Swedish national pension fund AP2 has put “special measures” in place to monitor the external asset managers it uses for Chinese investments, because of the high risk of human rights abuses in China.
The Gothenburg-based fund disclosed the approach in its first report about its work on human rights issues.
The SEK334bn (€30.9bn) pension fund — one of five backing Sweden’s state pension — said it has three mandates in Chinese domestic equities under external management.
“There are sustainability challenges associated with investments in China as transparency of companies and markets in China is not deemed to be as good as in more well-developed markets. The fund also considers China to be a high-risk country in terms of human rights issues,” AP2 said in the report.
Because of this, the pension fund maintained “close and active collaboration” with its external asset managers in China, it said, to make sure sustainability issues, including human rights, were integrated in investment decisions.
This mainly took the form of a dialogue with managers, it said, adding that in 2017 and 2018, these talks focused mainly on human rights issues.
“The work of these asset managers is regularly monitored on a quarterly basis, both in the form of a written report from the asset manager and through dialogue, where specific portfolio companies and the risks they or their sector may incur are discussed,” AP2 said.
External managers also undergo an annual assessment, it said, which includes their sustainability performance, and a poor result may mean the end of the fund’s collaboration with that manager.
AP2 said it was one of the first investors in the world to publish a report on its work with human rights, which was based on the United Nations’ Reporting Framework.
“We hope [the report] will not only explain how we are working with human rights, but also contribute to a broader dialogue on human rights issues in the finance industry”
Eva Halvarsson, AP2 chief executive
Eva Halvarsson, AP2 chief executive, said the fund had already decided to support the UN Guiding Principles Reporting Framework in 2016.
“We hope [the report] will not only explain how we are working with human rights, but also contribute to a broader dialogue on human rights issues in the finance industry,” she said.
She added that AP2 was actively engaged in integrating sustainability issues, including human rights issues, as part of its asset management activities.
Halvarsson noted that the report described how indices AP2 has developed in-house included a method for identifying companies involved in human rights controversies, which then allowed them to be taken out of the index.
In 2018, AP2 had a 2.0% strategic asset allocation to China A-shares, and a 1.0% allocation to Chinese government bonds.