French asset manager Tobam has made its emerging markets equities and high yield bond strategies fossil fuel free, in response to a request from Swedish pension fund AP1.
AP1, also known as Första AP-fonden, pledged to exit fossil fuels completely earlier this year, and has been on a long-standing mission to integrate sustainability into its emerging markets portfolios. As part of this, the SEK355bn (€34bn) ‘buffer’ fund worked with its existing asset manager, Tobam, to remove fossil fuels from its emerging market equities and global high yield strategies.
The change means companies with significant involvement in the production, sales or extraction of fossil fuels (including coal, coal power generation, oil and gas) are excluded from the investment universes of both strategies.
AP1 seeded Tobam’s emerging markets strategy in 2011, and the global high yield strategy in 2017. “Over all these years, several sustainability initiatives have been implemented by the manager and we look forward to cooperating on this front also in the future,” Tina Rönnholm, Portfolio Manager for AP1’s externally-managed accounts, told RI.
According to AP1’s website, the market value of the two strategies now stands at roughly SEK5bn and SEK1.5bn, respectively.
The latest move comes as the pair publish a report “that presents both theoretical and empirical evidence that systematic management can be made fossil-free, without sacrificing the market's risk premium”.
“The study presents empirical results for Första AP-fonden's investments in two widely differing asset classes; high-yield corporate bonds (Global High Yield Strategy fund) and emerging market equities (Emerging Markets Equity Fund ),” said AP1 in a statement. “Tobam's approach excludes investments in companies with fossil fuels and replaces them with other holdings with the same diversifying characteristics, which results in completely fossil-free systematic management without any change in the risk or return pattern.”
Rönnholm said it had “previously been considered ‘impossible’ to exclude a significant part of the relevant investment universe and still conduct systematic management, but we can now, together with Tobam, present the facts that it works”.
“This is groundbreaking, and we urge other systematic managers to do their own research in this area,” she continued. “In a next step, our hope is to be able to produce corresponding evidence for passive management as well. It could mean an important ‘tipping point’ because a very large part of all capital is managed passively today, and thus a fantastic opportunity to contribute to the transition to a sustainable society.”
In 2018, AP1 seeded an emerging markets equities fund from BlackRock that integrated material ESG elements. This was part of its wider drive to “replace all passive mandates” in emerging markets to enable the fund to better address sustainability.