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AP7 and ESG: “In the long run, this pretence around ESG integration is going to dissolve”

AP7 and ESG: “In the long run, this pretence around ESG integration is going to dissolve”

CEO Richard Gröttheim and sustainability head Johan Floren discuss what it really means to be a responsible investor, the SDGs and blacklisting vs. litigation.

The fifth of our in-depth series looking at Sweden’s AP funds features Sjunde AP-fonden. For an outline of the law changes discussed, see here.

AP7 is not included in Sweden’s Council of Ethics with the first four AP funds, and is not governed by the recently-passed legislation on ESG. Instead, it is ploughing its own furrow.

“The AP funds are among the best in the world on sustainability, but you wouldn’t know if from reading the newspapers” – CEO Richard Gröttheim

In November, the SEK376bn (€36.5bn) fund hit headlines when it announced it was considering starting legal proceedings against Alphabet (Google) over its record on sexual harassment. It is not AP7’s first attempt to warn some of the world’s biggest corporations to ‘do the right thing’, as Google’s own slogan demands. In 2017, it took legal action against Facebook over its attempts to reclassify its share structure – a move which would have potentially resulted in significant share dilution – and has been involved with a slew of other cases against companies including Vivendi, Sino-Forest, Petrobras, Toshiba, Volkswagen, Allergan, Cobalt International Energy, Deutsche Bank and Mitsubishi.
“I’ve been very involved on a personal level with the litigation activities,” explains CEO, Richard Gröttheim, describing law suits as one of four tools the fund currently works with on ESG (the others are engagement, voting and exclusion; although it may formally introduce a fifth this year: filing resolutions).
“To go through the courts, we have to be able to prove that we lost a lot of money. In the case of Facebook, it was minority investors like us that stood to lose the most from the share reclassification. With Alphabet, we would argue that the company didn’t release financially material information to shareholders in relation to the sexual harassment allegations.”
He adds that there is a lot of scrutiny on AP7 from the general public and the mainstream media, who often overlook the fact that much of the fund’s holdings are in passive equities, so exclusion can be tricky.

“People are always telling us we shouldn’t own certain companies, and that can be frustrating because there are other ways, like litigation, to tackle sustainability,” he says, adding: “The AP funds are among the best in the world on sustainability, but you wouldn’t know if from reading the newspapers. That’s part of the deal when you’re a public pension fund, and it’s right that it should be that way. But, as long as I know we are taking action to deal with some of these issues, then I can live with it.”
Gröttheim is backed by his Head of ESG, Johan Floren, who points out: “When there is a scandal like Facebook we are simply asked: are you going to sell? But for the kind of problems that these companies have, norms-based blacklisting isn’t very useful. You have more influence remaining in the stock and engaging.”
Floren says AP7 is “very strict” about excluding companies. However, that didn’t stop it in 2017 axing firms including giants Exxon and Gazprom, saying they were “in direct violation of the Paris Agreement”.

“When there is a scandal like Facebook we are simply asked: are you going to sell? But for these kind of problems blacklisting isn’t very useful” – ESG Head Johan Floren

Floren said at the time that the thinking was “to put pressure on these companies and change their behaviour through blacklisting” and Gröttheim hopes other investors will begin follow suit. Around €300m was divested.
“Then we decided to take the same amount of money and invest it in green impact equity,” Floren added. Those two mandates are aligned with the two Sustainable Development Goals that AP7 has chosen to prioritise over coming years: Goal 6, Clean Water and Sanitation, for which KBI now runs a portfolio; and Goal 13, Climate Action, managed by Impax.
“We’ve also put into the contracts with these managers that we’ll work with them to develop metrics and methodologies around measuring the impact itself,” says Floren. “There’s a lot of measuring output going on, and some attention given to outcome. But what’s the actual impact?” he asks, observing that the current tendency to “put a grid on the investments you already do… doesn’t create much value”.

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