2’s targets with respect to Canadian pension managers, see this report’s Table 1: Emissions Reduction Targets (total portfolio) and Table 2: Additional Climate-Related Targets.
DETAILS
AP2 is a member of the Paris Aligned Asset Owners (PAAO) and has committed to achieve a net-zero emissions portfolio by 2045, including scopes 1, 2 and 3. The fund has set ambitious interim targets to reduce scope 1 and 2 absolute emissions by 35% by 2025 and 55% by 2030, below 2019 levels, across the entire portfolio.
AP2 explains that “The Fund’s goal is for the entire portfolio to be in line with the Paris Agreement, meaning for the portfolio’s greenhouse gas emissions to decrease at a rate that can limit global warming to 1.5 degrees. The Paris Agreement stipulates that net zero emissions shall be achieved by 2050 at the latest. Since Sweden has committed to a steeper reduction, with net zero emissions as early as 2045, AP2 believes that this target should also apply to the Fund.”
AP2 is tracking real world decarbonization and adjusting accordingly: in 2019 the fund began reporting the proportion of changes to its portfolio carbon footprint from shifts in company holdings versus actual emissions reductions. Where the fund sees that reductions are primarily coming from changes in holdings rather than from companies decarbonizing, it uses that to inform engagement, intensifying “its engagement work with high-emission companies.”
AP2 states that “The Fund defines net zero emissions as the portfolio’s greenhouse gas emissions falling to as close to zero as possible. Remaining emissions can be offset by equivalent, permanent eliminations of emissions through verified, owner-determined emission reductions.”
Since Shift’s last analysis of AP2, the fund has set ambitious interim targets to reduce absolute scope 1 and 2 emissions below 2019 levels by 35% by 2025 and 55% by 2030. Despite not having an explicit public financial target for green investments, AP2 reports SEK 38.9 billion (approximately $5 billion CAD) invested in “targeted sustainability investments”.
For a comparison of AP2’s targets with respect to Canadian pension managers, see this report’s Table 1: Emissions Reduction Targets (total portfolio) and Table 2: Additional Climate-Related Targets.
DETAILS
Emissions reduction
AP2 has set ambitious interim targets “to reduce greenhouse gas emissions by at least 35 per cent by 2025 and by 55 per cent by 2030” below 2019 levels, stating that, “In order to succeed in reaching net zero emissions by 2045, AP2 should aim for a significant reduction by 2025 and 2030.
AP2’s Climate Plan specifies: “According to research, emissions reductions need to come quickly, reducing approximately by half every ten years, to limit global warming to 1.5 degrees. Since AP2 has set the goal of reaching net zero before 2045, the Fund should also aim for a substantial reduction already by 2030.”
AP2 has implemented the EU Paris-Aligned Benchmark (PAB) for its internally-managed global equities and corporate bonds (which comprise 42% of AUM). “Following the launch of this index in 2020, which resulted in a halving of emissions in the portfolios concerned, the criteria for the index stipulate that the portfolio’s total emissions should continue to decline by an average of 7 per cent per year.”
In 2023, AP2 reported its total absolute financed emissions, including scope 3, at 5.4 million tCO2e – a 48% reduction from the 2019 baseline.
Recognizing that portfolio emissions reductions must be accompanied by reductions in real world emissions, in 2019 the fund began reporting the proportion of changes to its portfolio carbon footprint from shifts in company holdings versus actual emissions reductions.
Green investments
As part of AP2’s recognition that “major investments are needed to create a fossil-free society,” AP2 has developed a framework to identify “targeted sustainability investments” linked to the UN’s Sustainable Development Goals.
The market value of the fund’s targeted sustainability investments at year-end 2023 was SEK 38.9 billion which includes sustainable infrastructure, Swedish listed cleantech equities, timberland that satisfies ten criteria for sustainable timberland investments, certain private equity funds with a clear focus on sustainability, and green and social bonds. The fund also notes that “Since 2020, AP2 has made a strategic allocation to sustainable infrastructure, assets that contribute to sustainable development in line with the Paris Agreement. So far, the Fund has made nine investments totalling approximately SEK 9 billion” ($1.18 billion CAD). Despite these investments, AP2 has not yet set explicit financial targets for investment in climate solutions.
Portfolio climate alignment
AP2 states that “Andra AP-fonden’s portfolio must be in line with the Paris Agreement by 2025. This means that for each asset class there must be a credible and relevant plan for reducing the greenhouse gas emissions from the assets to net zero in accordance with the Paris Agreement.” AP2 reported that “In 2023, AP2 continued to work on climate plans for the Fund’s various asset classes. In total, there is now a plan to reduce emissions in line with the Paris Agreement for 76 per cent of the portfolio, compared with 70 per cent in 2022.” For portfolio companies, AP2 states that “Companies must report “a clear climate plan that outlines how the company will achieve emission reductions, with sufficient measures to reach emission targets.”
