Fund Solutions

AP7 Bets on Active Ownership for Climate Transition

LGIM to collaborate on the Swedish pension fund’s new strategy, which will target both portfolio and real-world impacts.  

Swedish government pension fund AP7 is partnering with UK-based Legal and General Investment Management (LGIM) on a new climate transition strategy, but will retain voting control, in line with its stance as a universal owner.  

The active investment mandate will identify and invest in companies considered laggards in their climate-related progress, but which have the potential to align with the goals of the Paris Agreement. AP7 and LGIM aim to have a positive effect on these companies’ climate transition efforts while also delivering positive value generation through active ownership and management. 

“There has been a lot of focus on trying to find the greenest or best-rated companies and constructing clean portfolios – but this doesn’t go along with our ambitions to change the reality,” Johan Floren, AP7’s Head of ESG and Communications, told ESG Investor 

“Since we own the whole market, we want the whole market to change for the better.  

“Part of our climate action plan is to take active ownership and active management one step further by integrating them and ensuring one enhances the other,” he said.  

As part of its role as a universal owner, Floren said AP7 believes in retaining control of the voting at investee companies’ annual general meetings (AGMs) – a viewpoint the pension fund is carrying into this new mandate.  

“Last year, that meant [voting at] more than 4,500 AGMs,” he said.  

At ESG Investor’s inaugural Stewardship Summit, speakers pointed out many asset owners don’t have the resources to conduct engagements and/or voting in-house, instead relying on asset managers that may not vote in line with their priorities.  

“Of course, [voting] wouldn’t be possible if we couldn’t buy-in some services,” Floren acknowledged, noting that AP7 insources analysis and other services to lessen the burden on in-house resources.  

Nick Stansbury, Head of Climate Solutions at LGIM, said the asset manager will “collaborate very closely” with AP7 throughout the engagement process, providing their insights ahead of AP7’s voting decisions.  

Tracking potential  

LGIM will employ a “data-driven and evidence-led approach”, said Stansbury.  

The asset manager will analyse a prospective investee company’s ‘temperature alignment’, mapping its past performance and expected rate of future progress against science-based targets for that company and sector, translating this into “an equivalent climate outcome”, he said.  

“How fast is a company de-risking its exposure to the future costs of carbon by decarbonising its operations across Scope 1-3 emissions? How much capital is that company allocating to decarbonisation? How rapidly is that capital turning into a genuine reduction in emissions? How much of this is being publicly disclosed?”  

LGIM will also be assessing exposures to transition-related business opportunities.  

“The climate transition is going to create enormous opportunities in all sectors, simply because of the scale and pace of changes required.  

“We want to see selected companies’ exposure to these opportunities grow over time,” said Stansbury.  

The firm will utilise a variety of assessment approaches / methods, including its Destination@Risk tool. Launched in 2020, the framework quantifies physical and transitional risks within investment portfolios across a variety of climate scenarios, utilising machine-learning technology to collate relevant publicly available information, identifying companies failing to address climate-related risks.  

AP7 and LGIM have not yet decided which companies or industries the strategy will focus on, but Floren noted it will encompass a “combination of relevant sectors which have a high impact on the climate”.  

On the appointment of LGIM, Floren said: “We went through a very thorough process, considering several potential partners. AP7 decided that LGIM was the best candidate primarily because we were looking for a partner to collaborate with and innovate on a [strategy] that doesn’t really exist on the market yet. LGIM appeared to be aligned with our thinking and ambition more than other candidates.”  

Evolving engagement 

While AP7 favours engagement, the asset owner does blacklist companies that are proven to have engaged in unacceptable behaviour, such as having exposure to child labour, Floren noted.  

He said: “When considering whether to blacklist a company, it’s a very judicial process in that we take it upon ourselves to prove a company is involved in unacceptable behaviour. Once we have enough information, we ensure it is verified.” 

On 1 June, seven new companies were added to AP7’s blacklist because they conduct large-scale coal operations without credible climate transition plans.  

AP7 discloses why the decision to divest has been made, “but reiterates the promise to invest again if the company changes its behaviour”, which Floren argued is “the opposite of blanket divestment, where there is no incentive for a company or a sector to change if it is merely excluded”.  

Last month, The Church of England Pensions Board’s CRIO Adam Matthews reflected on the effectiveness of engagement with the oil and gas sector through Climate Action 100+ (CA100+), writing that “engagement with oil and gas should no longer be a top priority of CA100+”, given the sector’s slow progress transitioning. Instead, he called for the initiative to “focus on demand-side companies and how quickly they can exit their dependency on oil and gas”.  

AP7’s Floren said: “Fossil fuel producers have a clear impact on portfolios and the real economy but, if you look at the emissions, the utilities [and other end-users] that bought the fossil fuels to turn it into electricity or heating – their impact is even greater. 

“It’s a supply and demand logic; if the demand is unchanged, it will be virtually impossible to replace fossil fuels without an effective and well-priced sustainable alternative.” 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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