By Hamlin Lovell, NordicInvestor 

Andra AP Fonden (AP2) has four key focus areas within sustainability: climate, biodiversity, human rights and corporate governance. “They are all however interlinked. The philosophy is that a pension is not just about income in retirement. It is also about enjoying a good life in retirement, in society and nature and on the planet,” says Åsa Mossberg, Head of Communication and Sustainabilty at AP2 in Gothenburg, Sweden. She has been with AP2 since 2021. AP2 manages approximately SEK 460 billion (USD 42 billion).

Paris benchmarks and transition

All asset classes should be in line with the Paris agreement by 2025. The entire listed portfolio of equities and corporate bonds is already Paris-aligned and also considers other sustainability factors.

Paris-aligned benchmarks are used to this end for the Fund’s quant-based portfolios in global equities and corporate bonds. “The Paris benchmarks will tilt the portfolios towards best in class companies in each sector because the indices overweight better performers and underweight laggards,” argues Mossberg.

Current carbon footprints and transition plans can both feed into the process. The quant-based mandates with Paris benchmarks use current reported emissions. The pension fund also has a portfolio of Swedish equities managed based more on forward looking data. “We can remain invested with high emitters so long as they have transition plans. Companies are ranked based on the Institutional Investors Group on Climate Change (IIGCC) framework. The Science Based Targets Initiative (SBTI) is one indicator used for this ranking, in which we assess each company’s transition plan towards net zero. ,” points out Mossberg.

Exclusion lists and benchmark related exclusions

AP2 are active owners so exclusions are a last resort when dialogue is not successful.

There are however important semantic and conceptual differences in how different asset owners define exclusion lists. The choice of benchmarks implies some exclusions by default that do not appear on the AP funds’ published exclusion lists. “The Paris aligned benchmarks exclude fossil fuels such as oil, coal and gas above certain thresholds of company turnover: 1% for coal, 10% for oil and 50% for gas. This in effect excludes about 250 companies,” explains Mossberg.

The published AP funds’ exclusion list is separate, based on recommendations from the Council of Ethics of the Swedish AP Funds.

The Council on Ethics is a collaboration between AP 1, AP2, AP3 and AP4, to influence foreign portfolio companies to act responsibly in the areas of the environment, social issues and corporate governance. Collaboration in the Ethics Council gives the AP Funds the opportunity to manage sustainability in a resource efficient manner.

The Council on Ethic works with companies that violate international conventions that Sweden has supported, and also proactively with prioritised sustainability issues.

Voting

In 2024, AP2 voted on 96 percent of its Swedish and 89 percent of its foreign equity portfolio.  and the fund engages in dialogues on topics including climate, deforestation and human rights issues.

Some dialogue is direct and other discussions involve collaboration with groups such as Climate Action 100 Plus, the IIGCC’s Net Zero Engagement Initiative, Nature Action 100, or Platform Living Wage Financials.

Data challenges

The Task Force on Climate-Related Financial Disclosures (TCFD) standards are used for climate reporting. “The challenges here include data quality, especially for scope 3 emissions. It is also easier to get the data for listed equities but harder to get the data for other asset classes. This is improving over time,” says Mossberg.

AP2 gathers a lot of open-source data on areas such as deforestation. “We also use external data from several large data providers. We expect that CSRD should lead to more public data becoming available,” points out Mossberg.

In contrast to some other asset owners, she has not yet noticed much AI or web scraping in data gathering. AP2 would like to see more standardization of data in general.

Climate targets tailored to asset classes

AP2 has devised carbon targets calibrated to asset classes such as private equity, real estate and listed equities.

The long term climate targets use a 2019 baseline and set a net zero target for 2045 with an interim target of 55% reduction by 2030. In 2024 AP2 shows progress towards the interim target, having cut carbon by 44% versus 2019.

“We do not however expect the carbon trajectory to drop in a straight line. This is partly because it now includes some higher emitters to allow for more transition. Therefore it might pick up before coming down, which we also saw in 2024,” points out Mossberg.

AP2 also has a biodiversity goal of not contributing to deforestation by 2025. The asset owner has not opted for thematic targets based on green investments or industrial sectors or subsectors such as renewables, clean water or recycling.

The pension fund does however provide breakdowns on positive impact investments such as green, blue and sustainability linked holdings, tracking how much is invested in all of them across asset classes.

Criteria for impact investing include nine principles and some intention for tangible positive impact, such as green bonds reducing carbon emissions.

SFDR and Taxonomy of limited relevance

AP2 is not covered by SFDR or CSRD rules, but welcome data improvements that may come from them. Neither the SFDR categories nor the Taxonomy are relevant for the pension fund as these do not apply to internally managed portfolios and especially private equity funds are often not European and are therefore not covered by this regulation.

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