AP6 Targets Sustainability

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    Stockholm (NordSIP) – Sweden’s Sixth Swedish National Pension Fund (AP6) has always been the less-known sibling in a family of national pension funds that prides itself on being open and transparent to the public. The main reason for the fund’s somewhat mysterious reputation is that it invests solely in unlisted assets. A so-called closed fund, AP6 manages the capital allocated to it at inception in 1996 plus the returns that have been generated since, altogether amounting to some 4,5 billion Euros as of December 2020. In an exclusive interview for NordSIP, Anna Follér, Head of Sustainability at AP6, tells us about the fund’s sustainability ambitions and how it pioneers responsible investing among its peers globally.

    It appears that the rising sustainability tide has not left even the private equity markets unaffected. Unlisted companies, previously exempt from this type of scrutiny, increasingly realise that they need to up their game to attract capital as ESG-aware private equity investors are eager to put their money into sustainable alternatives. “I’m excited about the ESG-tailwind in the industry and the mounting consensus that sustainability contributes to value creation,” says Follér.

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    Just the other day, the Swedish government put forward a proposal to change the law that governs AP6, adding sustainability as a target for the fund’s operations. If approved in the legal process, the new legislation will enter into force on July 1st, 2022. “We welcome the proposal,” comments Follér. “The change would clarify the owner’s intention around responsible investments and provide a formal ground for AP6’s ESG-integration approach,” she adds. Since initiating the work in 2012, AP6 has actively developed the ESG-integration approach and developed a proprietary model for assessing and monitoring ESG in its investments. “The proposal from the government formalises our work to date and provides a good platform for developing the approach further,” she says.

    “Being long-term investors is in our nature,” explains Follér. “We have no choice, as our investments are quite illiquid. Committing money for the long-term means that we need to be extremely careful before we make any investment,” she adds. As a rule, AP6 tends to be a minority owner, and all the investments are made in partnership with others, either through private equity funds or as co-investments. “We strive to find partners who are best-in-class managers, not only when it comes to investment returns, but also in respect to sustainability. Once we have identified such managers, our ambition is to stay with them for the long-term, monitoring performance carefully and engaging actively over time to support further development,” she says.

    ESG is one of six carefully assessed areas during the extensive due diligence process prior to committing money. “Each investment opportunity is thoroughly considered from a variety of aspects. We look, for instance, at how robust the manager’s processes are and the way they have implemented ESG. Most importantly, we want to see that they have identified the material sustainability issues and have policies, processes, and resources to actively manage those,” explains Follér.

    Looking at AP6’s own sustainability agenda, there are two issues at the top of the list, according to Follér, one is the climate and the other one – diversity and inclusion (D&I).

    Prominent among the sustainability targets adopted by AP6’s Board of Directors in December 2020 is the decision that the fund’s investments should be aligned with the global climate goals stated in the Paris Agreement. In 2021, a more concrete plan for implementing this ambition in the portfolio is gradually being developed, according to Follér. “It is challenging, though,” she confesses. “None of the existing frameworks is yet a direct fit for private equity.”

    Data is a problem too. Although the fund has come far in measuring and monitoring the portfolio’s scope 1 & 2 carbon emissions, scope 3 is still a work in progress. The other side of the equation, how the impact of climate change on portfolio companies, is important to assess, too, according to Follér. “More and more fund managers are striving to quantify climate risk in the portfolio based on various climate scenarios,” she says. “Overall, though, the percentage is still low.”

    For quite some time now, D&I has been another focus area for AP6. “Gender equality, in particular, is a relatively easy aspect to measure and follow up systematically,” explains Follér. “Our Board of Directors has formulated quantitative targets for the portfolio, and we are engaging with companies and managers and reviewing gender equality in both investment and management teams on a regular basis,” she adds.

    “There is an awareness that a higher level of diversity among employees makes organisations more attractive to younger generations and that it leads to both better decisions and better results over time,” she says. As for the results, it is a mixed picture, it seems. While venture funds have quickly advanced towards equality, the change is slower in buy-out firms. Follér expects that it will take time to promote a diverse group of partners up the ladder.

    Going forward, Follér thinks it is high time to rekindle a proper discussion about human rights, an issue that she feels has been somewhat neglected. Given her background, an E.MA. in Human Rights and Democratisation from the EIUC and a master’s degree in Political Science from Uppsala University, it is not surprising that she is passionate about the topic.

    In general, Follér sees it as her mission to promote an active debate about material sustainability issues and how these can be addressed within the private equity community. Talking about the roundtable discussions organised by AP6 regularly since 2016, she sounds proud to have been instrumental in making it all happen. “Back in the days when we first started gathering several competing PE firms to discuss the issues together, it was a bit of an unorthodox setting,” she recalls. “It was also much appreciated, as participants found it useful to be a part of the conversation,” she adds.

    It takes time and dedicated recourses to conduct all the meaningful sustainability work that AP6 does. A growing recognition that it will take more people to deliver on the ambitious agenda has led to the recent appointments of two additional ESG specialists to the team, Per Norberg and Anna Grgic. “It’s a perfect point in time to grow the team and add more specialised resources. Sustainability has gained momentum in the private equity industry, regulation is increasing, and stakeholder expectations are high”, comments Follér. “Funds and companies in our portfolio are boosting up their sustainability resources, too,” she adds.

    Increased focus on sustainability in the public debate is clearly strengthening the rationale for responsible investments. When reflecting about the current challenges for responsible investors, Follér stresses the diversity of investors and that investors in different asset classes, geographies and sectors face different challenges. “For us as an indirect investor in private equity, we need to be very thoughtful when we build the portfolio as investments will remain in the portfolio for many years and we endeavour to find long-term strategies for engaging on sustainability in a tangible and relevant way,” she says. “Divestment strategies are not a good fit for illiquid assets for example,” points out Follér.

    When the call for quick change and development is strong, it can be challenging to have a long-term, systematic approach. But Follér observes that AP6 has achieved tangible results by the long-term strategy. “We are in a different place today, than 6-7 years ago, and we see a positive trend in terms of ESG-integration in our portfolio. We should endeavour to stay on course, work in a calm and systematic manner and not resort to random quick fixes,” Follér concludes.

    Photo courtesy of AP6

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