Understanding our climate-related risks and opportunities
The effects of climate change are clearly visible and will have an increasingly tangible impact on Kinnevik and our portfolio. Implementing the recommendations of the Task Force on Climate-related Financial Disclosures (”TCFD”) enables us to identify, assess and manage our most material climate-related risks and opportunities
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From 2023, the TCFD report is integrated into Kinnevik's Annual & Sustainability Report. Below is a link to an overview of the TCFD recommendations and page numbers where the information can be found in Kinnevik’s Annual & Sustainability Report 2022. The link also includes detailed information about climate risks and opportunities for each of Kinnevik’s sectors and sub-sectors, as well as the results of our scenario analysis.
Summary Implications on Kinnevik’s Business, Strategy, and Financial Planning
We have identified near-, mid- and long-term risks and opportunities for the most relevant sectors and sub-sectors. Transition risks related to market, reputation and policy & legal are the most material climate-related risks for the Kinnevik portfolio. On the latter, all our companies are to some degree exposed to transition risks stemming from increased pricing of greenhouse gas emissions and increased emissions reporting obligations. These risks are even more relevant and topical today compared to when we did our initial analysis in 2020. Carbon pricing mechanisms and more rigorous regulations related to emissions reporting could have implications for our companies’ costs, their ability to operate and our return on investment.
Increasing awareness about climate change will continue to impact customer preferences, leading to increased demand for products and services with a low climate impact. The risk of not being able to meet these demands by making the transition to a low-carbon economy may have a significant impact on our companies’ competitiveness. This is relevant for all our companies, although perhaps less so for our healthcare businesses in the short term as their customers primarily prioritise other aspects when choosing a care provider.
Chronic physical risks have also become more prominent in recent years. For our healthcare companies, extreme variability in weather patterns and rising temperatures may lead to reduced revenues as insurers, governments and customers struggle to adapt to new climate-related medical conditions and illnesses. Our food companies and Tele2 are to a larger degree reliant on physical assets and facilities for their production and offices, with more complex supply chains. They would therefore be more affected by severe weather events such as heat waves, floods and forest fires - generally referred to as acute physical risks. The consequences could include reduced product availability, increased repair costs of damaged buildings and inventory loss, which would have a negative impact on sales and lead to increased costs.
We estimate that all 10 companies included in our updated analysis are exposed to transition risks and eight companies are exposed to physical risks (representing 60% and 49% of portfolio value per 31 December 2022).
Meanwhile, we see several opportunities related to climate change, particularly as our strategy is to invest in technologyenabled and innovative businesses. The main opportunity is to be consumers’ preferred choice by leveraging new technology to take the lead in developing products and services with a low or positive climate impact. Compared to more analogue business models, our companies are in a good position to accelerate the pace of transformation to meet the growing demands of their increasingly climate-conscious customer base. More details on the climate-related risks and opportunities for each of our sectors and sub-sectors, as well as case studies of our companies taking the lead in combatting climate change, are available on Kinnevik’s website.
We estimate that nine companies included in our updated analysis are aligned with climate-related opportunities (representing 58% of portfolio value 31 December 2022).
Summary Results of Scenario Analysis
As our strategy is to invest in digital companies operating primarily a marketplace model, our portfolio generally has relatively low dependency on complex supply chains, physical assets and fossil fuels (excluding food and Tele2). Hence, our strategy shows relative resilience in a Very High Emissions Scenario. However, in this scenario the overall benefits of sustainability and lowemissions services are not recognised by consumers, impacting businesses trying to use sustainability as a competitive advantage.
As an investor in consumer-facing sectors, Kinnevik is exposed to a broad set of transition risks in the Stringent Mitigation Scenario, particularly related to market and reputation, i.e. shifting consumer behaviour as a result of increased climate consciousness and a decrease in discretionary consumption. We are also across all sectors affected by transition risks related to policy & legal, i.e. increasing climate-related disclosure requirements and stakeholder demands, and regulators catching up on increasing climate risks. Meanwhile, this scenario also offers the largest climate-related opportunities with regards to Kinnevik’s strategy to invest in digital companies disrupting legacy industries through innovation, new technology and a more sustainable approach.
Based on our analysis, the scenario with the largest potential negative impact on Kinnevik’s business, strategy and financial planning is the Very High Emissions Scenario. The most favourable scenario is conversely the Stringent Mitigation Scenario, as the climate-related opportunities in our portfolio in this potential future would likely outweigh the climate-related risks. The climaterelated risks identified in both scenarios may however lead to slower growth and lower profits for our companies leading to lower investment returns for Kinnevik, which in turn may lead to implications on our investment strategy and capital allocation decisions.
The results of the scenario analysis were first presented to Kinnevik’s Risk Committee in February 2021, and to the Audit & Sustainability Committee in March 2021. The updated analysis conducted in 2022 was shared with the management team in June 2022 and presented to the Audit & Sustainability Committee in September 2022.
Implications on Kinnevik’s Business, Strategy, and Financial Planning
In the Stringent Mitigation Scenario, our strategy may be affected as we will likely put increasing emphasis on climate aspects in capital allocation decisions, and increasingly look to invest in companies that will thrive in a low-carbon economy. In the Very High Emissions Scenario, our strategy may be affected as we may decrease our exposure to businesses with complex supply chains. In 2022, Kinnevik made its first larger investments into climate tech, allowing us to further seize the opportunities of the transition towards global emissions neutrality.