AP2’s sustainability activities focus primarily on a few priority areas that are considered essential to achieving a better long-term return. One of these focus areas is diversity. The idea to focus the Fund’s resources is to achieve results in areas of financial relevance. The Fund possesses extensive expertise and experience in these selected priority areas, having been engaged in these issues for a considerable period.
Diversity, and particularly to increase the proportion of women on boards and executive management, was one of the first corporate governance issues that AP2 started to work with already in 2002. The Fund has contributed to a positive development, through dialogue with companies regarding the selection process for the management and boards. To spread knowledge, for example through the Fund’s annual Female Representation Index, has been another way.
AP2 Female Representation Index
Since 2003, AP2 has measured the percentage of women on boards and executive managements and annually published a report on this, AP2’s Female Representation Index. The information from the Index is used in the Fund’s corporate governance work. The aim of this is to contribute to a factual debate on how to increase the number of female board members in Swedish stock exchange-listed companies, as well as diversity with regards to age, background, experience and expertise. Why is this desirable? Better recruitment basis creates better boards and management groups, which in turn creates better companies and better returns for the investors. We want to encourage more people to act to achieve change and take the diversity and equality perspective seriously.
The 2016 edition of the Index showed that the proportion of women represented on corporate boards now exceeds 30 percent, as well as the fact that the proportion of women on executive managements has for the first time exceeded 20 percent. No less than 44.9 percent of newly elected board members are women. Developments in recent years shows that it’s clear that these companies, without enforced legislation, are themselves well on the way to achieving gender equality on their boards and within their executive managements. I believe this clearly demonstrates that stakeholders and nomination committees have become better at utilizing the full range of competence available – and that the pace of this change-process is accelerating
ESG factors in quantitative portfolio management
One of our most important actions concerning sustainability that AP2 did during 2016 was to integrate ESG factors into the quantitative management of our asset class Global equities. In the case of the asset class global equities, with some SEK 90 billion under management, our quant model comprises source data featuring hundreds of different factors, covering some 2,500 companies.The model is then used to process all this data, which is condensed into 10-15 aggregated factors. These factors are then used to extrapolate the possible future levels of return on equities under management. This in turn determines which equities the Fund decides to over/underweight, to outperform index.
AP2’s ESG model includes environmental factors which include specific measurements for example, how much carbon emissions the companies emit or how much energy they consume. The model also includes measurements and indicators of social and corporate governance factors which, quite simply, can be said to indicate whether it is a healthy company.
An interesting observation made by the Fund is that companies featuring a high proportion of women in leading positions also note stronger growth, regardless of size or type of company. One possible explanation is that these companies are more focused on issues relating to values and corporate culture. This is reflected in the Fund’s measurable indicators, such as the proportion of women in leading positions or the range of in-company training.
AP2 invests in global programme to support female enterprise
In 2016, we invested in the Women Entrepreneurs Opportunity Facility (WEOF), which combines the possibility of strong returns with a social dimension. WEOF is a partnership between the Goldman Sachs 10,000 Women entrepreneurship programme and the IFC (International Finance Corporation).
As always, this investment was assessed in terms of the potential return and risk but it also offers the Fund opportunities to develop competence in diversity issues. The venture also offers opportunities for private investment in emerging economies, through collaboration with a world-leading player in this field. Furthermore, it provides diversification in other holdings in the form of alternative credits.
Women in developing countries are an under-utilized resource, capable of boosting company profits and contributing to increased prosperity. They are often hampered by poorer employment conditions and lower incomes than men, as well as a lack of access to the capital needed to grow their businesses. They are also often prevented from owning and inheriting land and other assets. These are obstacles we wish to help them overcome, while also making a sound financial investment.
For an institutional investor as AP2, there are several ways to work with and improve diversity. We will continue our persistent work both through our Index but also through investments that comply with our mission. We will also, in various ways, be engaged in the UN global Sustainable Development Goals and one of our focus is on Goal 5: Achieve gender equality.
Eva Halvarsson is CEO of AP2.