By Hamlin Lovell, NordicInvestor
Nordic Investor asked AP1’s Head of Sustainable Value Creation, Magdalena Håkansson, to comment on selected aspects of its ESG policies, which use a mix of in house and external analytics.
We also asked Tina Rönnholm, Portfolio Manager External Management, to comment on how AP1’s ESG policies apply to external mandates. AP1 likes managers to integrate ESG into the investment process and do in house ESG research.
ESG and Performance
The Journal of Sustainable Finance & Investment published a meta-level study, which looked at 2,200 studies and found a positive link between ESG and performance, in 63% of cases?
Magdalena Håkansson: When assessing ESG studies and their relevance, it is important to bear in mind that there is not one universal definition of ESG. Different studies will use different data sets. At the same time, some ESG factors would be more relevant for some investment strategies than others. The meta-study, along with many since, often indicate a positive or neutral link between ESG and performance. It’s perhaps not surprising, given the increased awareness of sustainability in general and greater expectations on companies to manage their operations in a responsible way. Shifts in society, technology developments and changed environmental conditions, can have a material impact on a company’s value chain.
There are many examples of where mismanagement of environmental, social and governance aspects have had a significant negative impact on share price. We also believe companies that manage relevant risks and opportunities, and at the same time are resource- efficient, are likely to be more profitable in the long term. Therefore, identifying which companies have sustainability embedded in their business strategy and ongoing operations is just as important.
AP1 has an in-house sustainability team and also uses external firms. Which types of external firms do you work with to inform your ESG policies?
Magdalena Håkansson: We use a combination of external data providers to support our work on integrating ESG aspect into our investment process, as well as for screening, engagement and exclusions purposes. Different sources are used for different purposes and often in combination. One solution, which monitors and assesses controversies serves as an input to our engagement and exclusion decisions. Other solutions provide insights on ESG aspects that are material for a company and how the company is managing and performing in relation to different aspects we believe are important. Using different data sources, helps us make more informed investment decisions.
Carbon reporting and green bonds
You have a low carbon approach, and publish a carbon footprint. What about methane gas, which makes a larger short-term contribution to climate change?
Magdalena Håkansson: Our published carbon footprint includes greenhouse gases as defined by the Greenhouse Gas protocol (GHG Protocol). This includes methane gas emissions which are converted into CO2e and reported as part of companies’ carbon emissions data.
Are any external providers helping you to measure the carbon footprint?
Magdalena Håkansson: We have access to carbon data and calculation tools from external providers. Although we see an increased uptake of companies reporting carbon emissions, a large number of companies, in developed and to a greater extent in emerging markets, are not disclosing the data. Therefore, we rely on external providers’ estimation models, as the best available proxy, to fill the data gap.
How big a part of your fixed income allocation are green bonds? Since most green bonds are investment grade, could this allocation be reduced by the new guideline reducing the percentage in securities with a high credit rating from 30% to 20%?
Magdalena Håkansson: We have approximately 1% of our fixed income allocation invested in green bonds. The new guidelines won’t have an impact on the allocation, as we don’t have a specific allocation towards green bonds. We assess these investments on the same financial characteristics and criteria we would apply in our assessment of “traditional” bonds.
Do all ESG policies apply equally to external managers and internally managed assets?
Tina Rönnholm: We work with sustainability on multiple levels at AP1 as sustainable value creation is one of our investment beliefs. Assets managed externally are thus no exception and we at the external management team work closely with managers we have a business relationship with but also broader within the industry. We feel we have a responsibility to influence the industry as we have a voice and a seat at the global table.
We expect our managers to integrate ESG in a way that suits their investment philosophy and process and we want this to be done throughout the organization. We prefer managers that do their own ESG research as opposed to those settling with off-shelf ESG ratings.
Do you instruct external managers how to vote proxies, or delegate that decision to them?
Tina Rönnholm: We also think active ownership is of utmost importance and this goes both for active and passive managers. We have delegated voting to some of our external managers after reviewing their voting policies and we are following up on their activities.
How do you view your relationships with external managers?
Tina Rönnholm: We have a constant dialogue with our managers around sustainability matters and we view ourselves more as long-term partners than clients. We expect continuous improvement by all and we like to stress that we as an industry must not settle with what we have today but must strive to do better.