AP1 seeds ‘next generation’ of funds in bid to put ESG into emerging markets portfolios

‘We have now provided examples of how you can improve your sustainability profile irrespective of your investment style,’ says Swedish pension fund

Swedish pension fund Första AP-fonden, better known as AP1, has seeded what it describes as “the next generation of index funds” for emerging markets responsible investors, in partnership with Legal & General Investment Management (LGIM).

The SEK355bn (€35bn) public ‘buffer fund’ has put an undisclosed amount into a pooled, index-linked vehicle called the Emerging Market Equity Future Core Fund, launched this week. The fossil-free fund reweights its large- and mid-cap constituents based partly on their sustainability performance. 

The investment is part of long-running efforts by AP1 to “replace all passive mandates” in emerging markets with more innovative versions that enable it to improve sustainability performance. Two years ago, it kicked off those efforts by seeding an ESG product from BlackRock.

Last month, it worked with French asset manager Tobam, to remove fossil fuels from its systematically-managed emerging market equities and global high-yield strategies, which have combined assets of around SEK6.5bn. It seeded those funds in 2011 and 2017, respectively. 

Tina Rönnholm, Portfolio Manager for AP1’s externally-managed accounts, told RI that it had “previously been considered ‘impossible’ to exclude a significant part of the relevant investment universe and still conduct systematic management”, but that it was now understood to be possible. 

“Our hope is to be able to produce corresponding evidence for passive management,” she said at the time.  

Speaking to RI today, Rönnholm explained: “We have a large chunk of our EM book of business invested passively and we wanted to improve the sustainability profile of this sleeve. It was also important to us to have a solution we can use as part of our core EM allocation and not to create yet another niche strategy – that’s why we named the fund Future Core to signal our ambition of providing solutions for the large pool of capital allocated passively today.”

“We think about this as the next generation of index funds,” she continued, highlighting how the approach considers 28 ESG factors and “offers transparent ESG-scores so that the companies know where they need to improve”. Companies that improve those scores “can to a certain extent impact their weight in the index”, she said.

LGIM has agreed to engage with companies within the index, and voting at AGMs on relevant topics. 

“We have now provided examples of how you can improve your sustainability profile irrespective of your investment style,” Rönnholm said, pointing to the fact that AP1’s recent announcements have covered active management, systematic management and passive management.