Stockholm (NordSIP) – In recent years, the Third Swedish National Pension Fund (AP3) has demonstrated growing sustainability ambitions, increasing its efforts to act as a responsible investor and willing to pull together the necessary resources to do it. Late in 2021, AP3 announced that they were establishing a dedicated sustainability group and looking for the right person to head it. Fredric Nyström was appointed Head of Sustainability and Governance in May 2022, assuming the overall responsibility for the fund’s sustainability work, such as defining, developing, and implementing processes, strategies and goals.
Almost a year into his new mission, NordSIP reached out to Nyström to hear more about the progress and plans ahead. “I have been able to focus on constructive sustainability work, such as assembling the team and transforming the fund’s broad and general goals into a concrete and measurable action plan,” shares Nyström. “It feels like a luxury,” he adds, relishing the fact that while his former colleagues at Öhman Fonder, alongside the rest of the fund management industry, have been struggling to implement the onerous regulatory requirements prescribed by the EU’s multiple sustainability directives, these seem but a distant echo at AP3. “It is such a relief,” confesses Nyström. “Here, I can focus on what truly matters.”
A new team is born
“The day I started at AP3 also marked the establishment of a dedicated sustainability group,” says Nyström. One could argue that it is not a big deal. The sustainability policy stays intact, the fund will keep working with the same focus areas, and the new team intends simply to bring more structure into the process. Yet, a move like this sends a clear signal to the whole organisation about sustainability’s importance, according to Nyström.
The team is now complete, and the members seem to have neatly divided the E, S, and G topics among themselves. Nyström focuses on human rights and other social aspects, where he can best capitalise on his expertise within the area. Senior strategist Peter Lundkvist, who has been with AP3 for over seventeen years, will continue working with corporate governance. A new addition since October 2022 is sustainability analyst Elin Olsson. Her strong scientific background and experience make her well-suited to lead the team’s efforts on climate.
Thus, the group’s members cover three of the four focus area delineated by AP3’s Board of Directors in 2021: Corporate governance; Climate; Human Rights; and Biodiversity. For the time being, they have decided to share the fourth one. “When it comes to biodiversity, everyone needs to pitch in,” says Nyström. “It is a learning curve for most of us. AP3’s Board identified the importance of the area early on, and the fund was among the first to formulate related goals in its policy. These days, biodiversity is on everyone’s agenda, yet it takes time to develop expertise in this complex field.”
That said, one of the tasks of Nyström and his team is to ensure that all of their colleagues within AP3’s investment organisation are on a similar learning curve, continuously increasing their understanding and knowledge of various aspects of sustainability. “Our team is a competence hub within the investment organisation, not an isolated group. We are deeply involved in the investment process, contributing to the analysis of specific investments and helping portfolio managers to make well-informed decisions.”
A global investor that does not invest everywhere
2022 has been a testing year for many asset owners, including AP3. “As an investor, we are always affected by major global movements in the financial markets, but given the general performance of markets over the year, the return should be regarded as reasonable,” writes the fund’s CEO, Staffan Hansén, commenting the fund’s first negative return (-5.8 per cent) since 2011. AP3’s annual report, released late last month, reveals some interesting changes to the fund’s investment strategy, to a certain extent prompted by the dramatic geopolitical and macroeconomic environment.
One important decision, according to Nyström, has been to divest from emerging markets, which AP3 executed during the autumn of 2022. “We approach the issue from a governance perspective,” he explains. “The risks involved in investing in emerging markets are considerable, and we need to assess them properly. We have initiated the work on defining an analytical model for political risks, which we expect to complete this year. Thereafter, we plan to resume investments in emerging countries based on our analysis,” he adds.
The new climate plan
For Nyström, this has been, above all, a year of operationalising AP3’s sustainability policy. “We have worked on developing concrete targets for our sustainability focus areas and determining how we will achieve them,” he says. One example he is eager to discuss is how AP3’s climate target has gradually evolved into a plan with several specific and measurable outcomes in sight. “We have now identified which companies in the portfolio account for the largest CO2 emissions,” explains Nyström.
According to the analysis, 55 of the fund’s holdings are responsible for 70% of its carbon emissions. Out of these, around 55% already have formulated a plan to reduce their carbon footprint, so it is the remaining 45% that AP3 needs to address. “Instead of selling the companies and thus reducing the portfolio’s carbon footprint, we choose to engage through dialogue and communicate clear demands,” says Nyström. “In this way, we can bring about change on the ground, where it needs to happen urgently, and not just in our portfolio.”
The approach resembles how some collaborative engagement initiatives, like Climate Action 100+, operate. However, they attempt to identify the biggest emitters overall globally. Nyström is adamant that AP3 needs to do their own exercise, with their portfolio as a starting point. “We admire their efforts, yet many of these initiatives end up engaging with the big oil companies. And, while these are systemically important, AP3’s portfolio is fairly light on big oil,” he says. “Our exposure to carbon emitters is mostly through industry and materials companies. Hence our engagement priorities are different.”
Speaking of engagement efforts and collaboration brings us to the topic of the Council on Ethics (AP-fondernas etikråd), the joint corporate engagement arm of Swedish National Pension Funds 1, 2, 3, and 4. An extensive strategic review of the organisation concluded last November that the collaboration between the funds is set to expand and that the Council will continue to be a key partner, integral to their coordinated sustainability efforts. “Although we have different investment strategies and portfolios, we share similar values and face the same issues,” says Nyström. “Sustainability is, therefore, a natural point of collaboration for us.”
He also mentions that apart from the Council, the state pension funds have other forums where sustainability experts from different organisations, including AP6 and AP7, can share their knowledge and experience.
Given the extent of the work at hand and the multiple challenges facing responsible investors today, Nyström is grateful for all the help he can get. “Together, we have the resources and the capability to contribute to a more sustainable development,” he concludes.