Swedish government pension fund AP7 has teamed up with UK investment giant Legal & General Investment Management (LGIM) on the development of a pioneering transition strategy.
In September, Responsible Investor reported that the SKr1000 billion (€86 billion; $92 billion) fund was looking for a manager to develop the strategy, which will seek to drive real-world decarbonisation and shareholder value by engaging “climate laggards”.
It will focus on misaligned companies across “climate-critical sectors” that have the potential to align with net zero by 2050. AP7 plans to invest 10 percent of its equity assets in line with the strategy by 2025, but the partnership with LGIM will only cover part of it.
AP7 and LGIM said on Tuesday that engagement with portfolio companies will be “highly targeted” and driven by “the equal objectives of accelerating the pace of the climate transition, and maximising long-term shareholder value”.
Following LGIM’s appointment, AP7’s head of communications and ESG, Johan Florén, told RI that there had been “a lot of interest” from asset managers in the strategy. But he added that there were “barriers” to involvement in some cases.
When it comes to ESG strategies, he said, there has been “a lot of focus historically on picking the best ones, the greenest ones, the highest-rated ones, and excluding the ‘bad apples’ or whatever you don’t like”.
By contrast, AP7’s strategy seeks to transform well-positioned laggards – something that could be hard for some managers to combine with a “best-in-class approach”, Florén said.
It may also require funds to abandon their focus on portfolio footprints, which they may be unwilling to do.
“If you have invested, for example, in optimising your portfolio footprint per tracking error unit… you’re going to have to tear it all down, otherwise you won’t be able to invest in the transition,” Florén said.
He added: “The potential is going from brown to green. You can’t start with green.” As an asset owner, he said, AP7 has more freedom to explore such strategies.
“If you have invested a lot in a business model that is working and there’s still demand for it, you’re not going to give it up easily. If you’re an asset owner, you don’t have that legacy to carry around in the same way. It doesn’t affect your income stream as immediately as it does for an asset manager.”
Once the new strategy is developed, Florén said AP7 plans to be “very open about it and explain what we what we [are] doing and why”.
He added that it is not a problem if other funds copy AP7’s approach – in fact similar approaches will amplify their stewardship efforts.
Florén described LGIM as the “best partner” for AP7. This mandate is different from normal ones, he added, in that AP7 is not buying a predefined product but is committing to work with LGIM to develop “something that doesn’t exist”.
“We don’t have it, they don’t have it; it’s a combination of intellectual and practical innovation,” he said.
The financial details of the partnership were not disclosed in Tuesday’s announcement.
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