Deforestation and Biodiversity
Alongside climate, another of AP2’s focus areas is biodiversity, and AP2 has set two targets which will complement its climate targets: by 2025 AP2 must have a portfolio that does not contribute to deforestation, and AP2 will “contribute to a net positive impact on nature” by 2030 at the latest.
AP2 clearly communicates that it is embracing its role and responsibility as a major asset owner in achieving a safe climate. AP2 increased its score on this indicator to an A through its clear articulation of double materiality, “considering not only the risks of the Fund’s investments being subject to climate and nature impacts, but also that the Fund’s investments have an impact on the world at large.”
DETAILS
AP2 acknowledges the climate crisis as posing risks both to its portfolio and the financial system as a whole, stating that climate changes “are likely to have a significant impact on the living conditions of future generations and also on the Fund’s returns and achievement of its objectives.”
The fund recognises that:
“work on sustainability issues requires a long-term approach – there are few quick solutions. This is also why it is appropriate for long-term investors like us, with an investment horizon of 30 years, to integrate these issues into our management of pension capital. This is how we can really contribute to change.”
AP2 acknowledges that:
“the consequences of climate change are both extensive and complex. Major climate change can occur suddenly when a critical point is reached, and can also trigger a domino effect with further negative consequences. The transition to net-zero economies will involve major societal changes.”
AP2 recognizes that:
“major investments are needed to create a fossil-free society,” adding that both energy and transport systems “need to undergo a rapid transition from fossil fuels to renewable sources.”
In 2020, AP2 made the decision to end investment in coal, oil and gas companies in order to align with the Paris Agreement, stating that “the world must stop relying on coal, oil and other fossil fuels and switch to wind, solar and other renewable sources in order to achieve sustainable global development in line with the Paris Agreement.”
AP2 not only recognizes but uses as a starting point for its reporting the concept of double materiality:
”AP2 applies the principle of double materiality to its sustainability work, including risk management and reporting... This entails considering not only the risks of the Fund’s investments being subject to climate and nature impacts, but also that the Fund’s investments have an impact on the world at large.”
Examples
“Climate change is ongoing and is caused by human impacts. The atmosphere, the sea, the polar ice caps and the Earth’s living organisms are affected and are changing at a pace that is unprecedented in history. All inhabited areas on the planet will be affected by climate change, including extreme weather conditions and changing precipitation patterns.”
“Climate change constitutes a serious systemic risk with a significant impact on the assets of the AP Funds and a negative impact on current and future generations.”
AP2’s score on this indicator has increased to an A due to its strong climate expectations, as expressed through its own commitment to Paris alignment, its expectations for external managers, and its proxy voting guidelines. AP2 could provide more disclosure on the timebound outcomes it is targetting with its own escalatory engagement process.
DETAILS
Expectations and escalation
Portfolio companies
AP2’s Paris-aligned target, PAAO membership, and inclusion of Paris alignment in its Sustainability Policy all provide signals to owned companies regarding its climate-related expectations. AP2’s webpage Expectations of portfolio companies, includes “Net zero commitment by 2050” and “Targets for emission reductions”, alongside reporting requirements for scope 1, 2 and 3 for both absolute emissions and emissions intensity. Companies must report “a clear climate plan that outlines how the company will achieve emission reductions, with sufficient measures to reach emission targets” as well as providing “a clear picture of the company’s capital allocation towards net zero by 2050”. AP2’s Voting Guidelines state that “AP2 expects companies to work actively on sustainability issues.
Proxy Voting Guidelines
AP2’s Voting Guidelines from December 2023 state the fund “advocates that companies express their support for, and draw up a strategy to be in line with, the Paris Agreement” in addition to reporting in accordance with the TCFD framework.
Further, the Voting Guidelines say that companies “shall specify explicit goals, means and action plans for how the sustainability policy is implemented and maintained. Companies shall prepare a report on this work at least once a year.”
The fund generally votes to support proposals “that entail requirements concerning the reporting of information related to climate… that facilitates shareholders' assessment of the risks associated therewith”.
The Voting Guidelines make it clear that remuneration should be tied to sustainability targets: “AP2 believes that strategic work with sustainability issues is a prerequisite for a company’s long-term sustainable value creation and return and will form the basis of the Fund’s voting regarding proposals for incentive programs.” It adds: “Sustainability issues that are significant to the company’s long-term financial development must therefore be reflected in the compensation programs.” The fund, however, should go further and link climate-specific targets to remuneration. It goes on to say that in relation to management remuneration, AP2: “Intends from 2024 to vote against proposals for incentive programs where, for operations, relevant sustainability issues are not reflected in the programs.”
