Andra AP-fonden (AP2) has just increased its strategic asset allocation to private equity from 10% to 15% of its overall portfolio.
The jump is the result of an influx of assets from fellow Swedish pension fund AP6, the private equity specialist shut down by Sweden’s parliament at the end of last year as part of an overhaul of the country’s pension system.
Åsa Norman, AP2’s head of sustainability, said the change provides an opportunity to adopt some of AP6’s tactics for integrating environmental, social and governance (ESG) considerations into the asset class on top of its own.
“We’re going through the process of looking at both funds’ approaches for sustainability integration and taking the best elements from each,” she told IPE.
AP2 has already decided to adopt one of AP6’s tools: a controversy check for its unlisted companies, which will be fully implemented across the private equity portfolio by the end of the year. The fund is still deciding whether to also use AP6’s ‘ESG benchmark’, which it used to present annually to general partners (GPs) to show them how they compared to peers on sustainability issues.
AP2 does a similar assessment, Norman explained, “but instead of sharing it externally, we feed the results into the broad engagement we have with our managers”.
She added that she’s still considering which approach to pursue in 2027.
Sustainability spotlight on private equity
AP2 is not the only pension fund exploring ways to bolster ESG in its private markets portfolios – asset owners across Europe are strengthening their focus on the asset class for a number of reasons.
First, there is a growing recognition that climate solutions will be a critical part of the transition to a net zero economy – making them both a major investment opportunity and a key way for investors to fulfil their portfolio decarbonisation strategies – and that most are being developed by unlisted companies.
While inflows to sustainability-related funds have generally faltered in recent years, figures reported in the Financial Times last month show that investments are holding up for private markets strategies with a focus on impact – especially green solutions.
Second, many asset owners now have mature sustainability programmes for their listed portfolios, which means they are shifting their attention to other asset classes.
“We’ve got to a stage where people are generally quite advanced and steady on their public market stewardship,” said Adam Gillett, head of sustainable investment at UK pension fund Railpen.
“Many of us are now trying to translate some of that across to private markets,” he added.
Gillett said Railpen has historically taken a bottom-up approach to integrating sustainability into private equity, meaning that each company or co-investment has been treated individually.
“The big thing we’re doing at the moment is looking at our private market stewardship work in a more systematic way than we have done previously,” he said.
“We’re trying to systematise it and make it as robust as our public markets work.”
‘Lack of transparency in private markets’
According to Morningstar’s latest annual survey, “the overall lack of transparency in private markets” – especially on sustainability topics – is also “top of mind” for pension funds.
“Asset owners continue to turn to their own solutions to address market data challenges where they perceive gaps,” concluded the May report, noting that “private market measurement” was one area of particular frustration.
Gillett agrees. “Data on emissions, temperature alignment and climate solutions are all much more challenging to collect in private markets,” he said.
“We have to go out to our external managers and the underlying operators of direct assets and ask for it, and the end result has been patchier.”
But last year, Railpen decided to expand its data collection to private equity, infrastructure and real estate, “and just do the best we could for a reasonable amount of cost and effort”.
Gillett said he has “noticed some nervousness with managers about providing data points they’re not fully confident about”, which can limit the discussions they’re able to have with investors.
“I’d like to see all stakeholders treat the information being provided with a bit more understanding, so that private markets managers and operators can feel more comfortable sharing it,” he said.
Improvements and standardisation
Norman at AP2 is pleased with how responsive GPs are becoming to sustainability data requests. “They’ve improved a lot since we introduced our approach in 2018. Many didn’t do any reporting at all back then,” she said, adding that the development of dedicated reporting frameworks has encouraged the practice, but there’s more to be done.
If each limited partner asks a different set of questions, Norman said it can “become difficult to handle” for managers and underlying companies. “So, as asset owners, we can align our requests,” she added.
