Corporate responsibility

KLP’s engagement in the field of corporate responsibility covers a wide field, across many of the UN Sustainable Development Goals (SDGs). Here, we present a selection of the topics we have worked on in 2021.

Climate-related goals for the investment portfolio

In many ways, 2021 was “a year of climate”. It was also the year when the net zero movement gained real momentum among financial investors. KLP is part of this movement. We have long supported the Paris Agreement’s goal of restricting global warming to less than 1.5 degrees Celsius (1.5C target). In 2021, we set a net zero goal for all our investments to help the world succeed in reaching the objectives set out in the Paris Agreement. When KLP sets a climate goal, we do so for and on behalf of our owners. Then they can feel confident that their pension funds are being managed in a secure and competitive way that also contributes to the world reaching its climate goals.

Roadmap to Paris

Our goal is for all investments to have emission levels compatible with the world achieving net zero by 2050. To this objective, KLP has developed its own roadmap based on internationally established standards and best practice. The roadmap describes how we will work towards the Paris Agreement and how we will assess whether our investments contribute to achieving the 1.5C target.

As a key reference point in our roadmap, we have developed the Paris Alignment Percentage (PAP), which describes the percentage of KLP’s investments that are in line with the 1.5C target.. When we calculate our PAP, we divide our investments into four categories:

Green investments – Companies and projects with zero or almost zero emissions, and which we know are aligned with the Paris Agreement.
High-emission sectors – Sectors deemed to produce high emission levels, and where acknowledged reference pathways have been established, enabling emissions from individual companies to be compared with the requirements of the Paris Agreement.
Other investments – Investments for which there are no acknowledged reference pathways, where we use other methods to calculate the degree of alignment with the Paris Agreement.
Investments without data – An important principle in our framework is to include all relevant investments in the climate goal. If we do not have data on an investment, we automatically assume it has zero Paris alignment and place it in a separate category.

Our goal of adapting our investment portfolio to the 1.5C target consists of several sub-goals:

Increase climate-friendly investments by at least NOK 6 billion per year.
Set strategies and goals that ensure high-emission sectors meet the Paris Agreement’s targets by 2025.
Ensure that emissions are reduced by 7 per cent per year from 2019 to 2030 and compare the climate-related goals of the companies we invest in against the appropriate mitigation pathway.
Have net zero-emissions from our investment portfolio by 2050.

It is vital that the corporate sector strives towards the same goals. We therefore wish to contribute to the development of knowledge and establishment of good climate-related practices in both the financial and other business sectors. Our approach to net zero is thus built on one of KLP’s core values – transparency. Transparency about companies’ net zero emission targets is vital if the Paris Agreement’s objectives are to be realised, because business enterprises must learn from each other and KLP’s stakeholders must understand what we are doing to keep global warming below 1.5C. Hence, in the interests of transparency, we have published our entire roadmap to net zero emissions on our website.

KLP tightened up the weapons-related exclusion criterion in 2021

All KLP’s investment decisions must comply with its Guidelines for KLP as a Responsible Investor. The objective of these guidelines is to ensure that KLP acts as a responsible investor and shareholder. This means that KLP aims to fulfil its obligations as a signatory to the UN Global Compact and Principles for Responsible Investment, contribute to sustainable development in line with the SDGs and provide its owners with a competitive return on investment over time.

There are four key aspects to KLP’s sustainable investment practice. We integrate sustainability factors in our investment analyses and decision-making processes, and we are an actively engaged and responsible owner. This means that we try and influence companies to engage in sustainable value creation, and always hope to resolve challenges through dialogue. Sometimes, however, this is not enough. In such instances, we are obliged to use stronger measures, such as excluding companies from our investment portfolio. We have clear criteria for exclusion. These are both behaviour-based, such as human rights abuses and environmental damage, and product-based, such as weapons, coal and tobacco. We are open about our decisions. The final aspect of our approach to sustainable investment is that we have a separate portfolio of impact investments, whose object is to contribute to sustainable development in low-income countries, as defined in the SDGs.

In the autumn of 2021, KLP’s board of directors made two changes to the company’s weapons-related exclusion criteria. These changes mirror changes in the ethical guidelines governing the Norwegian Government Pension Fund Global (GPFG). KLP has, for many years, excluded companies that can be linked to nuclear weapons for many years. Now we have further restricted what we accept in the way of investments in weapons-related business operations.

