Stockholm (NordSIP) – For responsible investors in the Nordics and beyond, the Council on Ethics, the joint corporate engagement arm of four of the buffer funds in the Swedish national pension system (AP1, AP2, AP3 and AP4), has been a fixed point of reference ever since it was established back in 2007. Recently, the venerable institution has seen a flurry of changes. Following a comprehensive strategic review and the departure of John Howchin, who had been at its helm for almost 12 years, the Council was reinforced by several senior hires. In July 2022, Tytti Kaasinen was recruited, albeit temporarily, as Engagement Director. Earlier this year, the Board appointed a new Head, Jenny Gustafsson. And, although Kaasinen’s assignment is soon coming to a close, more sustainability experts are expected to join the team in the coming months.
Perhaps more importantly, the Council’s list of engagement priorities has evolved significantly during the past year. Whereas the reactive work of systematically surveying and analysing problem areas and incidents remains unchanged, the focus of the Council’s pre-emptive efforts has shifted. Previously, these were organised into eight projects, focusing on human rights, the climate, and corporate governance. The Council’s newly introduced list of five focus areas is not just shorter, but also somewhat punchier. While some of these areas might look familiar, there are also newcomers and notable omissions. NordSIP reached out to Jenny Gustafsson to hear the reasoning behind these changing priorities and what outcomes we can expect in the coming years.
A natural evolution
“The change of focus areas is a natural development, both as current engagement projects are phased out and with the ongoing implementation of the renewed strategy and secretariat,” explains Gustafsson. According to her, the new list of priorities was established through a thorough double materiality assessment involving input from all four AP funds.
“The focus areas will be filled predominately with specific engagement projects targeting companies we deem material from both a portfolio and an ESG risk perspective,” she says. “We also want to deepen our own understanding of these issues and raise awareness of them and related topics, as both the context and the company efforts change in many of these areas.”
Two noteworthy new areas on the priority list are Anti-microbial resistance (AMR) and Water. According to Gustafsson, there are many reasons for lifting these particular challenges to the front. “AMR, sometimes even referred to as ‘the silent pandemic’, might be seen by some as an emerging topic in the investor space,” she says. “However, the Council on Ethics considers AMR a material, systemic risk to both societies and investments, and we are committed to raising awareness of the topic through different channels as well as effecting change through engagement with relevant companies.”
Water, on the other hand, has been a key ESG topic for a long time. “Good quality and sufficient amount of water is essential for health, sanitation, food production, power generation and numerous other industrial processes,” reminds Gustafsson. “Water is also closely connected to many other global challenges and risks, such as climate change, biodiversity loss, poverty and involuntary migration. The management and valuation of water resources can have significant societal and economic consequences,” she adds.
What happened to biodiversity?
Among the themes that don’t feature prominently on the Council’s priorities list anymore are two biodiversity-related ones: Biodiversity and food production and Deforestation and biodiversity. This seems odd, given the increased attention many responsible investors are paying to natural capital these days.
“Biodiversity is indeed an important ESG issue to consider, and currently a topic high on the agenda for many investors, not least because of the launch of TNFD,” confirms Gustafsson. “At the same time, the topic is rather broad and having worked on the issue in relation to food production, the Council on Ethics will now be focusing our efforts on specific drivers such as water and climate change. It is also important to note that often biodiversity and threatened ecosystems are issues that we raise in reactive dialogues with companies in response to serious, company-specific incidents,” she adds.
Another relevant aspect to consider, of course, is that the role of the Council on Ethics is to reinforce and complement the ESG efforts of the individual AP funds. Looking at the funds’ ongoing work streams, it is evident that these are already addressing biodiversity and deforestation.
One of the advantages of engaging on behalf of huge pension funds is the long-term focus of such an assignment. “The Council on Ethics has a set time frame for the process of reviewing and validating focus areas – but not specific deadlines for the areas themselves,” explains Gustafsson. “This allows us to work long-term, leaving sufficient room for analysis, collaboration seeking, base assessments, and company dialogues. Typically, but not decisively, we want at least two to three years when working on engagement projects within each of the focus areas.”
As for the more immediate future, the Council will continue working on ongoing projects, such as the Big Tech and Human Rights project it currently coordinates. “We will also explore relevant engagement opportunities and topics within the new focus areas where we are yet in the early stages.”
The number of areas responsible investors could engage in is vast and constantly growing. It is neither possible nor effective to tackle all of these simultaneously, so priorities must be set. The Council has made its choice, for now. Let us hope the proactive engagement work on these highly complex systemic challenges will yield some tangible results in the years to come.