The Climate and Nature Strategy helps Sitra manage the risks associated with investments and identify future return opportunities. The strategy defines the climate and nature targets of Sitra’s investment portfolio and the measures to achieve these goals. The strategy is updated regularly and the targets are reassessed in accordance with recent research data and possible changes in the investment environment.
Awareness of the effects of climate change and biodiversity loss has increased rapidly in recent years. An increasing number of companies and investors have also set targets to reduce greenhouse gas emissions and other negative impacts on nature.
Sitra recognises that preserving biodiversity and mitigating climate change are of crucial importance for both the well-being of society and the continuity of economic activity. International agreements, such as the UN’s Kunming-Montreal Biodiversity Framework and the Paris Climate Agreement, set a clear direction for development. The biodiversity framework sets several global targets for halting biodiversity loss and restoring biodiversity by 2030. The goal of the Paris Agreement is to stop global warming to 1.5 degrees, which requires rapid emission reductions.
Investors can influence the development by, for example, encouraging companies to engage in low-carbon and biodiversity-friendly business operations and by financing climate and nature solutions. Sitra will also develop its investment activities to support the achievement of the goals of the Paris Agreement and the Kunming–Montreal Biodiversity Framework.
The strategy also takes into account the recommendations and principles of the most significant international initiatives, such as the Net-Zero Asset Owner Alliance formed by the UN, the Institutional Investors Group on Climate Change (IIGCC) and the Science Based Targets Initiative (SBTi). We are exploring investor initiatives related to biodiversity.
Sitra’s Climate and Nature Strategy for Investments is part of Sitra’s guidelines for responsible investment, which are approved by Sitra’s Board of Directors. Sitra’s Chief Investment Officer is responsible for organising the implementation of responsible investment, and all persons involved in Sitra’s investment activities are responsible for its implementation.
Sitra’s Board of Directors receives regular reports on issues related to climate change and nature. Sitra also reports annually on its responsible investment practices to the PRI, and as a signatory of the Principles for Responsible Investment, Sitra is committed to complying with the international Task Force on Climate-related Financial Disclosures (TCFD) reporting framework and its requirements in its climate reporting. In nature reporting, Sitra complies with the Task Force on Nature-related Financial Disclosures (TNFD) reporting framework.
The global transition to carbon neutrality and nature positivity will take several decades, which means that the time span of the climate and nature strategy for investments must also be long. The reliability and comprehensiveness of science-based information is constantly improving, but there is still significant uncertainty surrounding development paths. For this reason, the strategy will be divided into intermediate goals and specified as the available information increases and the investment market develops.
The monitoring and objectives cover listed equity, fixed income and real estate funds in particular. The availability of data on climate change is moderate, but data on biodiversity is still limited. Tracking will improve across other asset classes as data coverage increases.
According to the TCFD’s definition, the risks caused by climate change are divided into transition risks related to the transition to a low-carbon economy and physical risks related to global warming. The risks arising from biodiversity loss can be shared in the same way.
Transition risks are related to changes in regulation, technological development and market behaviour, as well as reputational risk. Physical risks are divided into acute and chronic.
The profit opportunities brought about by climate change are related, for example, to companies that develop technologies to mitigate climate change or to facilitate the transition to a low-carbon economy. Strengthening biodiversity, in turn, creates opportunities for companies that, for example. produce ecosystem services, sustainable forestry and agriculture solutions, or develop technologies for monitoring the state of nature.
Climate- and nature-related risks and opportunities have financial impacts, the identification of which may lead to changes in strategic allocation, investment strategy, potential exits from investment targets, and dialogue with asset managers and companies.
The economic impacts of the realisation of climate and nature risks may include, for example; production and operational disruptions, supply chain disruptions, impairment of balance sheet items, physical damage, increases in insurance premiums, changes in resource and production prices and consumption behaviour. Figure 1 shows the risk framework in accordance with the TCFD model and the risk management perspectives for Sitra’s investments.
Risks can be assessed by examining companies’ climate and nature targets. Based on the goals set by the companies themselves, their readiness to react to changes in the operating environment can be assessed. In particular, companies that have set climate targets in accordance with the Science Based Targets initiative and nature targets in accordance with the Science Based Targets for Nature initiative can be considered to be on a path in line with sustainable development, i.e. in line with, for example, the Paris Agreement on climate change and global nature targets. Lack of ambition in setting targets, on the other hand, may increase long-term risks, in particular.
For the time being, Sitra does not have any targets approved by the SBTi, because the initiative only assesses the goals of private actors, not public organisations, such as Sitra.
Sitra supports the global transition to carbon neutrality through the selection of investment targets and influencing them. The long-term goal is for all of Sitra’s investments to be in line with the Paris Climate Agreement. In addition, the goal is to achieve a carbon-neutral investment portfolio by 2035 in accordance with Finland’s national target, provided that the investment environment allows it. The transition to a low-carbon and eventually carbon-neutral investment portfolio will take place in a controlled manner.
From the perspective of the real economy, the use of sustainable renewable forms of energy should be increased and fossil fuels should be phased out in order to curb climate change. Energy saving and energy efficiency, circular economy, electrification of transport, halting deforestation, increasing natural carbon sinks, and climate-resilient food production and consumption are also ways to mitigate climate change.
