Swedish pension fund divests from controversial businesses amid tightening regulations

Nicholas Earl, 13/06/2019

Andra AP-fonden (“AP2”), one of the five buffer funds in the Swedish pension system, has divested from approximately 60 companies involved in both the tobacco industry and the maintenance of nuclear weapons systems. 

The fund is looking to further integrate sustainability into its portfolio management, which it believes will lead to an improved management return and reduce risks for investors.

Mike Appleby, investment manager on the Liontrust Sustainable Investment team, suggests that more funds will move towards more sustainable sectors due to negative consequences in the market from investing in controversial businesses.

Mr Appleby told Fundeye: “It’s interesting that an increasing number of funds are looking at divesting from these controversial industries. We believe companies which have big negative externalities (like tobacco) will eventually have to pay for those negative impacts. This risk is often underestimated by the market which can make them poor longer-term investments as a consequence."

Nevertheless, AP2’s decision to divest comes six months after new investment rules regarding sustainable asset management for AP funds were introduced at the start of 2019. The AP Funds Act requires assets to be managed in an exemplary way through responsible investments and ownership, and require a greater level of ambition from the AP funds on sustainability issues.

The new legislation is designed to restrict the use, scope and distribution of potentially unsustainable products and businesses. AP2’s divestment from tobacco companies is in line with the convention on tobacco control, which aims to sharply reduce tobacco consumption and the harmful effects of tobacco smoke. Meanwhile, its divestment from nuclear weapons systems is in harmony with the Non-Proliferation Treaty (NPT), which advocates the long-term disarmament of nuclear weapons.

Although AP2 has stated that sustainability has been key integration issue since its inception, the fund has now decided to adopt a more stringent approach based on the underlying purpose of the international conventions.

Ryan Hughes, head of active portfolios at AJ Bell, believed that the active process of socially conscious divestment was still uncommon in the industry. He did argue, however, that environmental, social and governance ("ESG") factors were becoming increasingly important with investment decisions, and would be a long-term issue in the industry.

He said: “ESG investing is gaining traction every day so it is no surprise to see more examples of fund groups looking to actively avoid particular types of stocks. However, this negative screening approach remains relatively rare with most mainstream fund groups that are increasing their emphasis on ESG using it from a positive engagement perspective. Over time, I fully expect that the incorporation of ESG into investment processes to become the norm and this will have long term implications for those industries that do not score well on these factors.”

Laith Khalaf, senior analyst at Hargreaves Lansdown concurred with this analysis and pointed to external political events that have possibly brought ESG issues into the conversation.

He said: “While the amount of assets held in ethical funds is still a relatively small proportion of total assets under management, it does appear to be gathering steam, and events like the Extinction Rebellion protest do raise the profile of certain issues.”

AP2 is one of the largest pension funds in northern Europe. It has assets under management of SEK 334.8 billion (£27.85 billion) across almost every asset class worldwide.

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