Niklas Ekvall is the CEO of AP4, a Swedish public pension fund with assets of USD 40 Billion. AP4 pioneered portfolio decarbonization in 2012 and created the Portfolio Decarbonization Coalition (PDC) in 2014.
Mr. Ekvall’s previous positions include head of treasury at Nordea Bank, head of asset management at Nordea, Carnegie and AP3 respectively. He holds a PhD from the Stockholm School of Economics where he has also been adjunct professor and lecturer.
Christopher P. Skroupa: What does ESG look like to you and what are some trends you’re observing?
Niklas Ekvall: AP4 believes that sustainability (ESG) is a necessity for long term investors and a prerequisite for good long term performance because it affects the long-term risks and opportunities associated with every investment. AP4’s two main focus areas within sustainability are Climate & Environment and Corporate Governance. On the one hand, we view climate risk as one of the most significant long-term systemic risk to asset values. On the other, Corporate Governance is a very important tool for investors to safeguard asset values in general, and not the least by taking social responsibility and environmental issues into account when making investment decisions as well as when influencing companies to improve on these factors.
With sustainability integrated into the investment processes and corporate governance as a tool to promote ESG, we believe there are good prerequisites in place to generate good performance through handling risk and opportunity. Sustainability is therefore a cornerstone of our investment beliefs: “Integrating sustainability aspects in asset management contributes over time to better management of risks and opportunities, and thereby to returns. AP4 therefore considers sustainability a necessity to long-term successful investment management.”
Current trends we see are increased regulation in the EU regarding sustainability in relation to the EU Action Plan on Sustainable Finance. We see many initiatives when it comes to classifications, taxonomy, markets standards that we believe will be rolled out in the coming years and have significant impact on the finance industry. In general, we have a positive view on industry self-regulation, which we believe could contribute to a faster adoption of sustainable practices.
Skroupa: What is the state of play of ESG at AP4?
Ekvall: As a pension fund, AP4 is a long term investor. Our investment horizon is up to 40 years, and with that horizon ESG and sustainability needs to be in focus. We have a long dated tradition when it comes to integrating ESG into our investment activities. More than 30 years ago [in 1986] we established our first ownership code; the first of its kind in Sweden and very early also from an international perspective.
25 years ago [in 1993, Volvo] we were instrumental in setting up the first board nomination committee in Sweden, and later on significantly contributed to the establishment of The Swedish Corporate Governance Board which has proved to be pivotal for the Swedish model of self-regulation and to ensure a well-functioning equity market. Today we are active members in approximately 30 nomination committees of listed companies every year.
10 years ago [in 2007] we formed the Council on Ethics together with the other AP-funds in order to promote international corporate governance as well as our role as a responsible owners in cooperation with other institutional investors on a global basis. At that time, we also established that active engagement with the companies, rather than exclusion, as our main tool to try to influence companies. We were hence very early to implement and develop this approach, which today has spread internationally and is now adopted by many institutional investors.
Since 2009, we have been investing in dedicated active corporate governance mandates in order to promote corporate governance standards and at the same time create outperformance.
Environment and climate has always been part of our ESG work. In 2012, we started reducing carbon emissions in our equity portfolios. We have today invested a large part of our global equity portfolio into low-carbon strategies. In these strategies, we reduce carbon emissions by more than 50 percent.
Since 2012, our focus and ambitions in this area increased quickly as we started to actively direct part of our investments towards de-carbonization while also steering our portfolio away from inherent exposures to climate risk. We came to the conclusion that as a responsible owner, with a very long investment horizon, we needed to more thoroughly integrate climate and environment aspects to secure the long term sustainability of our returns.
Although AP4 is a comparatively large institutional investor, we represent only a very small part of the total investor community. To make a greater impact than what would be warranted by only our own assets under management, we are making a concerted effort to activate capital also from other investors for sustainable investments. For example, AP4 is a co-founder of the Portfolio De-carbonization Coalition (PDC), which to date has mobilized more than USD 800 billion for low-carbon investments. As another example, AP4 has participated in designing indexes and has been the first investor in newly started funds that other investors have also been able to invest in. In this context I want to mention Vasakronan, the real estate company that is jointly owned by AP1, AP2, AP3 and AP4, and which is a leader at sustainability in the property sector and a model internationally.
