Sweden’s AP2 plans in-house quant data model for portfolio human rights risks

New report provides comprehensive overview of the fund’s efforts on human rights

Sweden’s €34bn pension fund AP2 plans to develop an “in-house quantitative data model” to get a more complete picture of the human rights risks its portfolio is exposed to.

The ambition, which AP2 (Andra AP-fonden) plans to work on over the next year, was revealed in its human rights report, published today.

It provides a comprehensive overview of the fund’s efforts on human rights; it’s structured in accordance with the United Nations Guiding Principles on Business and Human Rights (UNGP) framework.

“We need to be able to look at the human rights issues in a more systematic way.”

That frameworks covers: governance of respect for human rights; defining a focus of reporting; and management of salient human rights issues.

Plans for the new human rights risk model, which AP2 hopes will allow it to be more “proactive” in its approach to such risks, follows a project it undertook with fellow Swedish funds AP1, AP3 and AP4, last year.

As part of that project, AP2, examining listed global equites, found that most sectors in which portfolio companies were active in posed “severe risks” on human rights.

“We are in the process of evaluating different data vendors to try to figure out how we can build the model, there are some challenges but we are ambitious” said Lina Sandström, Sustainability Analyst at AP2.

“We have a large portfolio with investments all over the world, we need to be able to look at the human rights issues in a more systematic way, so building a robust data model for that is key to be able to have a good risk identification process.”

Another area discussed in the report are the checks AP2 puts on its external managers – which run around a fifth of the fund’s assets.

While all managers are subjected to an annual appraisal on their sustainability efforts, the report details how greater checks are placed on the managers of its three Chinese domestic equities mandates due to the higher potential for human rights risk in the country.AP2, which was advised on conforming to the UNGPs by US non-profit group Shift, also discusses its “intensified collaboration” with AP1, AP3 and AP4 on human rights in the document. Shift is chaired by Professor John Ruggie, the author the UN Principles which informally bear his name.

RI reported in February that AP2 had created new equity indices covering both emerging and developed markets tilted towards companies with better sustainability credentials, including management of human rights issues, which is also mentioned in the report.

The project has now been widened to corporate bonds, and a new benchmark is slated for 2019.

The report also provides case studies on AP2’s engagement work on human rights, including with Brazilian miner Vale over the 2015 Samarco and 2018 Brumadinho tailings dam disasters, which resulted in the deaths of at least 153 people.

Despite the AP funds excluding Vale in May, Sweden’s Council of Ethics, the body that coordinates the funds’ sustainability work, continues to engage with the company “due to the serious circumstances surrounding the case”, the report reveals.

“For us it is very important that the financial sector takes human rights in to consideration, that is one of the reasons that we really wanted to publish this report,” Sandström told RI.

She added her hope that AP2’s report would inspire other companies to follow its lead.

Last week, the Financial Sector Commission on Modern Slavery and Human Trafficking released its final report, Unlocking Potential: A Blueprint for Mobilizing Finance Against Slavery and Trafficking, during the United Nations General Assembly in New York.

The Liechtenstein Initiative – the public-private partnership headed up by Principles for Responsible Investment CEO Fiona Reynolds that produced the report – has now also launched the Finance Against Slavery and Trafficking project to further accelerate the implementation of its blueprint.

The PRI is hosting an event on the report this Thursday.