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AP3

PRI reporting framework 2019

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes

Implementation processes

LEI 01. Percentage of each incorporation strategy

01.1. Indicate (1) which ESG incorporation strategy and/or combination of strategies you apply to your actively managed listed equities and (2) the breakdown of your actively managed listed equities by strategy or combination of strategies (+/- 5%)

ESG incorporation strategy (select all that apply)

Percentage of active listed equity to which the strategy is applied
98 %
Percentage of active listed equity to which the strategy is applied
2 %
Total actively managed listed equities 101%

01.2. Describe your organisation’s approach to incorporation and the reasons for choosing the particular ESG incorporation strategy/strategies.

The incorporation strategies must be realistic, relevant  and material for the mandate/strategy in question. The overall screening applies to the total portfolio. As the portfolio during 2018 had circa 3000 holdings there is a need to have an efficient process that makes the ESG integration more manageable. The relevance and materiality of different ESG factors vary among different industries, geographies and also over time. Both portfolios and also the  bench mark index are screened and narrowed down to make analysis of material issues doable. 

Each active manager is responsible for analyzing  the stocks in their portfolio, with respect to sustainability risks/opportunities and be prepared to explain the positions. Again the relevance and materiality will differ for different mandates, different strategies and different investment horizons. 

In the GES/Sustainalytics screen, on behalf of the Council on Ethics, all the AP-funds listed equities portfolios are screened twice a year and the result is analysed by each fund.

In addition to this the portfolio or part of it (different mandates) will be screened on a regular basis by AP3 internally;  (before  AG Sustainability meetings (ca 1/month), in connection with the rebalancing of the customized indices, quarterly, in connection with the annually internal 360 ESG/Sustainability review  (in the internal screening MSCI ESG Manager plus outcome from third party is used). At each occasion the outcome is shared and discussed with the portfolio managers. In addition there is an ongoing discussion about many different  sustainability issues; e.g... governance issues, board composition, gender, CO2 emissions and other climate issues, human rights, labour rights, work place incidents etc. The CO2 emissions are measured and analysed end of each year by Trucost. The outcome of this is also integrated in the overall ESG management of the portfolio.

AP3 has a holistic on sustainability, as one of many factors that should be considered in the portfolio construction and investment decisions. To AP3 the sustainability perspective is an integral part of all portfolio managers’ mandates and responsibilities. It is an integral part of the creation of long term value and  AP3s mission. The sustainability strategy covers the entire portfolio and requires all portfolio managers to consider ESG aspects in their investment decisions, both when making long-term strategic allocations  and individual investments. The strategy chosen  must offer long-term cost-efficiency and is therefore adapted to investment holdings and exposure. AP3 works actively to limit portfolio-related risk and to promote long-term sustainability through effective stewardship and investments.

In the Advisory Group on Sustainability portfolio managers (from different asset classes) , the Sustainability Team, Head of Portfolio Strategy, CIO, discuss and decide on measures to be taken. These are based on sustainability related  information, information on controversies, screening results etc, input in the process is coming both from staff responsible for sustainability and the portfolio managers. The financial, primary, and/or reputation impact govern the decisions.

01.3. If assets are managed using a combination of ESG incorporation strategies, briefly describe how these combinations are used. [Optional]

The overall screening applies to the total portfolio, ie if a company is formally excluded (board decision) or considered as not to be invested in i.e. be exposed to.

The integration means that all investments, all holdings should also be analysed from a Sustainability perspective (risks/opportunities) and the manager must be able to explain positions when asked. The PMs  should have  insight and knowledge about potential risks and/or weaknesses with regard to Sustainability and those factors should be considered in the analysis and investment decision and  risk/reward profile. Of course this also includes risks on the upside; opportunities.

Sustainability risk is incorporated in overall risk management in the fund and the Sustainability Team is part of the Portfolio Strategy Group.

The screening is done as one component in the process, integration is the addressing of material issues/factors and theme is when thesis is done with the ambition to find holdings eg. with a technological edge in different sectors.


LEI 02. Type of ESG information used in investment decision (Private)


LEI 03. Information from engagement and/or voting used in investment decision-making (Private)


(A) Implementation: Screening

LEI 04. Types of screening applied

04.1. Indicate and describe the type of screening you apply to your internally managed active listed equities.

Type of screening

Screened by

Description

Those are examples of factors considered in the screening, it does not mean they are all applied all the time.It is important to distinguish and select factors that are relevant and material both for the investee company and for the investor, ie AP3.

