Climate related risks and opportunities

We are working on assessing different methodological tools that can give us a broad and deep understanding of where and how climate risk might affect individual companies and the portfolio as a whole. The aim of this work is to be able to understand how climate risks could affect portfolio returns.

We are working to develop our own framework to increase our understanding of climate-related risks and opportunities in the investment portfolio. The works has been focused on equity investments so far.

The portfolio’s climate-related risks may be either physical risks or financial risks related to companies’ transition to a low-carbon economy. These risks have different time horizons. Physical risks might be exposure to extreme weather events such as floods, droughts or heat waves. Transition risks include regulatory changes, technological innovations and evolving consumer preferences. The risks we face as an investor are not the same as the risks managed by individual companies. The price of the assets an investor buys, and the degree to which this price reflects climate risks, affects the financial risks.

In line with TCFD recommendations, we are currently working to understand different climate scenarios and their impact on our portfolio. Scenario analyses are useful for exploring the consequences of different actions, whether passive or active. They help us illustrate different outcomes and better understand the processes over long time periods with given levels of uncertainty. We are working on assessing different methodological tools for climate scenarios that can give us a broad and deep understanding of where and how climate risk might affect individual companies and the portfolio as a whole. For example, we look at how possible future regulation in the form of carbon pricing and carbon quotas might impact on different companies, sectors and regions. The aim of this work is eventually to be able to understand how climate risks could affect portfolio returns.

One tool to better understand these risks is to assess the carbon footprint of the investment portfolio.

Carbon footprint

We have been analysing the equity portfolio’s carbon footprint since 2018. This analysis provides an insight into the level of greenhouse gas emissions from the companies we are invested in. It can also provide an insight into risks and opportunities across sectors.

We follow the recommendations for asset managers from the TCFD when calculating the fund’s carbon footprint. We start from the greenhouse gas emissions of each individual company in the equity portfolio, measured as tonnes of CO2 -equivalents. These emission data are supplied by analysis firm MSCI and cover companies’ Scope 1 and Scope 2 emissions. Emissions within Scope 3 are not included in this analysis. At portfolio level, we calculate emissions in three ways – based on holding, revenue and market value. We report emission data at sector level for the equity portfolio and their relevant benchmarks. The equity portfolio contains both global and norwegian equities. Norwegian equities amounts to 25 % of the equity portfolio and include carbon intensive industries such as oil and gas. The global equity portfolio has lower emissions than MSCI ACWI

Issuer Carbon IntensityCarbon Emissions (1M Invested)Coverage
Equity Portfolio164,0418,8373,96%
MSCI ACWI186,9614,6899,42%

This analysis of greenhouse gas emissions provides only a snapshot for 2019, however, and does not take account of companies’ strategy, industry structure and other factors. Reporting on greenhouse gas emissions still varies in frequency and quality. Emission data are generally published in connection with a company’s annual report early the following year. When analysing emission data for 2019, the most up-to-date numbers will therefore come from companies’ annual reports for 2018 published in 2019. In this analysis, considering the extend of the coverage for such calculations is important. Companies not reporting emissions data are modelled using sectoral and regional proxies.

Emission intensity

The companies in our equity portfolio emitted around 164,04 tonnes of CO2 -equivalents for every million dollars of revenue. This is referred to as equity portfolio’s emission intensity. The equity portfolio’s emission intensity is 19 % percent below that of the benchmark index.

The difference can largely be put down to our investments in energy, materials and utilites having a lower emission intensity than the companies in the benchmark index. We calculate companies’ emission intensity by dividing the emissions of an individual company by its revenue. This enables us to compare how much different companies and sectors emit for the same amount of revenue. It is worth noting that emission intensity is affected by changes in the prices of the products companies sell. For example, an oil company’s emission intensity will decrease when oil prices rise, even if the size of its emissions is constant. To calculate the total emission intensity of the companies in our portfolio, we weight each company’s emission intensity by the value of our investment divided by the value of the entire equity portfolio. This is the metric recommended by the TCFD, because it makes it possible to compare emissions across companies, sectors and managers. The results of this analysis are used to inform our investment process and is the basis for an engagement program to address climate risks and opportunities.