Since 2015, we have dedicated sustainability mandates within different focus areas such as gender and children’s’ rights. The same year we decided to divest tobacco companies.
AP4 has also been a pioneer in the growing market for green bonds, and has been a very active investor in green bonds since 2013. In the early days of green bonds, AP4 was an important investor to get the market started and thereafter for its continued growth and development.
A significant work was conducted in 2017 and early 2018 to develop our sustainability framework including a new sustainability policy. An important aspect in the framework is how our work can contribute to the achievement of the UN’s Sustainable Development Goals. A number of specific actions were the outcome of this process. The projects are all on-going and include: Integrating sustainability into all investment processes; thematic investments into climate & environment; models and targets for the evaluation of sustainability; co-operations and initiatives with other investors; internal education and information about sustainability.
We are actively working on incorporating climate change effects into our long term economic forecasts. In 2018 we made the decision to sell coal companies from the global equity portfolio where thermal coal represents 20 percent or more of turnover. This further reduces portfolio exposure to large carbon dioxide emissions and fossil reserves and thus reduces the climate risk in the portfolio.
AP4 is active in owner initiatives that support the UN’s Global Goals. These include initiatives urging companies to refrain from negative climate lobbying, initiatives advocating for stock markets around the world to apply sustainability reporting guidelines, initiatives demanding that oil companies work to reduce the negative environmental impacts of their operations, and initiatives focusing on gender equality and human rights.
Transparent reporting of climate-related risks and opportunities contribute to a faster transition to a low fossil fuel society. And a rapid transition is necessary to minimize climate-related risks and negative impacts on ecosystems, societies and economies. AP4 supports the Task Force on Climate-related Financial Disclosures’ (TCFD) recommendations and has reported in accordance with TCFD guidelines during 2018. We measure and report the carbon footprint of our investments yearly since 2013 as part of our broader work on addressing climate change.
AP1, AP2, AP3 and AP4 collaborate in the Council on Ethics of the AP Funds to influence foreign companies to work for improvement in the area of sustainability. The Council’s continuing work encompasses preventive and reactive dialogues with foreign companies — some 200 dialogues every year — as well as industry-wide projects, and international collaborations and initiatives. If dialogues are not deemed beneficial, the Council on Ethics may recommend the AP Funds to exclude certain companies from the investment universe. This is transparently reported on the web.
Skroupa: What new legislation is being mandated that is having an impact on Swedish investment trends?
Ekvall: The AP Funds Act is expected to be revised in two steps, effective as of January 1, 2019 and July 1, 2019 respectively. The first step will include increased flexibility when it comes to asset allocation and a higher ambition level when it comes to sustainability. This step has been prepared by the Ministry of Finance and is currently awaiting a final decision by the parliament.
The major expected changes to the investment guidelines are: the minimum requirement to hold fixed income investments that are liquid and with a high credit worthiness will be lowered from 30 to 20 percent of the portfolio; The maximum limit to hold unlisted investments will be raised from 5 to 40 per cent (Please note that unlisted real estate investments are currently not included in the 5 per cent limit, but is proposed to be included in the new 40 per cent limit. This would also go for semi illiquid investments such as hedge funds with lock-ups. So the 5 and 40 percent limits are not directly comparable); Current minimum requirement to hold at least 10 percent of assets in external management will be taken out; requirement to manage the portfolio in a sustainable and exemplary way will also be added to the law (this implies an increased ambition level relative to current wording and we welcome this new ambition level. We are of the view that the new legislation partly reflects the current practice among the AP Funds and the Council on Ethics but also that we should strive to develop even further in order to secure that we also in the future will be at the forefront of sustainability).
The second step will involve flexibility regarding certain direct investments in unlisted equities and debt. The Ministry of Finance is working on a proposal and the target is that these changes will be decided by the parliament in the spring of 2019 to be effective as of July 1, 2019.