One change is that the exclusion criterion now applies to both the development and production of weapons, as well as the production of key weapons components. The line KLP has drawn may be summarized thus: the terms “production” and “weapons” shall be understood broadly and include all assembly of the weapons themselves and their key components. The term “weapons” also includes systems and platforms intended for use in connection therewith, as well as related systems and components.

The other change relates to the sale of weapons to states engaged in armed conflicts which use them in ways that constitute serious and systematic violations of the rules of combat laid down in international law. This change also reflects the new GPFG guidelines.

New regulations – a paradigm shift for the financial sector

The EU and Norway have adopted new regulations and regulatory amendments, and more are in the pipeline. This represents a paradigm shift for the financial sector. Previously, KLP and other investors were not required by law to invest responsibly and sustainably. Those that did, chose to do so voluntarily under the impetus of other drivers. While the new statutory provisions largely establish disclosure requirements, they also formalize requirements for the management of sustainability risk. KLP considers this to be a positive move. We believe it will accelerate the pace of change, since the entire sector is now focusing its attention on sustainability.

We consider the following requirements to be the most relevant for KLP:

1. The EU’s Taxonomy Regulation

This EU classification system sets out the criteria that must be met before a particular economic activity, based on research and best practice, may be considered sustainable. In addition, the system contains reporting requirements.
This will encompass KLP, KLP Banken and KLP Skadeforsikring. KLP Kapitalforvaltning is covered as a financial market participant (a business that provides investment service and products). In addition, KLP Skadeforsikring may assess its business against expected criteria for climate-related damage. Property companies have also been given criteria for assessing sustainability.

2. Sustainable Finance Disclosure Regulation (SFDR)

This imposes disclosure obligations on financial market participants and financial advisers. Such undertakings must disclose how sustainable risk considerations are integrated in risk assessments and advice, and any negative consequences of their investment decisions.
KLP Kapitalforvaltning is covered as a provider of securities funds. In our opinion, KLP is not covered, since KLP is not a financial market participant as defined in the regulations because KLP does not provide the products covered by the regulation. Pension funds are, however, covered. Since the majority of our competitors will be covered by the regulation, we feel it correct of KLP to comply with the regulation to the extent applicable. It will help to increase the amount of information our customers receive.

3. Solvency II Directive

Amendments to the solvency regulations have been proposed. These include a requirement that sustainability risk be explicitly integrated into the undertakings’ operational and risk management.
This will apply to KLP and KLP Skadeforsikring, which are insurance companies.

4. Non-Financial Reporting Directive (NFRD)

This standardizes what companies are expected to report on sustainability-related matters, so that investors have adequate information for investment analyses. Such disclosures must follow a European standard in keeping with other EU regulations and directives (EU taxonomy and SFDR). The directive applies to listed companies in addition to major enterprises. Companies in the KLP Group will probably also be covered.
As far as we can see, KLP, KLP Skadeforsikring and KLP Banken will be covered.

5. Act relating to enterprises’ transparency and work on fundamental human rights and decent working conditions (Transparency Act)

The purpose of this Norwegian legislation is to promote companies’ respect for fundamental human rights and working conditions, and legally safeguard public access to information on how companies deal with adverse impacts deriving from their operations. The law requires companies to perform due diligence assessments and account for their work on such assessments in public disclosures.
All of KLP’s companies are covered by this Act’s provisions to some degree or other.

KLP is closely monitoring developments in the various regulatory frameworks

KLP is favorably disposed to the developments in the regulatory framework in these areas. The new requirements establish new market standards that will affect the entire sector and that KLP will be measured against by its stakeholders. In the years to come, KLP will naturally use these standards as the foundations for its development endeavors.

The EU’s Taxonomy Regulation and Sustainable Finance Disclosure Regulation (SFDR), in particular, will highlight differences between financial managers. As a result, these regulations will make it easier to compare KLP with its competitors, thereby emphasizing the importance of maintaining high standards. This is particularly relevant for KLP with respect to the debate about active versus passive asset management.

KLP reports on matters relating to human and labor rights (pursuant to the Transparency Act) in its annual sustainability report. The law will formally enter into force in 2022, and we will further systematize our work relating to due diligence assessments and how we deal with adverse impacts that such assessments may reveal.