Dutch insurers and pension funds invest not only directly in listed equity and corporate bonds, but also indirectly via investment funds. New DNB figures on CO2 emissions of non-financial corporations relate to both types of investments and provide a more complete picture of insurers’ and pension funds’ carbon footprint. They show that relative emissions related to economic output for the period 2020-2021 are lower when indirect investments are included, while absolute emissions are higher; the latter because investment funds are now taken into account in the analysis.
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At the end of 2021, insurance corporations and pension funds (IC&PF) in the Netherlands invested €514 billion in listed equity and corporate bonds directly, while an additional €376 billion was placed in these instruments through Dutch investment funds. When assessing the carbon emissions associated with these IC&PF portfolios, both types of investments should be considered to provide a more accurate overview of the risks that IC&PFs face. From a supervisory and financial stability point of view, DNB is interested in transition risks stemming from a potential decrease in the value of – in particular – high carbon intensive companies, as a consequence of the societal transition towards a carbon neutral economy in 2050.
At De Nederlandsche Bank, we independently compile statistics on the Dutch financial sector and economy. This article is based on these statistics. More information on our statistics and all dashboards can be found on our Statistics homepage.
In existing studies aiming to capture CO2 footprints, indirect investments via investment funds are often not accounted for when calculating carbon footprints, due to data limitations. DNB statisticians have overcome these limitations by using nationally available data on Dutch investment funds and applying a methodology to include indirect investments, a so-called look-through methodology (see first textbox and the supportive DNB analysis). The inclusion of indirect investments gives a more complete picture of insurers’ and pension funds’ carbon footprints, and will be incorporated in future releases of the climate change-related indicators of the European System of Central Banks.
Absolute emissions increase, but relative emissions decrease when including indirect investments
Based on the most recent data, the total carbon emissions that are financed by the IC&PF sector through their investments in non-financial corporations, the so-called Financed Emissions (see second textbox), increase by 97% in 2020 and by 57% in 2021 when investments via investment funds are included. This increase is an expected effect and a direct consequence of the increased portfolio size.
For carbon emission relative to economic output, or Weighted Average Carbon Intensity (WACI, see second textbox), insurers and pension funds in the period 2020-2021 finance relatively fewer carbon intensive firms when looking at the total portfolio of direct and indirect investments combined, compared to their direct investments alone.
The inclusion of indirect investments via Dutch investment funds causes the WACI of IC&PFs to decrease by 8% in 2020 and by 15% in 2021. This means that the average carbon intensity of the portfolio is lower when indirect investments are included, and is due to investment funds investing relatively more in less carbon intensive industries, compared to the direct investments of insurers and pension funds. Overall, from 2020-2021 the relative transition risks of insurers and pension funds decreased.
This analysis uses an internal DNB securities dataset. Based on this data, a large part of the IC&PFs’ investments in investment funds can be included using the look-through methodology. This increases the IC&PFs’ investment portfolio in listed shares and corporate bonds significantly from €514 billion to €890 billion.
The calculation of carbon indicators is based on a subset of these portfolios. In line with the ESCB climate change-related indicators, the focus lies on the carbon trends in the real economy and therefore is restricted to the exposures related to non-financial corporations. Applying this filter for the calculation of the indicators, the relevant IC&PFs direct investment portfolio amounted to €312 billion, in 2021. The total portfolio, including both direct and indirect investments, amounted to €616 billion.
Carbon indicators for the period after 2021 are not yet available but are annually updated.
A financial institution’s investment portfolio can be managed by the institution itself (direct investments), and/or by external investment funds (indirect investments), which further invest on behalf of their holders. To get a more complete picture of the financial institution’s portfolio and its associated risks it is necessary to incorporate the investment portfolio of the investment funds as well.
The so-called look-through methodology enables us to do this by looking through the external investment funds’ investments. Assume that pension fund A invests €500 in investment fund B. We look through fund B by replacing A’s investment in B with the investment portfolio of B, considering the portfolio composition of the investment fund. Essentially, the €500 is now allocated according to B’s portfolio.
Currently, foreign investment funds are not included in this study. In addition, when funds invest in funds, a multiple-order look-through is needed to capture the full picture. This is not yet included in the analysis.
Financed Emissions (FE), or absolute carbon emissions financed by a financial institution or sector, are calculated based on the ownership perspective. A company's annual carbon emissions are allocated to a financial institution’s or sector’s proportion to the part of the activity it finances. This absolute indicator is the most indicative for the total emissions from a financial sector or institution, but differences in the size of portfolios make it unsuitable to make comparisons among institutions.
The Weighted average carbon intensity (WACI) is the relative carbon emission per million euro of company revenue (carbon intensity), weighted by the investor's portfolio weights. This indicator is relative in two ways: 1) the carbon intensity reflects an issuer’s emissions relative to its revenue, and 2) the portfolio weight indicates the value of an investment relative to the investor's entire investment portfolio. While this indicator allows for comparing among financial sectors and institutions, it does not provide information on the absolute level of emissions.
In this analysis, DNB focuses on the FE and the WACI using Scope 1 emissions. A company's direct carbon emissions or so-called Scope 1 emissions are emissions caused by sources that are controlled or owned by a company (e.g., emissions associated with fuel combustion in boilers, furnaces, vehicles). The same calculations have also been done for Scope 2 emissions (a company’s indirect carbon emissions related to the purchase of electricity, steam, heat, or cooling) and can be found in the supporting DNB Analysis.
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