Annual Report 2020

The UN Sustainable Development Goals are the framework for KLP’s corporate responsibility work. We aim to be a leader in efforts to achieve those goals, and believe that we can contribute in particular to achieving the climate target, sustainable urban development and infrastructure, a more sustainable business sector, and health-promoting jobs.

Climate change is one of the biggest challenges that we face, and climate-related developments are seen as a significant risk to financial stability. Since 2010, KLP has reduced emissions from its own operations by 82 per cent, and the weighted carbon intensity for our investments has fallen by 55 per cent. KLP’s portfolio has consistently lower carbon intensity than the benchmark indices we measure ourselves against. Much of the decline in emissions from operations from 2019 to 2020 comes as a result of the Covid-19 pandemic, but there has also been a positive trend in reducing emissions in recent years. We are pleased that emissions from KLP’s asset management have been reduced over the past decade, but there is a long way still to go.

KLP’s operations will be developed in line with the 1.5-degree target in the Paris Agreement. That means that emissions should be net zero in 2050. In 2021, to provide a basis for KLP’s climate work over the next ten years, we will set climate goals for the company for 2025 and 2030.

The Paris Agreement is not just about cutting emissions, it is also about increasing climate funding to realize the green transformation, an area where KLP can make a particular contribution. KLP has built up a portfolio of climate-friendly investments over several years, and we will continue to do so. In 2020, we increased our climate-friendly investments by NOK 8.8 billion, well above the target of NOK 6 billion in new investments each year. In all, we have put NOK 52.2 billion, or eight per cent of the pension assets, into climate-friendly investments. Of this, investments in renewable energy amount to NOK 32.7 billion, or five per cent of our total investments. For full details, see KLP Sustainability Accounts. An important part of the work to stop climate change is to restructure much of the world’s energy production from fossil energy to renewable energy, in line with Goal number 7, “Clean energy for all”. As a contribution to this, KLP invests heavily in renewable energy, both in the Nordic region and in the rest of the world.

In September, the consultancy PwC released a report assessing the way in which Norway’s 100 largest companies are working and reporting on climate issues. KLP was placed in the category with the best overall rating and is one of four companies that can show cuts in emissions in line with the Paris Agreement.

Like pensions, investments in infrastructure, social development and real estate are characterised by a long-term time horizon. The investments are important for social development throughout Norway, and closely related to our owners’ commitment to develop and safeguard our society. This work is particularly relevant to Sustainable Development Goal 9, “Industry, innovation and infrastructure”, Goal 11, “Sustainable cities and communities” and Goal 7, “Clean energy”.

KLP aims to continue investing in the green transformation in Norway and is constantly looking for new investment opportunities.

Investments in renewable energy also face resistance in some quarters. In 2020, KLP invested in the Nord-Odal wind farm. This is the first time we have invested directly in a Norwegian renewable energy project. The investment has raised a lot of discussion and made many inquiries. We understand that, but the need for more renewable energy is important, and we believe that, overall, the project balances the necessary concerns for the environment and nature. It is also important to increase Norwegian renewable energy production to support increased electrification and increased demand from emission-free transport, and growth in new green industries.

KLP invests heavily in climate-friendly infrastructure abroad. In 2020, a large solar power facility that KLP has invested in through the Copenhagen Infrastructure Partners fund was completed in Texas, USA. This will produce 246 MW a year, equivalent to the electricity needs of 34,000 Americans. KLP’s investments have helped to complete 25 new renewable energy plants, which produce enough electricity to serve the needs of 7.6 million people.

If we are to meet the climate goals in the Paris Agreement, it is vital to develop more renewable energy capacity. That is especially true in developing countries, where coal is often the first alternative. In order to invest in developing countries, “blended finance” funding solution is often used.

Some of KLP’s investments in renewable energy in developing countries are made through partnerships with public-sector enterprises and public capital. This form of funding is called “blended finance”. Here, development funds are used strategically to mobilize private capital for sustainable development in developing countries. KLP has been making such investments since 2012, and we see this way of investing as an important climate solution. Using blended finance, the pension money has been invested in renewable energy projects which include one of the world’s largest solar farms in Egypt, Mozambique’s first large-scale solar farm, and Africa’s largest wind farm in Kenya.

