By Hamlin Lovell, NordicInvestor 

Since 2021, Tredje AP-fonden’s (AP3) board, has defined a new sustainable investment policy prioritizing four areas: planet (climate and biodiversity), human rightsand corporate governance. The framework includes “double materiality” risks for its SEK 534,3 billion (USD 48 billion) of assets (per June 30 2024).

“This structures and clarifies our focus on the biggest risks and how we influence society. Previously our approach had been a bit ad hoc,” admits Fredric Nyström, Head of Sustainability and Active Ownership, who has in January 2025 become Chairperson of the Council on Ethics of the Swedish AP Funds. Before joining AP3 in 2022, he was Head of Responsible Investment at Öhman Fonder and has also been a member of the board of Sweden’s Sustainable Investment Forum (Swesif).

Leaders and laggards

AP3 does not focus on “best in class” approaches. “We use an ESG service provider to remove companies with low ESG scores, which may be actually laggards or could simply be bad at reporting. Individual managers also have some freedom to choose companies with higher emissions based on a more qualitative assessment,” says Nyström.

The pension fund does not exclude entire sectors such as defence and are more interested in focusing on how individual companies operate in terms of governance and risks. “We can refrain from investing in defence firms that export to human rights violators,” says Nystrom.

Exclusion categories include violations of UN Global Compact conventions around human rights, environment, corruption and labour rights. “We work with the other AP funds to identify firms, influence them and change their behaviour. The board can also determine exclusions, but removing ESG laggards is seen as an active risk management approach rather than exclusions,” Nyström clarifies.

AP3’s exclusion list is quite static and there have not been many changes to the list over the last few years. However, the list is reviewed as part of the fund’s research process; for example, WalMart was excluded for some years but can now be invested in again whilst at the same time, two Chinese companies have been added to the list.

AP3 withdrew emerging markets exposure after Russia’s invasion of Ukraine in early 2022 and has since then developed a new methodology to select investible countries based on a range of criteria including rule of law. During a conversation with AP3’s CIO, Jonas Thulin, NordicInvestor discussed this new approach here.

Engagement and global collaboration

Company engagement and proxy voting have been increased since 2021 with a team dedicated to this activity. There is a mix of bilateral and collaborative engagement.  AP3 is working with their Council of Ethics of the Swedish AP Funds as well and can even collaborate with US investors on human rights issues.

Nyström does not expect that engagement in any specific region will have more impact but rather prefers to drill into individual companies and sectors.

Carbon reporting frameworks, toads and frogs

The Task Force on Climate-Related Discloures (TCFD) is one source of inspiration for carbon reporting, even though the framework is not exactly followed. Similarly, biodiversity is influenced by the Taskforce on Nature Related Financial Disclosures (TNFD), though it is much harder to define and measure. “It is by its nature very local with different species of toads and frogs in local areas” points out Nyström. “We are also struggling to quantify targets for human rights implementation,” he admits.

Data improvements

ESG always entails data issues and it is easier to take it step by step with more granular data from new data providers and solutions. AP3’s external data includes sources like Bloomberg and MSCI but they also source a lot of data from company disclosures.

“Data coverage has been improving as more asset classes are covered and we get better at using the data,” says Nyström.

Climate transition, and sustainability targets

To pursue Paris 2050 goals, AP3  are very selective on fossil fuel companies. “There is no coal and we are sensitive to oil and gas. We have high expectations that high emitters need solid strategies for reducing emissions. We also want to invest in sustainable bonds providing solutions and engage in a structured dialogue with the biggest emitters,” says Nyström.

The main target is net zero by 2045 to align with Sweden’s national goal. There are other interim targets: listed equities should have reduced Scope 1 carbon by 50% by 2025 versus 2019, and this target will be reviewed in 2025.

There is also a goal to get 50% of companies setting Science Based Targets Initiative (SBTI) targets by 2050, and 100% by 2050.

“It would be much faster and easier to hit carbon targets simply by divesting, but we want to engage to drive positive change,” stresses Nyström.

There is a target to invest 25% of fixed income in sustainability labelled assets by the end of 2025, when the target will be reviewed. This could include green bonds, sustainability linked or water related and they need a key definition.

EU, global labels and standards

AP3, like the other AP funds in the Swedish pension system, follows their own legal obligation to manage assets responsibly but do not use any specific labels. Thus, the pension fund can look at any frameworks but are under no obligation to report under them.

Since a majorityof the fund’s assets are managed internally the SFDR categories do not apply to most of the assets but the pension fund also has a few external funds for emerging markets equity which are article 8 aligned.

This article will feed into NordicInvestor’s upcoming special report on Sustainable Investing