AP Funds Caught in the Fire of Nuclear Weapons

    Stockholm (NordSIP) – Swedish daily Dagens Nyheter (DN) published a story arguing that the Swedish state pension AP funds have not excluded some companies which are suspected of breaching the Non-Proliferation Treaty (NPT). The delicate balancing act of upholding fiduciary duty and ethical considerations at the same time has been tested again. But what is really at stake here is the effect of attention-grabbing headlines on policies, and ultimately on investment outcomes.

    Exclusions have different mechanisms of action. Primarily, the active disassociation by an institutional investor from a particular company is a way of establishing distance and thereby signalling a disapproval of the company’s activities, or moral stance. For a long time, exclusions were the main tool institutions resorted to, in an attempt to express their ethical stance, as well as to protect themselves from public scrutiny and bad publicity. For a few years now, the ideas and methods behind sustainable investing, however, have evolved. Many institutions say that exclusion may deprive potentially harmful companies or even whole industries from the guidance of watchful investors. “If the good people leave the potentially harmful companies to bad people, they won’t get better at what they do, and they might become even worse,” is often what one hears.

    “Tata Power has been assessed to be involved in key components of launch systems specifically designed for and with the primary purpose of delivering nuclear warheads.”

    Pointing fingers is easy. According to DN, the AP funds may have an exposure to companies related to the manufacturing of nuclear weapons amounting up to SEK 6.2 billion (approx. €600 million), of which SEK 16.4 and 19.0 million for AP1 and AP2 respectively, in Indian utility company Tata Power. This investment of barely €3.5 million can be still be used as an interesting case study.

    At Handelsbanken, Karin Askelöf, acting Head of Responsible Investments, explained how her bank sees the company and what is at stake. As it turns out, Tata Power is excluded from Handelsbanken’s assets under management, both passive and active, and not only for one reason. According to Askelöf, “Tata Power has been assessed to be involved in key components of launch systems specifically designed for and with the primary purpose of delivering nuclear warheads. In accordance with our policy, we practice a zero tolerance regarding our exclusion criteria for forbidden weapons and nuclear weapons.”

    Also, Handelsbanken applies exclusions for companies involved in coal power generation, where Tata Power qualifies as well, as it breached the 30% revenue threshold set by the bank. The coal power generation is also the reason Tata Power has been blacklisted by Norges Bank Investment Management (NBIM), which is often used as a benchmark for exclusions in smaller institutions.

    According to John Howchin of the AP funds’ Ethical Council, the case of Tata Power has not yet been thoroughly investigated. He says: “We annually research information where companies are deemed by external information providers to be connected with breaches of conventions that Sweden has ratified. This is usually a few hundred companies each year and covering environmental, human rights and corruption as examples. Breaches of the NPT are not that common, and we have only recommended one exclusion here, Indian company Larsen & Toubro. We always conduct our own research, and regarding Tata, this is not yet finished.”

    At Handelsbanken for example, Askelöf adds, Tata Power could potentially be excluded on the basis of norm violations as well as for the other two criteria. “We screen all our investments for norm violations, but Tata Power has not been identified as breaching any of those so far.”

    “We always conduct our own research, and regarding Tata, this is not yet finished.”

    These problems are complex and take resources and time to examine, especially considering the exposure AP funds have to every single company. In this case, Tata Power represents 1.7% and 1.1% of AP1 and AP2’s entire potential exposure to nuclear weapons, respectively. This corresponds to approximately 0.005% of AUM for both AP1 and AP2. In the case of public pension funds the responsibility of such issue may lie directly with the government, one could argue. In fact, it is not the first time the AP funds are under scrutiny by the Swedish papers for the same reason. More than 10 years ago, DN published an article showing that AP4 invested in Honeywell and United Technologies, who procured significant components used in the manufacturing of nuclear weapons. Already then, the answer of the fund’s representatives pointed to the government and called for stronger regulations. As we have discovered, however, some of the AP funds may take the liberty of applying more stringent criteria than others.

    Swedish public pensions are not the only ones in the limelight when it comes to investments in nuclear weapons. A report published by peace organisation PAX in March this year states that 329 institutions invested US$525 billion (€425 billion) in 20 nuclear weapon producers between 2014 and 2017. In the report, which ranks the different institutions, only the 7th of the AP funds makes it into the “hall of fame”, along with the Norwegian government’s pension fund, Storebrand Group and several Danish pension funds (MP Pension, PenSam and PFA). AP7 is rewarded by a four-star rating (out of four), as it systematically excludes all companies involved in the development or production of nuclear weapons, based on research by ISS-Ethix. The list includes Tata Power.

    The report only gives AP1-4 a two-star rating (out of four). The Ethical Council was established in 2007 to monitor and analyse the portfolio holdings of the AP funds 1, 2, 3 and 4 to ensure that the companies the funds invest in do not infringe on international conventions signed by Sweden. As a result, these funds only exclude investments in companies producing nuclear weapons for states that are not signatories to the Non-Proliferation Treaty. The Ethical Council publishes a list of recommendations for exclusion which is followed by all four funds, which as of January 2018 encompassed four companies active in “aerospace and defence”: Elbit Systems, L-3 Communications, Orbital605 and Textron.

    When deciding whether or not to invest in nuclear weapon manufacturers, it is crucial to consider the value and purpose of international treaties such as the NPT. Ultimately, it is also the responsibility of investors to ensure that those companies that manufacture the components of nuclear weapons hold their end of the bargain.


    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA
    Aline Reichenberg Gustafsson, CFA is Editor-in-Chief for NordSIP and Managing Director for Big Green Tree Media. She has 18 years of experience in the asset management industry in Stockholm, London and Geneva, including as a long/short equity hedge fund portfolio manager, and buy-side analyst, but also as CFO and COO in several asset management firms. Aline holds an MBA from Harvard Business School and a License in Economic Sciences from the University of Geneva.

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