The Paris blacklist: inside AP7’s decision to revamp climate exclusions

AP7, a Swedish pension fund with over $135bn under management, will publish an updated climate action plan this autumn. The update will include a revamped climate exclusion process.

The decision to increase the ambition of AP7’s climate exclusion list was announced in June this year – when four new companies were added to it. The planned changes will align AP7’s portfolio management with its active ownership goals.

Charlotta Dawidowski Sydstrand - AP7’s head of sustainability told Net Zero Investor more about the decision to revamp the fund’s climate exclusion process and what the changes mean for the fund’s investment decisions.

Paris blacklist

On June 13, the fund announced it would exclude two American energy companies - Chord Energy Corporation and Coterra Energy Inc based on their misalignment with the Paris Agreement. In addition, India’s JSW Energy Limited and Brazilian oil and gas firm PRIO SA would be added on similar grounds.

AP7’s climate exclusion list, which effectively removes companies from its investment universe, has been around since the Paris Agreement was signed. The agreement itself forms the basis of the fund’s exclusion decisions.

“When the Paris Agreement was adopted ten years ago AP7 integrated it into our blacklisting process to put pressure on fossil fuel companies to accelerate the climate transition. As circumstances change, we must be prepared to adapt our strategy to achieve that”, says Sydstrand.

Change they did. Sydstrand says geopolitical headwinds have had a negative impact on prior progress. “Global developments, especially Russia’s invasion of Ukraine, have shifted global priorities towards energy security which has negatively impacted some climate strategies, especially within the fossil fuel industry”, she warns.

Transition mandate

The decision to increase the ambition of climate exclusions is part of AP7’s response to changing circumstances.

At the heart of it all, is an attempt to align portfolio management with active ownership. Something the fund’s transition portfolio, launched in 2022, will serve as a model for.

According to its 2024 climate action plan, the transition portfolio will account for 10% of the equity fund by 2027. In 2023, the fund collaborated with Legal & General Investment Management on an externally managed transition mandate. By autumn 2024, AP7 began working on an internally managed equity portfolio, in line with the transition portfolio priorities.

“AP7 has also been changing. We’ve strengthened our integration of stewardship into asset management, with a growing focus on our new transition mandates”, notes Sydstrand.

Phasing out engagement

An alignment with the transition portfolio will mean separating climate exclusions from other exclusion categories, since the latter rely more on reported incidents.

“We are shifting our active ownership efforts to companies that have greatest potential to transition, and we are starting to phase out our engagement with companies where we believe the potential to influence is more limited”, says Sydstrand.

The changes come at the heels of a review of AP7’s climate exclusions conducted earlier this year.

“During the first half of the year, we initiated a review of our climate-related exclusions. Companies excluded for climate reasons will continue to be excluded but will no longer be subject to public blacklisting or engagement dialogues”, she confirmed.

Inclusion

While the fund’s climate blacklist primarily determines companies AP7 will exclude, it could also have an inclusion side effect - steering capital towards companies where progress is being made.

“We will direct our ownership efforts toward companies in our transition portfolio where we see greater opportunities to make an impact”, Sydstrand adds.

Initially, AP7’s criteria for blacklisting (Paris alignment) will remain constant but new factors will be considered going forward.

“Over the coming year, we will also actively evaluate and incorporate the engageability of companies to ensure our stewardship efforts are directed toward those where we can make the most meaningful impact”, she notes.