Case study: Helping Länsförsäkringar define companies in transition

Länsförsäkringar AB and its subsidiaries are owned by 23 local and customer-owned regional insurance companies across Sweden. Together, they form the Länsförsäkringar Alliance. Länsförsäkringar Liv AB and its Asset Management form the asset owner wing of Länsförsäkringar AB, managing life and non-life insurance assets. Together with Länsförsäkringar’s mutual fund company, the two entities have combined assets under management of $32bn. Länsförsäkringar is an active signatory of the UN-supported Principles of Responsible Investment (PRI), and began using TPI data in its investment activity in 2019.
Länsförsäkringar AB’s Responsible Investment (RI) team, led by Kristofer Dreiman, use TPI data primarily as an ESG integration tool to inform both its exclusion and climate transition lists, which are updated on a quarterly basis by the RI team and approved by the investment committee.
The company has a comprehensive screening policy, based on global standards including the UN Global Compact, OECD Guidelines for Multinational Enterprises and UN Guiding Principles on Business and Human Rights, and excludes sectors such as controversial weapons, tobacco and online gambling.
In terms of climate-related exclusions, Länsförsäkringar screens out selected mining and fossil fuel energy companies which derive more than 5% of revenue from thermal coal or from oil sands. For coal, this bar was initially set at 50% in 2016 but was subsequently lowered to 20% in 2017 and to 5% in 2019, making it one of the most ambitious climate exclusion policies of any comparable asset owner. Companies with significant oil reserves and production, where the prospects for meaningful active ownership are deemed to be insufficient, can also be excluded. During the summer of 2020, Länsförsäkringar also started to implement new climate-related exclusion criteria for conventional oil and gas companies.
Second chance rule
TPI data is used to inform Länsförsäkringar’s definition of “companies in transition”, which are exempted from the climate-related exclusion policies. This “second chance” criteria apply only to energy companies, not to companies whose business model is based on the extraction of fossil fuels.
Kristofer Dreiman explained the logic of this distinction thus: “We want to encourage energy producers and utility companies that have started to move away from fossil fuels, and made a commitment to transition.”
Länsförsäkringar may therefore consider retaining companies with between 5-20% of revenue from thermal coal power generation where TPI’s ‘carbon performance’ metric shows them to be aligned with the Paris Agreement’s 2°C benchmark. For example, US utility company Entergy Corp derives more than 5% of its revenue from coal, but has been assessed by TPI to be on a pathway to align with the 2°C benchmark, and is thus exempted from Länsförsäkringar’s exclusion policy.
Mr. Dreiman explained. “We strive towards implementing more sophisticated exclusion policies and we realised that a static exclusion list based on current performance failed to distinguish between companies which are on a journey towards better climate performance and those which are not. Using TPI data allows us to support those companies which are on this journey.”
Looking ahead, Länsförsäkringar AB has recently taken a board level decision to align its portfolio with the Paris Agreement’s most ambitious benchmark. The ‘climate smart’ vision aims to harmonise its portfolios with a trajectory equivalent to limiting climate change to 1.5° by 2030. It is currently exploring how a broader use of TPI data may help them achieve this goal, for example by using TPI Management Quality data to internally over or underweight particular companies and sectors.
Mr. Dreiman noted that “The range of companies we are exposed to is wider than the range TPI currently assesses, so we welcome TPI’s expansion to cover more companies and sectors. We look forward to integrating this expanded coverage into our investment activity in some form in the near future.”