Sector screening could be retailers for example, working conditions, toxic emissions, salaries etc.

Corporate governance screening could be board composition,  diversity, treatment of minorities etc.

AP3 as a public entity and part of the Swedish state AP3 does not screen to exclude geographic regions/countries  but we may screen to gain knowledge and insight about potential issues.

Screened by

Description

Those are examples of factors considered in the screening, does not mean they are all applied all the time.It is important to distinguish and select factors that are relevant and material both for the investee company and for the investor, ie AP3.

Enviromental screening  could be energy efficiency, reduced emissions, new technology, etc

Social measures taken to improve working conditions, education, etc

Governance improvement  eg independent  board members, gender diversity,  pay etc

 

04.2. Describe how you notify clients and/or beneficiaries when changes are made to your screening criteria.

AP3 screens the portfolio using reliable external data from the MSCI ESG Manager including Carbon Metrics, the Council on Ethics of the AP funds and  Global Engagement Services (GES now Sustainalytics),Trucost, Bloomberg and other sources. It is important to remember to check and /or question the data as it might be wrong or outdated. There is  sometimes a a non negligible difference, changes that the company has done is not yet in the ESG information.

One important objective is to identify and evaluate cases where companies are acting in violation of international treaties and conventions.

Information about companies excluded from the investment universe after board decision is available on the website, and will be updated on a yearly basis. The criteria will vary among different sectors, different degree of relevance and to some extent over time.The screening done can be both negative and positive for a manager of an active mandate i.e.. depending on the portfolio composition and strategy.

In addition to this screening with public exclusion from the investment universe AP3 regularly screen and analyses  the portfolio as part of the  risk management. These screenings can lead to active decisions not to be invested in/have exposure to some companies, the absolute majority of these decisions concern small cap companies.

AP3 is a public entity, all Swedes are "clients" the management and principles arr reported on an annual basis in the Annual Report. if there are bigger changes a press release may be issued. The Finance Department evaluate the AP funds once a year and use then an external party in addition to the Funds own reporting.


LEI 05. Processes to ensure screening is based on robust analysis

05.1. Indicate which processes your organisation uses to ensure screening is based on robust analysis.

          The service providers AP3 use have the resources to ensure that  data and analysis is reliable and robust. The Council on Ethics also investigate.
        

05.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your ESG screening strategy.

05.3. Indicate how frequently third party ESG ratings are updated for screening purposes.

05.5. Additional information. [Optional]

The robustness and reliability of the information is very important as it is for all information to be used in the investment processes. Part of the integration work should therefore be on the reporting, transparency and standardisation of data. The requirements on company reporting, transparency and standards for comparability is key to good integration.

The updating of the ESG ratings is based on the companies´ annual reporting and other development e.g. incidents that will impact the ESG rating.

In the dialogues kept with many companies and other stakeholders, we get information that can become input in the investment process.


LEI 06. Processes to ensure fund criteria are not breached (Private)


(B) Implementation: Thematic

LEI 07. Types of sustainability thematic funds/mandates

07.1. Indicate the type of sustainability thematic funds or mandates your organisation manages.

07.2. Describe your organisation’s processes relating to sustainability themed funds. [Optional]

Focus on technology innovation and efficiency measures.


(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the ESG factors you systematically research as part of your investment analysis and the proportion of actively managed listed equity portfolios that is impacted by this analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

The review of sustainability issues is part of the mandates of the portfolio managers. In addition the Advisory group on Sustainability address those issues in their meetings. The Sustainbility team works on a daily basis with different issues.


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on a robust analysis.

          The service providers AP3 use have the resources to ensure that data and analysis is reliable and robust. The Council on Ethics also investigate.
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information.[Optional]

The managers have access to ESG Manager including Carbon Metrics, Bloomberg, Trucost, GES/Sustainalytics  data/information  is also used.  Other souces can be made available if asked for. Sustainability issues are expanding in the company research and are a natural part of the analysis.

Increasingly ESG issues are incorporated in external sell side analysis.

Companies increasingly also include sustainability issues in their meetings and presentations as a strategic and or risk point on the agenda.


LEI 10. Aspects of analysis ESG information is integrated into (Private)


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