Stockholm (NordSIP) – Sweden’s $105 billion AP7 has been fending off increasingly vocal criticism in the local media over its oil and gas related equity holdings, particularly a $47.5m purchase of Saudi Aramco shares. Climate campaigning social media platform We Don’t Have Time (WDHT) had issued AP7 with a “climate warning” and called for a consumer boycott if the fund persisted with its $3 billion worth of fossil fuel investments. Following Chief ESG and Communication Officer Johan Florén’s initial discussion on the subject with NordSIP that was published on 18 January, he sat down with WDHT founder Ingmar Rentzhog for a further hour-long debate, the recording of which was released on 5 February 2024 and is hereafter summarised by NordSIP.
AP7 maintains a policy of not trying to outsmart the market, preferring an investment strategy focused on holding every component of the MSCI All-Country World Index (ACWI). As the default option in the Premium component of Sweden’s pension system, AP7 has gathered almost 5.7 million individual pension savers, to whom it offers exposure to the whole global market. As Florén explains, this “universal owner” role means that the portfolio will reflect both the opportunities and the problems prevalent in the world economy. AP7’s policy for dealing with the latter is to engage with problematic companies. Once this process has been deemed to fail, some companies will be excluded from the portfolio. This is based on a public blacklist that is updated every six months.
Oil: in or out, what ultimately works best for net-zero?
The divestment versus engagement debate has been hotting up as the climate crisis gather pace and pressure grows on investors to put their net-zero words into action. For Rentzhog, holding fossil fuel companies that are not transitioning towards renewables provides them with market credibility and financial support for their expansion plans and ongoing greenhouse gas (GHG) emissions. AP7’s standpoint is that dialogue without ownership is meaningless. Florén believes that problem companies will never seriously engage with non-shareholders.
But what level of share ownership is needed to be effective? In the case of Aramco, the main catalyst for this discussion, Rentzhog insists that non-Saudi state shareholders suffer from an inbuilt disadvantage with only 2% of share capital being freely tradeable. Florén does concede that strong majority owners are a genuine obstacle, not just with Aramco but also those firms with smaller percentage majority owners that may simply be unwilling to change their ways. Nevertheless, he points out that following pressure from AP7 and other investors Aramco has made some progress on several sustainability indicators, while conceding that it has been far too little in the four years since their IPO.
Aramco have been particularly overt in their latest climate transgressions, in particularly with their aggressive lobbying at COP28 and net-zero-busting oil production expansion plans. Florén explains that AP7 continues to engage with high emitters through collaborative initiatives like Climate Action 100+ (CA100+), but also indicates that a crackdown by AP7 on oil companies is imminent. His team began working through all the coal companies in the portfolio in 2022, on the basis that this is the most climate damaging fossil fuel. 36 out of 70 coals firms ended up on the blacklist and were jettisoned. AP7 considers that the remainder have credible transition plans underway. The next phase of this fossil screening will focus on conventional oil producers (oil sand exploiters being already excluded) and will run until 2025, although Florén hints that they might speed up the process given the current outcry.
Does remaining invested in oil companies help finance their continued exploration and production? Rentzhog believes that a mass divestment of institutional investors would hit the fossil sector hard and redirect much needed capital towards renewables. He compares retaining oil company shares while investing in green technology to “having your cake and eating it too.” However AP7 is invested in the secondary market, which means that there is no direct fuding of new projects. For this reason, Florén does not believe that any such kind of concerted capital starvation strategy would work in listed equities. However, he does believe that such moves can be effective in private markets and the credit space. Florén also mentions that engagement and escalation with individual companies is time and labour intensive. With more than 3,000 holdings AP7 must take a staged approach and choose their “battles” judiciously. Florén cautions against too much focus on individual cases like Aramco, pointing out that several Chinese coal companies represent a bigger climate threat than the Saudi firm.
AP7 have so far retained their Aramco shares while the likes of Norges Bank Investment Management (NBIM) removed the position from Norway’s Government Pension Fund Global. Rentzhog also points to AP1, which is undergoing a blanket divestment of the whole oil and gas sector despite working under similar government guidelines as AP7’s. Florén suggests that barring any dramatic and unexpected improvement Aramco are likely to be heading for the blacklist. In fairness to AP7, the Investing in Climate Chaos database that helped spark off the current controversy shows NBIM retaining $40 billion worth of oil, gas, and coal investments including ExxonMobil, Adnoc as well as Russia’s Gazprom and Lukoil.
Could AP7’s clients vote with their feet?
WDHT’s campaign on this issue has stated that AP7’s Aramco holding must surely go against the wishes of its pension savers. Rentzhog inquires whether AP7’s clients have been consulted on fossil investment and whether any of them are voting with their feet by withdrawing their funds. Florén explains that AP7’s mandate is driven by the government, and they have not so far consulted their client base at such a granular level. Rentzhog signals his intention to carry out such a survey via the WDHT platform. Looking ahead, Florén admits there is room for general improvement in AP7’s engagement process, especially given the addition of parallel and interrelated sustainability themes to focus on like biodiversity and natural capital.
AP7 has shown that it does not shy away from external criticism, with senior figures like Johan Florén willing to participate in a healthy debate on the pros and cons of engaging with high carbon emitters. As part of NordSIP’s ESGpresso Lungo podcast series, we will be continuing the discussion with him later in February, given the pertinence of this topic not just to Swedish pension investors but also the wider global institutional asset owner community bound by net-zero targets. AP7’s ratio of ESG staff to total number of holdings is not comparable to NBIM’s. Does this hinder the fund’s ability to simultaneously deal with all the sustainability-related problems in the portfolio? Should AP7 invest in building up its internal ESG resources, or would that compromise its focus on providing Swedish pension investors with value for money? Many questions remain regarding the challenges faced by asset owners seeking to influence positive change and keep all their stakeholders happy.
