Swedfund strives to minimise negative climate impact in all its investments. Initiatives relating to the environment and climate form an integral part of the investment process based on Swedfund’s sustainable development policy and separate stance regarding the environment and climate. Climate is one of two thematic areas to be considered before decisions are taken concerning new investments regardless of sector, geography or instrument. In 2015, Swedfund decided to focus solely on investments in renewable energy, thus excluding investments in fossil energy generation.
Swedfund uses a model to estimate CO2e which has been developed by an external supplier and is based on the Green House Gas Protocol (GHG Protocol). In the model, the CO2e exposure of investments is weighted based on Swedfund’s owner stake in the portfolio company. In cases where Swedfund acted as lender, the determination of Swedfund’s share is based on the outstanding loan's share of the portfolio company's balance sheet total and, in the case of lending to banks, the size of the loan relative to the bank's total borrowing. The calculation presented below consists of Swedfund’s portfolio companies, including the underlying holdings of the funds and the co-financing facilities, a total of 156 investments in 2017 (147 investments in 2016). Emissions from Swedfund’s portfolio amounted to 24 thousand tonnes in 2017 (2016: 35 thousand tonnes). Amongst Swedfund’s investments, those which produce energy, including a gas-fired power station, have the greatest impact on the climate. These holdings account for approximately 60% of all emissions in the calculation. As Swedfund has opted to continue investing exclusively in renewable energy, CO2e exposure from Swedfund’s investments is expected to decrease over time.
During the year Swedfund has also conducted an analysis of how climate and environmental risks impact Swedfund’s investments and, in turn, how they can impact Swedfund’s financial position. The analysis summarises the key environmental risks in the investment portfolio and how Swedfund works to manage and mitigate them. To analyse how the climate risks that have been identified could impact Swedfund’s financial position, Swedfund has developed a method to take into account of the climate risks and the requirements concerning mitigation that Swedfund imposes on portfolio holdings. The degree of impact on Swedfund’s financial position is based on the reasoning that a low climate risk will entail a low financial risk, and correspondingly for medium and high climate risks. Swedfund’s risk profile is analysed from a "top-down" and "bottom-up" approach. "Top-down" analyses and categorises the external climate risks the portfolio is exposed to. "Bottom-up" includes Swedfund’s investment process, i.e. the identification and management of environmental and climate-related risks in the portfolio, as well as CO2e emissions from investments.
Swedfund’s environment and climate risk profile is largely influenced by three factors: The region in which the activity takes place, the sector in which the activity is taking place and the size of Swedfund’s shareholding or loan. The climate risks in Swedfund’s focus regions, Africa and Asia, are relatively high at a general level. At the same time, the risk level in the three sectors in which Swedfund focuses its investments in are categorised as low , with the exception of investments in renewable energy. The choice of instruments further balances the risk,given Swedfund’s management of environmental and climate-related risks during the screening prior to an investment, as well as measures during the active ownership phase.
The analysis shows that Swedfund’s business model adequately addresses environmental and climate-related risks, partly through the work relating to the environment and climate being carried out within the portfolio companies. The focus sectors which have been established in the business model are sectors which have relatively low environmental and climate risk exposure, and by following the business model, the exposure of Swedfund’s operations and investments to environmental and climate risks is maintained at a limited level. The exception is the energy sector, where the risk is considered to be medium.
At the same time, the Energy & Climate sector is the sector in which Swedfund has identified the greatest opportunity to have a positive impact through its decision to exclusively invest in renewable energy. The investments that Swedfund make in the world’s poorest countries also help reduce the overall risk of climate change, partly through Swedfund’s efforts to identify sustainable solutions through addressing and implementing measures aimed at the environmental and climate-related challenges that Swedfund is facing in the countries in which the company invests.
Climate investment case from the past year - Climate Investor One
In June 2018, Swedfund invested USD 15 million in the CIO Construction Equity Fund. Access to sustainable energy is a prerequisite for effective poverty eradication, which is the overarching reason why Swedfund is investing heavily both in the sector itself and in broader climate investments. Another factor behind the investment in CIO is that we want to work to increase capital flows from the private sector for sustainable climate projects in developing countries, and we believe that Swedfund can act as a catalyst for private investment. It is hoped that CIO will be able to serve as a good example of how financing facilities can be structured in order to attract different types of capital and contribute to a marked increase in sustainable energy generation in developing countries.
What makes CIO unique is that it offers tailored financing throughout the life-cycle of a project, with the overarching aim of developing renewable energy generation at a faster pace. The facility is based on the knowledge that different stages of a project’s life-cycle require different types of capital from different types of financing institutions. A structure has therefore been constructed for what is known as ‘blending instruments’, which consequently also means that different investors are able to participate according to their own risk profile.CIO encompasses three separate but operationally interlinked funds.