Going forward, we plan to increase our investments in renewable energy, both in existing funds and with new partners.

As a real estate manager, KLP wants to be in a position to contribute to sustainable urban development. For KLP’s real estate management operations, this meansthat we are working both to reduce greenhouse gas emissions, and on energy saving and reuse. We are committed to safeguarding the urban environment and the quality of life of those who work and live in and around our properties. One of KLP’s buildings, which has been refurbished on the principle that this brings greater environmental benefits than demolishing and rebuilding from scratch, is the “MAX building” outside Trondheim. KLP has converted this into Trøndelag’s first refurbished passive building. Although it is a refurbishment, it has been awarded BREEAM’s top rating of “outstanding”. There are only four other buildings in Norway with this rating.

We care about buildings with good environmental qualities. We define environmental buildings as buildings with energy class A or B. We also use environmental certification according to BREEAM NOR as an important tool for working on sustainability in the property portfolio and are constantly increasing the share of the property portfolio that is environmentally certified. Circular economy and reuse, in relation to our property business, are topics we will be working more on in the future.

In 2020 KLP gave a green loan to Møre og Romsdal county, to purchase electric ferries. Compared with ordinary loans, green loans have a reduced interest rate, and are given to municipalities, counties and enterprises with municipal affiliations. The requirement KLP makes is that the loan must have a clear positive environmental and climate effect. More and more of our owners have projects that meet this requirement, and it will be exciting to follow their development in the years ahead. In addition to green loans, municipalities can apply for support to document climate measures. These could include climate and environmental measures in municipal buildings and mapping the need for water and sewerage capacity in the future.

Sustainability is essential to long-term value creation in business and society. There are many challenges to be addressed, and as a large investor we often use dialogue as a tool.

By entering into dialogue with the companies we have invested in, we encourage them to move towards sustainable operations. To clarify what we as an investor expect from the companies, we have established a document called “KLP’s expectations as an investor” in 2020. These say that the companies in which we invest the pension assets should have profitable business models that do not harm people and the environment but help achieve the world’s goals for a sustainable future. The purpose of the document is to describe how we expect the companies we invest in to work for responsible business and sustainable wealth creation.

Establishing dialogue with companies to bring about an improvement can be challenging. Over the past year, we have been discussing with companies in Brazil which are involved in destroying the rainforest and not safeguarding the rights of indigenous people. These discussions have been demanding. KLP understands that it is hard for these companies, especially when the relevant authorities are not pursuing any clear policy or setting any regulatory requirements that are enforced. But we cannot give up because of this. So far, KLP has had no feedback from companies to reassure us that the risk of severe deforestation will be reduced or that the rights of indigenous people will be safeguarded. Discussions with these companies will therefore continue in 2021. Read more about this work here.

Another example of dialogues is our follow-up of shipping companies we have invested in. We ask shipping companies for confirmation that, when they send ships for scrapping, this will be done in a proper and safe manner. Here it has been encouraging to see that several companies have improved their practice.

These two dialogues are examples of work we do which supports Sustainable Development Goals 14 “Life below water” and Goal 15 “Life on land”.

KLP is an investor which tracks predefined indices as a key element of its asset management. This gives us a huge financial advantage because the risk is being spread, and the pension assets gain access to wealth creation in the equity markets at low risk and low cost. In 2020, KLP also developed a new framework for risk management and due diligence assessment in our investments. The new framework helps us to avoid investments with a high risk of contributing to breaches of international norms, where the companies in question cannot ensure that they have policies and practices in place to reduce this risk. The framework consists of three elements as a basis for excluding companies: country risk, industry risk and corporate risk.

We will continue to implement the framework in practice in 2021. Efforts in Brazil to prevent the deforestation now taking place in the Amazon have been facilitated by this form of risk-based approach.

