Sjunde AP-fonden (AP7) recently teamed up with a number of other key investment players – fellow state fund AP3, pension insurer SPP, asset managers Storebrand and Skandia and the Church of Sweden – to focus on how it can further the sixth Sustainable Development Goal: “Clean Water and Sanitation – Ensure availability and sustainable management of water and sanitation for all”.
The six now form a working group, created as part of a wider initiative by Swedish aid agency SIDA, which saw numerous investors in the country get together to address the implementation of different SDGs.
“We chose to work with water because it is such an urgent issue. You only have to look at the findings of the World Economic Forum to see that it’s consistently within the top global risks,” says Johan Florén, Head of ESG at AP7. “There’s been a lot of focus on carbon emissions and reserves, but in some ways water risk is more urgent, because of the dispersed nature of the problem, but also the direct impact on people from available solutions.”
At least 1.8bn people do not have reliable access to safe drinking water, according to the World Economic Forum. The WWF predicts that, if we continue to consume water at the current rate, by 2025 two-thirds of the world could face water shortages. The World Water Council claims that the economic costs of water insecurity is estimated at $500bn each year.
In addition to its very visible impacts, the reason AP7 chose to focus on water is because there are already clear solutions, Florén says. “There are things we can concretely do now to deal with this: we have the technology, the companies exist, and investor demand is strong. Our mission is more about finding ways to bring these things together.”
The fund will take two approaches to water. Firstly, it will engage with companies to encourage them to “put water higher on their agendas”. Last year, the pension fund launched a project to do just this, focusing initially on water intensive sectors like mining, garment and food & beverage.
“The other part is pure investment,” says Florén. “We need to put our money into water projects.”
AP7 is the unusual among Sweden’s six ‘AP’ funds. The other five work within a ‘pay as you go’ pension model and act as a buffer to cover any shortfalls in the main system, while AP7 is the default alternative within the ‘premium’ pension system. Investment-wise, this means it functions as a UCITS fund, and is more constrained in the asset classes it can allocate to than the others.It cannot invest in real assets like infrastructure and real estate for example, and only has a very small allocation to private equity. The rest of its capital is put into global equity and SEK-denominated bonds, which will influence its work around water investments.
“So, for example, in the same way we could talk about green bonds, perhaps we should be talking about blue bonds,” Florén says, adding that as part of the initiative he assessed AP7’s existing green bond portfolio, and identified a number of investments which already covered water projects. “It could be useful to begin dividing green bonds into two parts, green and blue, to help investors who want to target water.”
Currently, the supply of water investment opportunities does not meet the demand, according to Florén. “Just like broader green investment, the demand for water investments is high, and the need for water investment is really high. So where is the problem? Why isn’t this market taking off?”
The first port of call to help the working group bolster the supply of water investment opportunities will be the local politicians and ‘kommuner’ – Sweden’s municipalities. “That’s where a lot of these decisions need to come from, and a lot of this financing needs to happen. We want to be very hands on. It’s important that we get useful results that translate into more spending and meaningful engagement on water – that we dig down into where we can do good and how we can overcome obstacles – rather than just give a commentary on ideas and principles.”
Another “central part” of AP7’s work around water is the development of a reliable impact measurements for its own investments. “And we don’t mean ‘impact’ in the framework of philanthropy – we are talking about this on an investment basis.” The pension fund has been assessing different strategies already in the market, but Florén stresses that the market is currently “very immature” in this respect, and much of the focus is still on output – the projects or companies financed – rather than the ultimate impacts on society.
All these efforts have contributed to AP7’s decision to begin tendering for a new, “blue/green” equity mandate, which will see it issue a Request for Proposals in the coming weeks. Florén declined to disclose further details around the size and terms of the allocation, but said AP7 expected to have the mandate up and running some time towards the end of the year.