Sweden’s AP funds’ ethical umbrella

Council gives Swedish state funds responsible investment muscle.

Sweden is known for being co-ordinated in ethical and environmental matters. But it came as a surprise when the country’s national pension buffer funds, AP1, AP2, AP3 and AP4, which manage combined assets fast approaching €100bn, established a joint ethical council at the beginning of this year. Nadine Viel Lamare, chairperson of the ethical committee and head of corporate communications at AP1, said its genesis came from a decision by the four funds that they should work together on ethical investment. The potential synergy might seem obvious, but isn’t. Under Swedish law, the four AP funds are in direct competition and have separate investment policies. Viel Lamare explains: “When we started, it was solely with the idea of coordinating research on the environmental and social factors of the funds’ overseas investments. We thought this would give us a better view of the overall market and allow us to discuss the pros and cons before each fund went away to talk with their own advisors and implementany decision. We ended up realising that we all wanted to work the same way and so we selected GES Investment Services, the Stockholm-based research house, as a unique advisor for an ethical overlay that we could each apply to our individual investment decisions.
We also felt that it would be better to work together as a lobby force against larger companies than to try and do this individually.” Prior to the creation of the ethical council, AP1 was the only fund working actively in ethical investment, although all had expressed an interest in voting their total shareholdings and addressing environmental concerns.
“In the original documentation for the AP pension reforms made at the end of the 1990s, there was one line that said the funds should take into account ethical and environmental criteria as long as it did not lead to any loss in financial terms. That was the only guidance we had, which left a lot more questions than answers!” says Viel Lamare.

The ethical committee does not include the two other AP funds: AP6, which is invested solely in the Nordic region, and P7, the default fund for the state organised PPM system, under which Swedes pay a portion of income tax into retirement mutual funds. “AP7 is a different case because although they have a similar kind of structure and policy to us, they work on an ethical exclusion rather than engagement basis. To date there haven’t been any discussions about them joining the ethical council,” says Viel Lamare.
The distinction is important, she notes: “It’s really a measure of last resort for us to divest from a company on ethical grounds. We are involved in engagement. In practice the ethical council would only make recommendations to divest and it is up to the individual funds to discuss what they do. We want to see changes in the areas where we believe there are problems, so we want to see a change of strategy and then implementation by the company so we can check the result.”
The council is made up of one representative from each fund, plus two staff from GES to report on the latest ethical issues. Chairmanship revolves annually between the funds and will next year pass to Carl Rosen, head of corporate governance at AP2, who is an outspoken supporter of robust engagement with companies.
Its overall ethical stance is drawn from the guidelines of the International Labour Organisation and the UN Global Compact. “Our meeting time is spent looking at how we work within these criteria and understanding what this really means for our investments. Meeting with companies is also really important for such a strategy towork,” says Viel Lamare.
Having originally scheduled four meetings a year, the council has already met six times in 2007. Viel Lamare says this could rise to bi-monthly because of the commitment necessary for such a strategy: “Engagement is quite time consuming,” says Viel Lamare.
From its outset, the council decided it needed targets. It proposed entering into serious dialogue with ten companies every year: “GES does a twice yearly report for us on companies we invest in and we discuss which ones are not up to standard. “We don’t disclose exactly what companies we are dealing with, but I can say that we have been in discussion with a lot more than ten companies this year! We will also issue a report early next year to show how we work and what we have done.”One example where the ethical council has gone public is on Yahoo!,the internet service provider, which has been threatened with legal action by the World Organisation for Human Rights over its decision to disclose the identity of Chinese citizens writing about democratic reform, which lead to their arrest.
“AP1 had been trying to have a dialogue with Yahoo! before we created the ethical council. We have continued that dialogue with them through the ethical council. Yahoo! has now become part of a multi-stakeholder dialogue with different NGOs, which is due to produce a report at the end of the year on the issue. It would be fair to say that the problems facing Yahoo! are also problems across the internet sector when it comes to China. We have had one meeting with Yahoo! and will review our position later this year.”
The ethical council has yet to recommend that the AP

funds sell any of their investments over ethical concerns. However, Viel Lamare says other sectors of concern include oil companies over issues of corruption, environmental damage and human rights abuses: “Otherwise, we speak to companies on a case-by-case basis. We don’t want to have a bias necessarily to any one kind of engagement or any one sector,” says Viel Lamare.
In terms of overseas share voting, each AP fund has a different policy.
Viel Lamare says AP1 tends to focus its votes where it has larger stakes or where there are particular issues it wants to address: “We’ve voted on resolutions to bring about changes at Yahoo!, and we’ve also co-filed a resolution on Walmart with the New York City Employees’ Retirement System (NYCERS). One reason for filing joint resolutions is to be more visible to other investors and to know what others are doing. The UN Principles for Responsible Investment (UN PRI) are very useful to this end. We are always looking for collaboration with other investors, especially in situations where we don’t get responses from companies and we feel we need to add more power to our campaign.”AP4 is the only one of the AP funds not yet affiliated to the UN PRI, although they are understood to be looking at joining. Viel Lamare says equities remain the easiest asset class in which to implement an ethical approach, although she says that if AP1 were to exclude a company’s shares it would exclude their bonds also. Alternative investments are more difficult, she says: “It’s difficult really to get any information on ethical issues for alternatives. We have started to have discussions on how we might look at this area, but one of the issues is that the AP funds strategies are markedly different in the amount of investment they have in private equity and hedge funds and the geography of these assets.”
She says the ethical council’s work is starting to raise the profile of the AP funds amongst corporations: “I wouldn’t say they all know who we are, not yet. But when you consider that Walmart did not know who the Norwegian Petroleum Fund was when they were first challenged by them, then maybe that is not surprising. But companies we invest in now know that we can talk with asset managers and other investors and that coverage of these issues in the press can be damaging to them, so there is a change.”