The fund is engaging companies to get real world emission reductions. In 2019, the fund began reporting the proportion of portfolio emissions reductions from shifts in company holdings versus actual emissions reductions. Where the fund has seen that companies’ real-world decarbonization is marginal, it focuses its engagement: ”to help drive this change the Fund intensified its engagement work with high-emission companies.”
Engagement and escalation example
In 2022, AP2 (along with other investors) formulated a shareholder proposal for Volkswagen calling for “clarifications on how the company’s lobbying contributes to driving the climate issue forward.” This issue with Volkswagen was escalated, with AP2 reporting in its 2022 Sustainability Report that “the company’s reluctance to submit shareholder proposals concerning climate lobbying to the AGM has resulted in a legal summons from several institutional owners, including AP2.” AP2 should continue disclosing similar examples of escalation and engagement.
External managers
AP2’s webpage Expectations of external managers sets out stringent expectations for external managers to commit to net zero by 2050 or earlier for the portfolio. In terms of transition risks, external managers are expected to work with their portfolio companies to ensure there is a “Robust plan to reach net zero, SBTi-adjusted or equivalent. All portfolio companies [are] to have credible plans to reduce emissions.” There is a further reporting expectation of “absolute emissions, for scope 1, 2 and 3” as well as TCFD reporting being “not required but encouraged”.
AP2 carries out “annual evaluation” of the sustainability work of external managers using “a model based on PRI’s framework for due diligence, follow-up and dialogue” on the basis of 25 different assessment points. In accordance with AP2’s new biodiversity and human rights policies, the fund also has “updated due diligence processes for new managers” on sustainability.
Collaborative engagement
AP2 is actively involved in Climate Action 100+ and is leading the dialogue with AB Volvo. “During the year, the dialogue with AB Volvo focused on the company’s climate plan and the pathway to net zero emissions, climate lobbying and the Just transition framework.”
Through its membership in the Institutional Investors Group on Climate Change (IIGCC), AP2 collaborates to engage companies, authorities and other investors to highlight long-term risks and opportunities from climate change. AP2 reports that it uses the following IIGCC frameworks and initiatives:
Paris Aligned Asset Owners;
Net Zero Investment Framework;
Climate Action 100+; and
Net Zero Engagement Initiative.
The Net Zero Engagement Initiative, launched in March 2023, is an investor-led initiative that builds on investor engagement beyond the Climate Action 100+ focus list (of 166 companies that account for 80 per cent of global industrial emissions). “During the year, 107 companies received letters and were then contacted for dialogue. The most important recommendations for the transition plan are that the companies have 1) a commitment to net zero emissions, 2) adjusted emission targets, 3) reported emissions and 4) a credible strategy for decarbonisation. Together with other investors, AP2 leads dialogues with five of the companies in the initiative.”
According to AP2’s website “AP2’s dialogues are followed up with several KPIs (Key Performance Indicators) in order to monitor and compare progress in the dialogues.”
Climate transition is one of the focus areas for the AP funds’ Council on Ethics – a collaboration between the AP funds to jointly influence companies to sustainable value creation and transparent reporting. The Council on Ethics has a particular focus on high-emission industries, and metal and mineral extraction. “The global mining industry plays an important role in supplying the raw materials deemed necessary to achieve a climate transition. It also faces extensive sustainability challenges.” The AP funds’ Council on Ethics is therefore participating in the Mining 2030 initiative and has been part of its steering group since 2023. On its website, the Council of Ethics spells out the timeframe for escalatory dialogues: “The Council will recommend the AP Funds to exclude companies where we do not reach the desired outcome within maximum four years.” Dialogues were conducted by the Council of Ethics on behalf of the AP funds with 76 companies in 2023.
Policy engagement
The fund recognizes that “AP2 can contribute to the transition by being an active owner. This takes place through engagement, primarily dialogues with both companies and decision-makers.” In order to “support the transition, political measures and commitment are also required, where institutional investors such as AP2 have an important role to play.”
For example, AP2, alongside over 600 international investors, supported the 2024 Global Investor Statement to Governments on the Climate Crisis, which “calls on governments to increase their climate policy measures and, among other things, more direct climate regulations are demanded for both the financial sector and real economy companies.”
AP2 is a member of the Paris Aligned Asset Owners (PAAO). The fund provides excellent disclosure and transparency of both its holdings and emissions, and is showing improvement over time in its GHG reporting. The board has no fossil fuel entanglement. However, executive remuneration lacks a clear compensation link with the fund’s climate targets, and the fund lacks a clear statement that Board members must have climate expertise. Still, there is significant evidence that climate is integrated throughout the fund even without these elements being specified. Disclosing such requirements will afford greater clarity and accountability.
DETAILS
Accountable Paris-aligned membership
AP2 is a member of the Paris Aligned Asset Owners (PAAO).
