Eva Halvarsson: AP2 CEO on ESG in quant, land grabbing and why investment regulation needs to change

The fund publishes its sustainability report today (Feb 10) alongside its financial numbers for the first time.

Eva Halvarsson, CEO of Sweden’s second AP fund, one of the country’s national pension buffer plans, says 2016 was “a kind of turning point” for its ESG work: “A lot of the things we’ve been working on for many years came to fruition.”
The fund publishes its latest sustainability report today in Swedish, and in English in about a month’s time. For the first time, the document has been released alongside its annual financial report: “We’ve decided we don’t want sustainability to be seen as something that we do separately and secondarily – it should be part of everything we’re doing, so from that perspective it’s strange to publish a specific document at a different time of year from our annual report,” explains Halvarsson, adding that the two reports may in future be published as one integrated document, to reflect this even further.
Updates included in the document range from work around the United Nations Sustainable Development Goals (SDGs) and the UN Guiding Principles, to new ESG strategies and heightened transparency in response to accusations of involvement in land-grabbing: “We have a saying in Swedish that translates as ‘Do things before you talk about them’. That’s always been the way we’ve operated at AP2. There’s been ‘sustainability-washing’ in some parts of the market recently, where people have done a lot of talking before making anything happen, and signed a lot of pledges without getting very much done. We’ve been doing it the opposite way around: we’ve been doing things in-house before we announce anything. Sometimes that means we’ve been criticised for what is perceived as a lack of activity, but gradually we will be able show that’s not the case.”
One of the criticisms AP2 faced in 2016 was that some of its investments in Brazilian farmland were linked to ‘land-grabbing’ – an accusation the fund vehemently denies. A report commissioned by the European Parliament’s Subcommittee on Human Rights said AP2 was invested in land involved in ownership conflicts via its investment in TIAACREF’s Global Agriculture Fund. It slammed the Swedish pension fund for refusing to disclose details around the acquisitions, citing competitive concerns. At the time, AP2 said it would begin using a third-party audit to assess the sustainability of agricultural investments in Brazil.Its sustainability report shows that sustainability consultant BSD Consulting is now performing audits, and that – as of December – it has disclosed the details of its acquisitions via TIAA’s website: “It’s extremely important to be as transparent as possible. In this case, that meant ultimately sacrificing some of our competitive and commercial interests, but we think in this instance that was the right thing to do.”
One of the key decisions AP2 made in 2016 was to introduce ESG into its quant portfolio. An ambitious move that relates to some 30% of the SEK300bn (€32bn) fund’s capital: “We realised that we couldn’t be seen as trustworthy in relation to our sustainability work if we weren’t addressing it in a structured way through our quant investments,” says Halvarsson. “But it’s so totally different from our fundamental approach. We realised it had to be done from scratch.”

“We have a saying in Swedish that translates as ‘Do things before you talk about them’.”

The result is that the in-house mathematical model that underpins its quant equities strategy now includes a series of ESG-focused KPIs, such as a company’s carbon footprint or the number of females in senior positions: “The main challenge is that we normally look at quant data over 10-30 years, so we can really test patterns. But with sustainability data, there simply isn’t that long history, so we are looking at more like 7-8 years. The quant team was enthusiastic, but they were nervous about that timeframe issue and careful to select data points which have very clear correlations with performance.”
Also included in the report, for the second year in a row, is a rundown of AP2’s work in relation to the UN Sustainable Development Goals: “I love them,” says Halvarsson. “I think the SDGs are extremely important in enabling different stakeholders to speak the same language, even though we’re coming from different perspectives.” AP2 will expand its work in 2017 on the SDGs from an in-house approach to asking its Swedish holding companies to report on their work: “It makes it easier to engage with companies around sustainability, because there is an independent reference point we
can all understand,” says Halvarsson. “It also makes it easier for everyone to see that we can’t all do everything, but we can each focus on relevant and specific goals. For us, the priorities are climate change and diversity.”
In 2017, AP2 will continue its work around the UN Guiding Principles on Human Rights. This began last year with a move to integrate them into its internal activities, but this year the plan is to start engaging investee companies on the topic. Other ambitions for the year include the broadening out of its ESG quant strategy from equities to fixed income, and the creation of an ESG index, via the quant team, to enable AP2 to employ ‘semi active’ investment strategies.
“More generally, we have turned our focus from risk to opportunity in a very concrete way,” says Halvarsson. “We began a number of years ago by looking at sustainability from a risk perspective, andthat meant we divested. We’ll continue to do that, but we will also begin to look more intensely at new opportunities – vehicles that support the SDGs, or investments that are specifically aimed at financing the transition to a green economy.”
That work would be made easier, she points out, if Sweden’s AP funds were not bound by such tight rules around the asset classes they can invest in. Currently, all the AP funds must invest 30% in bonds and cannot have more than 5% in unlisted assets, for example: “If that regulation could change so that we could increase our allocation to unlisted assets to 10% or 15%, and reduce our focus on bonds, then not only would we be able to generate better returns in a low-interest environment, but we could also invest more in different kinds of green companies that will help move us towards a low-carbon world. A lot of new opportunities are in unlisted firms.”