KLP sees it as a social responsibility to contribute to new growth in Norwegian business across the country. That is why KLP invests some of the pension money in seed funds. These are funds that finance start-ups. The first investment partnership was established in 2018, in collaboration with SINTEF and its Venture V fund. The investments in this fund continued in 2020 too, together with new investments in other funds from other development environments. In this way, the pension assets help to invest in small start-ups growing out of the research and development world.

Over the next few years, we plan to invest NOK 1 billion in seed funds related to development organizations in several parts of the country.

KLP has long been working actively with our owners to create a good working environment in the municipalities, counties and health enterprises. That is why KLP works with a number of customers every year in what we call the “KLP working environment network”. The network is a biennial forum where the participants receive both financial and professional support from KLP. Together we work on projects with customers on topics related to inclusive working life, full-time culture, equality and diversity, and prevention of violence and intimidation. The projects have a common goal; employees should be happy at work. Because when employees are happy at work, they perform better and the employer avoids high absence costs and extra effort to hire temporary workers. People on long-term sick leave also run a greater risk of becoming disabled. This is not socio-economically profitable. Sustainable Development Goal 3, “Good health and well-being” and Goal 8 “Decent work and economic growth” address this.

Sveio municipality was part of KLP’s working environment network from 2018-2020, with a project at Sveio care centre. The challenge they brought to the table was that most employees at the care centre and in the home service worked part-time. Through the project to “Increase core staffingæs jobs” they worked to establish more permanent full-time positions, reducing the use of part-time and temporary workers. They used the temporary staff budget to increase the part-time percentages of the permanent employees, and no other funding were provided by the municipality. The care center saw that having a more stable staff also reduced sickness absence from seven to three per cent, while at the same time job satisfaction increased.

For the second year in a row, KLP organized ”KLP’s Climate Conference for Municipalities”. The aim was to provide the the most important meeting place for municipalities. With them we discussed the industries of the future, and one question we raised was “Is there such a thing as fair climate action?” You can find recordings of the four live streams here (in Norwegian only).

As a way of highlighting local success concerning taking climate action, KLP presented its Climate Prize for the municipalities during the broadcasts. Hamar municipality took third place for Norway’s first circular economy industrial park. Second place went to Vestland county and their project to electrify taxi services in the county. The winning project chosen by the jury came from Hå municipality in Jæren. The municipality has launched a project which aims to use the manure from the many farms in the area to produce biogas. Cow dung is not in short supply in Norway’s largest livestock farming municipality. It is a problem for the municipality to get rid of all the manure, so something had to be done. This will be an effective climate measure that addresses precisely this issue in one of the most important sectors in the municipality.

By using manure to make biogas, they can reduce the impact of livestock farming on nature. Hå municipality received NOK 250,000 for the winning entry.

On www.klp.no you can see the films and stories we have made about the project in Hå municipality, and about the projects that came second and third in KLP’s Climate Prize for the municipalities.

We have established Group guidelines to ensure proper procedures for managing the operational risks posed by financial crime in KLP’s activities. As part of ongoing improvement and development in this area, we are working systematically and holistically with preventive and risk-reducing measures. This is split into three programs:

KLP’s companies subject a statutory reporting requirement are registered with and under the supervision of the Financial Supervisory Authority of Norway. KLP complies with national anti-money laundering and anti-terrorist financing measures, and decisions on sanctions and freezing of assets. We have assessed the risk of money laundering and financing of terrorism in our own activities as the basis for the risk-based approach we have chosen.

The key elements of the Norwegian rules on anti-money laundering and anti-terrorist financing are contained in the Money Laundering Act and regulations. These rules comply with the EU Money Laundering Directive.

KLP is a member of the UN Global Compact, which includes the principle concerning corruption; KLP has zero tolerance for all forms of corruption, and we have clear guidelines and effective measures in place to prevent this within the organization. Policies and measures do not only cover our own employees, but also partners, business associates, suppliers, agents, customers, investments and others who perform elected roles or assignments on KLP’s behalf.