Transparency and disclosure of holdings
AP2 discloses its public equity and fixed income holdings and their valuations twice per year, and its non-listed equity, participations and loans once per year. This information is posted on the Holdings section of AP2’s website.
Climate disclosures and climate risk
AP2 reports on its climate progress in two annual reports, a Climate and Nature Report in accordance with the TCFD and TNFD recommendations and its Sustainability Report, because “the Fund believes it is important to be as transparent as possible regarding the portfolio’s emissions.”
Portfolio carbon footprint
AP2’s carbon footprint covers around 70% of AUM and includes scope 1, 2 and 3 emissions.
In 2024, the fund reported its financed emissions for all asset classes (broken down into equities, separating Swedish and foreign, foreign corporate bonds, government bonds, unlisted real estate, farmland, timberland and sustainable infrastructure) and including scope 1, 2 and 3 emissions.
“AP2 uses a large number of metrics to analyse the climate footprint, risks and opportunities within different asset classes. These include emissions, in both absolute terms and intensity, reasons for change (change in portfolio and companies’ emissions, respectively), as well as indicators to assess companies’ and managers’ alignment towards net zero emissions.”
For listed equities, the fund measures and reports on the basis of three different approaches to demonstrate different aspects of climate risk and to be able to monitor developments “both in absolute terms and relative to the portfolio companies’ revenue and the value of the portfolio.” The fund reported the carbon footprint of the listed equity portfolio broken down between Sweden, developed markets and emerging markets, with scope 3 reported separately from scopes 1 and 2.
AP2’s carbon footprint disclosure separates emissions reductions resulting from changes in company holdings from emissions reductions resulting from portfolio company decarbonisation, breaking down its carbon footprint disclosures to make the data more meaningful. “The graph on the next page presents the reasons for the change in total carbon emissions between 2022 and 2023 for AP2’s listed equities portfolio. The calculations relate to emission data from Scope 1, 2 and 3, expressed in millions of tCO2 e. The graph shows that most of the decrease can be attributed to changes in the Fund’s holdings.” By splitting the causes of carbon emission reductions in 2023, it becomes clear that “most of the decrease can be attributed to changes in the Fund’s holdings. The companies’ contribution to the reduction is marginal, which clearly shows that significantly greater reductions in the companies’ emissions need to take place in the coming years. During the year, to help drive this change the Fund intensified its engagement work with high-emission companies.”
Climate scenario analysis
In its Climate and Nature Report, AP2 explains that it has used IPCC-informed outlooks and “conducted an overall scenario analysis in which physical and transition risks are estimated on the basis of two scenarios: a scenario with an orderly transition and global warming of 1.5°C, and a “hothouse” scenario with global warming of 3°C. In both scenarios, the physical risks are significantly higher for the Fund than the transition risk.” AP2 has a lower transition risk than a comparable index as it has “worked for a long time to reduce” transition risks, including through implementing the EU Paris-Aligned Benchmark.
Board climate expertise and/or fossil fuel entanglement
AP2 does not appear to have a public board competency framework and has identified no Board members as having climate expertise. No Board members appear to have fossil fuel entanglements. According to AP2’s 2021 Sustainability Report, Board and staff members receive training in sustainability topics including climate.
Executive compensation and climate
There is no indication that AP2’s executive and staff compensation is tied to the achievement of climate targets, although the Climate and Nature Report in accordance with the TCFD and TNFD 2023 states that “All management team members have a responsibility to take climate and nature issues into account, according to their various roles.”
AP2 has exclusions, based on revenue thresholds, for coal, oil and gas companies; additionally, AP2 excludes power companies that generate more than 50% of their revenue from fossil fuel combustion.
For a comparison of AP2’s exclusions with respect to Canadian pension managers, see this report’s Table 3: Fossil Fuel Exclusions. For a list of all of the disclosed fossil fuel investments held by Canadian pension funds analysed in this report, see this report's Table 4: Fossil Fuel Investments.
DETAILS
AP2 has aligned its internally managed global equities and corporate bonds portfolios (approximately 42% of AUM) to the EU Paris-Aligned Benchmark (PAB).
These portfolios:
exclude investment in companies that receive more than 1% of revenue from coal;
exclude investment in companies that receive more than 10% of revenue from oil;
exclude investment in companies that receive more than 50% of revenue from gas; and
exclude investment in power companies that receive more than 50% of their revenue from combustion of fossil fuels.
These exclusions resulted in the divestment of 250 coal, oil, gas and utility companies (2021 Annual Report, p.43). AP2 reported in its Sustainability Report 2023 that an “example of an asset class in which the Fund during the year has divested from adverse climate risks is the Fund’s global equities and corporate bonds.” Each year, “these portfolios are reviewed and a decision is made as to whether AP2 wants to retain the exposure to companies with a high transition risk.”
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