Sweden’s AP2 develops in-house ESG-tilted corporate bond benchmark

State fund takes raw data from ESG providers

Swedish pension fund Andra AP-fonden (AP2) is preparing to launch an ESG-tilted corporate bond benchmark on the back of the recent integration of ESG into its active corporate bond model.

Earlier this year, RI reported that the SEK345bn (€34bn) buffer fund had developed a quantitative ESG approach for its equities investments – across passive, active, developed markets and emerging markets – making the innovative decision to buy in raw ESG data from providers, rather than relying on final pre-packaged ESG scores.

Now, Tomas Morsing, AP2’s Head of Quantitative Strategies, has said that his team is completing the same process for investment grade corporate bonds, and has just introduced the approach to its active work.

“But the active part of what we do is relatively small. If we really want to have an impact and raise our ESG exposure, then we need to change our index. So, starting in January, we will be building a corporate bond index with an ESG tilt.”

Work has been underway on identifying appropriate ESG issues throughout 2018, using much the same approach as equities: taking raw data from ESG providers and establishing which factors display a robust returns correlation.

Speaking on an RI webinar about ESG integration in corporate bond portfolios last week, Morsing warned the audience that there are big challenges around ESG data and quantitative analysis.“Different ESG providers have very different amounts of data… and the indicators [they use] are not the same… the questionnaires are also different,” he observed, adding that some of the data is “a little bit softer”, and can be based on estimates, while other data may be slightly out of date.

“We will be building a corporate bond index with an ESG tilt.”

From a quant perspective, back-testing can also be problematic, Morsing said, because many providers have updated their methodologies significantly over recent years.

Morsing declined to disclose which ESG factors it would be including in its new models, but said that – mirroring its equities work – carbon intensity was likely to feature highly. Gender diversity is another topic that AP2 has put top of its sustainability agenda over the past 18 months.

Not all ESG topics are transferrable from equities to fixed-income, though, reflected Morsing in a conversation with RI.

“There are a few issues that appeared in the equities work that don’t come up in corporate bonds and vice versa: some governance aspects, for example, show up as material issues for corporate bonds but not so much in equities.”

The new index is expected to be constructed in-house.