Investor Spotlight: Sweden’s AP7 Pushes Forward on Biodiversity

Martha Brindle, Director, Public Markets at bfinance sat down with Flora Gaber, Head of ESG Analysis at AP7, part of the Swedish Public Pension agency which manages around $80 billion, to discuss her organisation’s climate journey and its involvement as a participating member of the Task Force on Nature-related Financial Disclosures (TNFD).

Flora Gaber
Head of ESG Analysis at AP7, part of the Swedish Public Pension agency.

Thanks to its strong focus on ESG matters and sustainability as a whole, AP7 was one of two asset owners involved in a pilot scheme, driven by the Task Force on Nature-related Financial Disclosures, which looks to address some of the challenges associated with biodiversity loss and how they can be tackled through investments.

“This framework helps you identify the most important impact drivers for biodiversity loss. It helps you identify the high-risk sectors, the prioritised ecosystems, and it provides you with guidance to adjust the impact and risks from biodiversity loss,” explains Flora Gaber, Head of ESG Analysis at AP7, in a detailed interview below. “The framework was open to innovation and was truly create by the market and not regulators, meaning there has been extensive feedback from participants which means challenges can be addressed early on.”

Many investors, even those that are considered ‘ahead of the pack’ in terms of sustainable investment, have struggled with implementing policies or measures that tackle biodiversity loss. However, the framework being developed by the TNFD hopes to aid specialist and mainstream investors in overcoming these challenges.

Q: Flora, could you provide us with an overview of your climate journey so far, and how you have extended that into biodiversity?

Our climate strategy is built on the fact that we are a universal owner with a very long-term view. At AP7, we are mainly concerned about the global systematic risks that affect the entire economy. We recognise that this is something we cannot diversify away from, so we’re focused on addressing these risks in the real economy. We realised it is something we cannot do alone, so our strategy is to collaborate with other like-minded investors. And against this background, we have developed our Climate Action Plan.

The Climate Action Plan provides a summary of the climate scenario analysis for our equity fund, and the equity fund is approximately 90% of our total AuM. The results showed that if the world continues with business as usual, and doesn’t reduce its greenhouse gas emissions, there is a risk that our financial goals could become challenged, meaning we run a significant risk of not reaching our financial targets. We’re trying to address this in the real economy through our investments, and our active ownership. Our targets include increasing our share of green bonds. Another target is to develop a climate transition portfolio. One element of this portfolio is an investment mandate focused on combining active management and active ownership where we aim to achieve a positive effect in companies climate transition, and at the same time achieve long term shareholder value. We recently initiated a partnership with LGIM as part of this portfolio development.

More and more plans in Canada are encountering this question: when contributions are reduced, what should we do about liquidity?

With regards to biodiversity, we have been working on it for several years, starting with the topic of deforestation, which is crucial both for climate and biodiversity loss. But we are early in the process of integrating biodiversity, and deforestation is the first focus area. We also realised that biodiversity is a topic that still needs to be developed for the financial market, and we are therefore participating as a member of the Task Force on Nature-related Financial Disclosures (TNFD).

Flora, AP7 was one of the two asset owners involved in the TNFD beta pilot phase recently. Are you able to talk us through some of the key takeaways, the positives and any challenges you found on the framework?

While we do recognise biodiversity loss as one of the global systemic risks, we’re not experts on biodiversity, so we have to focus on being ESG generalists, but we do realise biodiversity is important and we want to place some focus on that. When we started addressing biodiversity a few years ago, we realised this is a complicated issue. It’s difficult to understand and there is a threshold that you need to get past. The positive thing about the TNFD framework is that now you have a method for getting past that threshold.

This framework helps you identify the most important impact drivers for biodiversity loss. It helps you identify the high-risk sectors, the prioritised ecosystems, and it provides you with guidance to adjust the impact and risks from biodiversity loss. So, both in terms of measuring and reporting; and setting targets. Also, it aligns with standards on the market and related regulations. The framework was open to innovation and was truly create by the market and not regulators, meaning there has been extensive feedback from participants which means challenges can be addressed early on.

The TNFD has really put biodiversity loss at the forefront of investors’ attention.

Ultimately, the TNFD has really put biodiversity loss at the forefront of investors’ attention and not just specialised investors, but also mainstream investors. There are already an impressive number of functions, but bear in mind that the information is not yet perfect.

Q: Can you offer further details on how you’re starting to implement and evaluate biodiversity for your portfolio at AP7?

The details of the pilot have not yet been assessed fully or published. However, what we have learnt from the pilot is that it is important to focus on the first step, which is prioritising biodiversity and mapping out your portfolio to identify where risks may lie, and whether, as an investor, you can make a difference in the real economy.

Q: Thinking about your use of external managers, what are you starting to expect and ask for on biodiversity and on climate more generally?

We hold annual ESG-related discussions with our external managers, something that has been going on for more than six years now, and every year we draft a new set of goals, which also analyses their ESG policies and reports, and then in the following assessments we follow up and discuss what targets were met. In doing this, we drive continuous improvement of our managers efforts and ensure our goals and targets align.

In terms of sustainability, we have published climate-related targets for our managers in our Climate Action Plan and we expect them to draw up climate policies in line with the Paris agreement and create their own action plans. While we haven’t yet drawn up biodiversity policies, I imagine our framework would mirror the approach we have taken towards the broader sustainability sector.

Q: What advice do you have for investors on this topic?

When we started looking at this a few years ago, it was a bit daunting. But I think the most important message is that, even though it is difficult to measure nature-related risks and opportunities, and there is still a lack of high-quality data, I realised that investors could still start to work on these issues, we can still do a lot. For instance, we’re already focused mainly on active ownership, we already have voting guidelines internally with regard to biodiversity, and we already have active, engaging dialogue with these companies.

I think that we need to collaboratively address the underlying potentially huge systemic risk and then devise a plan to address it.

I think that we need to collaboratively address the underlying potentially huge systemic risk and then devise a plan to address it.

Most major companies have now acknowledged climate change and have introduced measures to achieve some kind of improvement, if not net zero, between now and 2050. When we’re talking about biodiversity, what proportion of major portfolio companies have acknowledged a biodiversity risk and even set some form of target?

While we do not know the precise figures, the proportion is minor. When we were going through our voting rights and assessing high-risk companies, like those that are at risk of being involved in deforestation either directly or in their supply chain, we would have thought that some of them may have biodiversity policies in place, but that is not what we found. So, we acknowledge that there is a lot of work to be done in that respect, especially from investors who are in a position to actively reach out to their holdings and challenge their policies.