Swedish pension fund AP7 has appointed Legal & General Investment Management (LGIM) to manage a global equities climate-transition strategy involving active ownership work, under which the asset manager will single out companies that are not on track to meet emissions targets – but have the potential to do so.
The parties described the strategy as innovative, with both saying it involved new ways of working.
Richard Gröttheim, chief executive officer of AP7, told IPE the SEK905.2bn (€79.8bn) pension fund had been integrating climate considerations into its portfolio for some time now, and trying to increase the ordinary work of active ownership.
“We have now appointed Legal & General for a specific mandate which combines these two,” he said. “It’s a transition mandate where we have the active ownership working together with the investments.
“We think this is a really good way of speeding up the work now, and creating real change in the real economy and also with the investment in these companies creating some extra return for our savers,” said the CEO of the default option provider in Sweden’s premium pension system.
AP7 and LGIM said the active investment strategy would aim to “drive real-world change as well as unlock long-term shareholder value” by investing in, and then engaging with, specific companies that were ”climate laggards” in their sectors.
“The strategy will seek to identify those companies across climate-critical sectors that are currently not, but have the potential to become successfully aligned with the Paris goals,” they said in a statement today, adding that this approach contrasted with approaches that invested in those companies already aligned with 2050 net-zero targets.
Of the 3,000 companies in AP7’s investment universe, Gröttheim said these could be divided into those that already were leaders in climate terms, those that would probably take a long time before they realised they had to change, and a third group that could be defined as transition companies.
With “some active ownership and a push”, this last group would be part of the transition and therefore also a good investment for AP7’s customers, as well as creating real-economy change, he said.
“And we haven’t done this before,” he said.
Gröttheim confirmed that the new mandate was part of the transition portfolio AP7 established last year, into which it has so far made one investment – a quantitive mandate done through a total return swap.
However, the LGIM mandate announced today was a step up from that, he said, in that it also involved active ownership to push the companies.
Asked how large the mandate awarded to LGIM was, Gröttheim said: “We don’t know yet because it’s a work in progress and we’ll need to come back to that.
“As we already have these companies in our beta portfolio and we will add more holdings in these companies, it will be pretty large,” he said.
LGIM said the strategy would follow a “data-driven, fundamental and engagement-led investment approach seeking to support the climate transition to reach net zero by 2050”.
Nick Stansbury, head of climate solutions at LGIM, said that while there were some small components of the service to be provided for AP7 that his firm already did for other clients, so far that had been in a limited way and not as it was in this mandate.
“For us this is genuinely revolutionary, the first time we’ve ever done anything like this – having designed an entirely new way of investing in the energy transition and also working with a strategic innovative asset owner like AP7 in constructing an entirely bespoke approach to this from scratch,” he told IPE.
Earlier this month, AP7 said that in this year’s annual general meeting season it would put more focus than before on holding company boards accountable for delivering credible climate-transition plans.