Stockholm (NordSIP) – The long-running divestment versus engagement debate came to a head once again with the recent acquisition of Saudi Aramco shares by Sweden’s $105 billion AP7 state pension fund. Commenting on the move Ingmar Rentzhog, CEO of climate-focused media platform We Don’t Have Time, said: “This is one of the world’s dirtiest oil companies, controlled by the Saudi state, the very country that strongly opposed the COP28 agreement to transition away from fossil fuels.” AP7’s investment also drew strong criticism from economic commentator Katrine Kielos-Marçal in the Dagens Nyheter newspaper as well as Anthropocene Fixed Income Institute (AFII) CEO Ulf Erlandsson. AP7 has a long track record of active corporate engagement punctuated with some notable high-profile successes. NordSIP therefore sought to gain a better understanding of its rationale for holding Aramco and other potentially controversial fossil fuel holdings from AP7’s Chief ESG and Communication Officer Johan Florén.
A portfolio under public scrutiny
German environment and human rights NGO Urgewald maintains the online Investing in Climate Chaos (ICC) database of oil, gas, and coal holdings of global institutional investors. AP7 ranks as an extreme outlier in Sweden with $3.2 billion worth of fossil fuel shares, considerably more than second and third placed AP4 and AP1 with $532 million and $301 million respectively. AP1 has stated its intention to completely divest from fossil fuels. Along with the Aramco shareholding, the ICC database also shows AP7 being invested in other major oil producers including the Chevron Corporation and ConocoPhillips. Both firms scored an overall D- for negative climate lobbying on London-based NGO InfluenceMap’s LobbyMap platform.
Who will follow ConocoPhillips out the door?
Challenging this type of negative behind-the-scenes corporate behaviour has been one of AP7’s core sustainability themes, so we ask Florén how they handled the engagement in these cases, and how they escalate in the face of inaction: “When we still owned [ConocoPhillips] we co-filed a climate lobbying resolution at their AGM for a couple of consecutive years asking for climate lobbying disclosure, the company has since then started disclosing and publishes lobbying reports.” Despite this initial progress, Florén points out that AP7 has since formally blacklisted ConocoPhillips due to their involvement in the exploitation of oil sands. Regarding Chevron, Florén elaborates further: “AP7 voted for all climate proposals and against the whole board at the 2023 AGM because of insufficient climate transition plans. It is correct that Chevron has still not published a lobbying report despite repeated efforts from shareholders. At the 2021 AGM , a shareholder proposal that Chevron should publish a report on lobbying payments and policy got 47.9% of the votes, but as it was below 50 it was rejected.”
With such a large portfolio and diverse investor base AP7 faces the challenge of operating as a “universal owner” while maintaining sustainability standards in line with international norms and stakeholder expectations. It does therefore publish a blacklist of excluded companies that is updated bi-annually, which currently includes several oil and gas firms such as ExxonMobil, Shell and Gazprom. Florén continues: “We have blacklisted a number of companies that oppose climate change regulation, for example through lobbying such as Exxon, and there is an escalation procedure. In 2023, we have further strengthened our expectations and will vote against directors of high-emitting companies that do not demonstrate sufficient progress towards climate change, including not taking a responsible approach to their climate lobbying.”
Is Aramco a realistic engagement target?
Saudi Aramco has invested in renewable energy and improved its score in that respect according to the Transition Pathway Initiative (TPI) criteria, but most of that effort has gone towards decarbonising its own operations. Aramco’s approach to the global transition and Scope 3 emissions is perhaps better reflected in Saudi Arabia having the world’s largest oil production expansion plans and its intense efforts to steer the COP28 process away from a fossil fuel commitment. Aramco’s continued role in fuelling the climate crisis even led to the United Nations publicly castigating its financiers last year. Florén concedes that the SEK 500 million holding is indeed problematic: “Saudi Aramco’s development is clearly worrying, not least in light of COP28. A strong majority owner does not in principle mean that active ownership is meaningless, and we are evaluating various ways to intensify the involvement in the near future, but certainly blacklisting will be inevitable at some point.” He goes on to hint at a forthcoming clampdown on oil firms that are prevaricating on their transition obligations either through greenwashing or by simply ignoring the issue: “We have a climate action plan that we launched in 2022 where we started with coal companies and now oil companies are at the top of that agenda.”
No blanket sector divestment
AP7 appear to remain fully committed to the concept of active ownership as a key driver of the low-carbon transition, preferring to use their might to influence positive change rather than offload problematic stocks to potentially less sustainability-minded investors. Nevertheless, Florén says they will consider more drastic action if firms fail to respond to pressure: “We vote against companies that have not set medium-term greenhouse gas reduction targets, that are not sufficiently adapted and companies that, despite our commitment, fail in their climate lobbying due diligence. On lobbying, we want to see a commitment to conduct all lobbying in line with the goals of the Paris Agreement, a list of lobbying activities, a disclosure of trade association membership and a review of their trade association’s climate positions, and finally that the company takes action as a result of the review.” He explains that the investee firms are evaluated using relevant indicators set out by Climate Action 100+ and the TPI. “If companies fail to do this, we vote against the board,” explains Florén, adding ominously: “We are currently developing our blacklisting of oil companies according to our climate action plan.”
Laggards’ days may be numbered
It seems clear from Florén’s response to the recent Saudi Aramco controversy that AP7 is not considering an AP1-style blanket divestment of the fossil fuel sector. One might assume that with several past successes as an activist investor AP7 will have seen Aramco’s 2019 initial public offering (IPO) as a rare opportunity for direct engagement with one of the world’s highest emitters. However, with the Saudi state retaining more than 94% ownership of Aramco and the Gulf nation’s Paris-Agreement-busting expansion plans, any meaningful pressure on company management seems unlikely. It was mainly for this reason that Norway’s KLP recently excluded the stock from its portfolio. Saudi Aramco and several of its major oil and gas producing peers will do well to keep a close eye on the next update of AP7’s portfolio blacklist.
