Systemic selection – collaborative engagement – Vattenfall

The issue

Vattenfall is a state-owned utility company in Sweden that has ambitious targets to become fossil-free by 2040. Its government ownership and leading position in the Swedish utilities market creates a positive investment case and strong credit rating. Using our internal climate risk assessment (for more details see our Stewardship Report), we view Vattenfall as a leader in its sector – a view verified by the exploratory bottom-up climate modelling we carried out on the power generation sector in 2023.

Notwithstanding this, Vattenfall is a carbon-intensive holding and, relatively, a material contributor to the emissions generated in the portfolio . As a result, during 2023, the company was selected for engagement through our engagement and prioritisation framework, under the climate thematic workstream.

Given the relevance of the utilities sector to both the global transition to a low-carbon future and our own portfolio, we considered it appropriate and efficient to engage through collaborative engagement. Considering the long-term nature of the company’s goals and engagement as a process, we wanted to use this collaborative engagement to monitor the company’s progress over time and deepen our understanding of the company.

By paying attention to sustainability factors such as this, which are likely to be financially material to the long-term performance of this issuer, we believe we can better manage downside risk for our clients, shareholders and other stakeholders.

Activity

During 2024, another virtual meeting was arranged with the investor relations team to build on the engagement that we reported on in last year’s Stewardship Report. Subsequently, to provide further details, a series of emails also followed.

Mirroring the engagement in 2023, the conversation extended to: (i) again, a focus on Vattenfall’s near-term targets and how its net zero goal would be achieved by 2040; (ii) fossil fuel phase out plans, particularly within their own generation activities and increasing the share of fossil fuel-free electricity sales; and (iii) customer education and partnerships.

Reduction levers and achieving near-term goals: Vattenfall discussed their procurement process, particularly how they monitor suppliers’ compliance with emissions targets. This is carried out via life cycle assessment analysis, which is subsequently verified by a third party. They are also part of the CDP supply chain programme, where they capture and share data used to manage supplier risks.

We also discussed the Corporate Sustainability Reporting Directive (CSRD). It was clear that the CSRD was both an area of focus for the company and that it was influencing the company’s plans to report on the quantification of decarbonisation levers in its planned CSRD disclosures. We were told to expect publication in line with the regulatory deadline.

Fossil fuel phase out and customer partnerships: In our discussions surrounding customer education and partnerships, we focused on the steel industry and how Vattenfall is working with key steel industry partners to make fossil fuel-free steel (with early-stage projects currently underway). We also discussed how Vattenfall is offering biogas to downstream customers.

Outcome

Overall, the engagement proved to be another useful dialogue with the company, providing a broad overview on their strategy, including more detail on their plans to reduce scope 3 emissions and their sustainable procurement strategy. On the face of it, it appears that CSRD is prompting consideration of more challenging areas of the company’s decarbonisation strategy, including quantifying decarbonisation actions, scope 3 emissions and supply chain management.

We focus on financial and sustainability risks and opportunities that have the potential to be financially material to long-term performance. The company’s strategy and response demonstrates alignment to this focus as it seeks to deliver a sustained return and leadership in sustainability for its owners and creditors. We hope to deepen our understanding and encourage this issuer to focus its approach on these important themes through continued collaborative engagement.

This case illustrates how our prioritisation and engagement framework identifies issuers with a material impact on our portfolio for engagement. It also demonstrates how engagement can provide a long-term monitoring tool, allowing us to evaluate strategy against action on an ongoing basis.

When selecting collaborative initiatives, we check for alignment to our corporate and stakeholders’ investment goals and priorities. This aims to ensure that our goals and other investors involved in those initiatives often intersect, allowing us to work together on shared areas of interest and through this alignment generate focused effort, such as this case.

 

The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.