For investors, this means assessing the return-to-risk ratio of investments from the perspective of climate risk and reducing the number of high-risk companies or industries, even possibly excluding them from the investment universe, and increasing the number of investments that offer climate solutions.
Sitra aims to achieve carbon neutrality in its investment portfolio without carbon offsetting. Emission reductions in the real economy are influenced at the company level, which is why Sitra as an investor has reservations about the use of offsets in investment activities. There are limited possibilities for offsetting and they should be reserved for activities where other means of emission reductions are not possible for technological or economic reasons.
According to the Science Based Targets initiative (SBTi), offsets should not be used to achieve emission reduction targets, but can complement voluntary climate action. The SBTi requires that the remaining emissions are permanently neutralised, for example through carbon sequestration, only after long-term emission reductions have been achieved. Offsetting means offsetting emissions with climate action taken elsewhere, and neutralisation, on the other hand, means permanently removing the remaining emissions from the atmosphere.
A prerequisite for a climate analysis of an investment portfolio is high-quality data. At the moment, the carbon footprint can be calculated for about 56 per cent of the value of Sitra’s investment portfolio. The aim is to increase the coverage of data, especially among alternative investments. Sitra is dependent on the data reported by the investees under the funds, i.e. the companies.
The climate impacts and risk of Sitra’s investments are measured using the carbon footprint. Sitra’s long-term goal is to have a carbon-neutral investment portfolio. In the short term, we will significantly reduce the carbon intensity of the investment portfolio, and this will be monitored in relation to the benchmark index where applicable. The weighted carbon intensity of Sitra’s investments must be lower than the benchmark index. The goal is for the weighted carbon intensity of Sitra’s investments to be at least 50 per cent lower in 2025 than in the base year 2020. The corresponding target for 2030 is 75 per cent.
When examining the carbon footprint and carbon intensity, the emissions generated as a result of the investment targets’ own operations (so-called scope 1) and indirect emissions related to purchased energy (scope 2) are taken into account. As calculations and data develop, the goal is to also take into account all indirect emissions (scope 3).
Climate risk can be reduced by emphasising companies with a low carbon footprint or carbon intensity in relation to the industry. Climate risk is also mitigated by promoting positive development, for example by investing in renewable energy or other business that benefits the environment.
Sitra has excluded from its investment universe companies whose turnover is related to the production or use of coal in energy production without a clear strategy for reducing the use of coal. The development of any other carbon risk concentrations will be monitored. The amount of fossil fuel reserves in the portfolio is monitored, and the goal is to keep the share of reserves low.
The commitments made by companies to reduce emissions in relation to the targets of international climate agreements are an indication to investors of the right direction of development. The share of companies that have set Science Based Targets (SBTi) in the investment portfolio is monitored.
Investors can also seek to influence companies and asset managers. Large investors in particular have influence, and institutional investors are the strongest drivers of the spread of responsible investing. Smaller investors can also concentrate influence through networking, for example by participating in investor initiatives.
Sitra is involved in the Climate Action 100+ initiative, which encourages companies to meet emission reduction targets in line with the Paris Agreement and to report on climate change risks to their business.
Over the past twenty years, Sitra has made climate-friendly investments, for example. thematic equity and private equity funds, renewable energy infrastructure, energy efficiency in properties and growth companies developing climate-friendly technologies. Thus, measures to achieve a more climate-friendly investment portfolio have in practice been initiated long before this climate strategy.
The first step in the implementation of the Nature Strategy is to map the natural risks, dependencies and impacts of the investment portfolio. The aim of the analysis is to identify the extent to which Sitra has been exposed through its investments to sectors and geographical areas that cause, for example, deforestation, pressure on waterways or biodiversity loss. The work utilizes both asset managers’ ESG data and external tools, such as ENCORE (Natural Capital Finance Alliance) and TNFD standard metrics.
The assessment emphasises both direct and indirect impacts: the risks and opportunities arising through the value chains of investment targets are examined from the perspective of land use, water consumption and ecosystem services, among other things. The aim is to identify and take into account sites with a high nature risk in investment decisions in the same way as for high climate risks.
The share of nature-positive investments in the portfolio will be investigated and efforts will be made to increase the share. In practice, this includes companies that, for example, finance solutions that support biodiversity, such as strengthening ecosystem services, developing urban green spaces, and monitoring technologies that support the improvement of the state of nature.
The measurement of natural risks and impacts is a rapidly developing area, but Sitra is committed to adopting international standards as they become established. In the initial phase, emphasis will be placed on qualitative and comprehensive-related indicators, such as the industry and geographical distribution of investments, the coverage of TNFD reporting of investment targets, and the share of companies publicly committed to science-based targets for nature (SBTN). As the quality and availability of data improves, quantitative indicators will also be increasingly introduced.
Investor initiatives are important channels for influencing companies, also when it comes to nature goals. Sitra is involved in the Nature Action 100 initiative, which encourages companies that have a significant impact on nature to set targets for the protection and restoration of biodiversity.
Figure 2 shows the key climate and nature objectives of Sitra’s investment activities on a timeline. Interim targets have been set for 2025–2030, and their content and schedule will be specified regularly as the knowledge base improves. The intention is to set more detailed nature targets in the next few years as the availability of data and indicators develop.
Portfolio Manager, Investments
Vice President, Investments