Through a comprehensive anti-corruption program, which constitutes the Group’s overall effort to combat all forms of corruption, we will revise and improve KLP’s policies and measures in 2021. The program will be adapted and will cover risk areas and elements relevant to the Group’s activities and the jurisdictions in which the Group operates.

At KLP, we are committed to fighting abuse, which extends beyond corruption and money laundering to encompass all forms of financial crime. KLP provides financial support to the Norwegian Eco-Forum, which aims to combat economic crime, with a particular focus on cooperation between members and interdisciplinary skills development. Through industry partnerships, KLP are represented in committees within Finance Norway with the aim of strengthening efforts to prevent and detect economic crime.

In national threat assessments, the authorities have warned specifically against information theft, investment fraud, market manipulation, payment fraud and tax avoidance. KLP pays particular attention to these threats and has implemented risk-reducing measures.

Corporate responsibility is integrated into corporate governance at KLP and is a key part of the corporate strategy. All business areas and subsidiaries have a responsibility to implement this and develop their own measures and goals for corporate social responsibility in their own activities. The figure below shows how the management and control of corporate social responsibility is set up in KLP.

Despite a massive commitment from investors, companies, civil society and a united international community, the negative trend in deforestation continues in Brazil. Over the past year, KLP has had dialogue with companies it has invested in and with the Brazilian authorities, but so far without the desired effect.

In the summer of 2020, 29 international investors, including KLP, wrote a letter to the Brazilian authorities demanding a halt to deforestation in the Amazon rainforest. In the letter, the investors express deep concern over the increasing deforestation. This has resulted in several top-level digital meetings.

“It has been exciting to be part of an investor partnership striving to influence the authorities in Brazil. The initiative received great attention internationally, and we felt we were taken seriously by the Brazilian authorities,” says Jeanett Bergan, head of responsible investments at KLP Asset Management.

Will Brazil’s government start to listen to demands for the protection of the Amazon rainforest? That is the big question. The investors’ letter has at least provoked hectic activity in the Brazilian management and desire for dialogue with investors. Bergan hesitates to say whether the dialogue has been effective in bringing about a change in policy.

“If the dialogue can help reduce deforestation and safeguard the rights of indigenous peoples, it is important. It’s too early to say whether that will happen. It is a deliberate policy that is being pursued in the country right now, and investors alone will not be able to turn this around. But if the same pressure comes from many quarters, there is hope for a change of course. It will be important to follow developments further and to continue the dialogue,” she says.

The risk of contributing to deforestation is the same risk associated with all activities that interfere with nature. The rainforest is considered particularly valuable because of its rich biological and species diversity, as well as its size, and is therefore also of importance to the world's climate.. The conversion of valuable rainforest into pasture for cattle, and for soya and palm oil production, is an area that carries a severe risk of deforestation. During the year, KLP mapped the risk of deforestation from its investments. The highest risk in the portfolio is related to companies involved in palm oil and soya production and/or trading. There is also a significant indirect risk related to the financial sector and companies that finance the trading companies. Below is an overview of the companies in KLP’s portfolios that are associated with the highest deforestation risk. The analysis is based on data from TraceFinance.

Over the last few years KLP has followed up on several of the companies and will pursue this work and continue discussions with businesses in 2021.

“It is hard for companies to avoid complicity in severe deforestation when the relevant authorities are not pursuing any clear policy or setting any regulatory requirements that are actually enforced.” So far, KLP has had no feedback from companies to reassure us that the risk of severe deforestation will be reduced,” says Bergan.

Golden Agri-Resources Ltd

Wilmar International Ltd

Kuala Lumpur Kepong Bhd.

First Resources Ltd

Cargill, Inc.

Bunge Ltd

Cargill, Inc.

Archer-Daniels-Midland Co.

Mitsubishi Corp.

Toyota Tsusho Corp.

CITIC Ltd

BRF SA

Sodexo SA

Walmart, Inc.

Bell Food Group AG

BlackRock, Inc.

Morgan Stanley

T. Rowe Price Group, Inc.

State Street Corp.

Mitsubishi UFJ Financial Group, Inc.