It is AP4's conviction that the integration of sustainability aspects into the selection and management of assets contributes to a good risk-adjusted return over time. The methodology for how sustainability is considered and included in AP4's investment processes depends on the chosen investment strategy and degree of ownership influence.
The manager should preferably be a signatory of the PRI and share the conviction that integration of environmental, social and governance (ESG) related considerations contribute to long term value creation. Further, the manager should be subject to a policy related to the integration of and reporting on ESG issues. It is expected that fund managers provide regular updates describing how their ESG policy is being implemented and progressed, the process, responsibilities and including examples of activities and ESG KPIs and ESG targets used, notice of material changes to the ESG policy and reports on potential ESG incidents. How the manager integrates climate transitions risks/possibioities into the investment process is a focus. AP4 explore which standards and guidelines the manager supports/is signatory to. AP4 mentions specifically TCFD and PRI as two important framworks to adhere to.
in addition to having expectations on a general ESG standard on all managers, fund managers can also be selected based on certain sustainability themes linked to the sustainability transformation.
AP4 has internal written guidelines and tools for the evaluation of external managers prior to a new investment and for the follow-up of the completed investment, as an integrated part of the investment process, which also has been updated, in 2020, in a cross-funcional internal project, see below under "A new project...". In cases where AP4 does not have a direct relationship with the nominee, the issues should be secured in the intermediary's evaluation of the nominee.
AP4 sees that standardization of sustainability information benefits the business community and the transition to a sustainable economy. Therefore, AP4's tools draw inspiration from the PRI's guidelines for due diligence and reporting within private equity and hedge funds as well as ILPA.
For investments managed through an external manager, an assessment is made of the manager's insight and management of sustainability aspects. The assessment is based on the established tools and assess the following areas:
1) Investment strategy
Evaluation of the investment strategy in relation to a transformation to different sustainability trends/risks/opportunities, including climate change?
Are there specific sustainability risks, including climate risks linked to the investment strategy?
Are sustainability aspects a factor in the investment strategy?
Are there sustainability risks associated with the investor base?
2) Inclusion of sustainability in the investment process and ownership
Governance and responsibility
Practice - Investments
Practice - Ownership
Monitoring and reporting
3) Sustainability in the manager’s own organization
Policy, practice, monitoring and results regarding essential sustainability issues in the manager's own organization
Employees, including skills, psychosocial work environment, diversity and gender equality
Governance and business ethics, including compliance, conflicts of interest, anti-corruption, whistleblowing
In the selection process for new investments, the sustainability assessment is compiled as part of the regular in-depth analysis conducted in the investment process. A summary must be included in the documentation for final investment decision. In the legal documentation, e.g., investment agreements, side letters and/or other documentation, expectations and goals regarding ESG are included.TCFD and PRI are two framworks/guidelines AP4 strongly recommends if they not already are part fo the managers work.
A new project is initiated
When a new project is initiated, i.e. a new manager or investment is to be evaluated, a mapping of relevant sustainability aspects including long-term climate risk/possibilities/transistion risks is done. At AP4 the responsibility of sustainability is integrated with each investment team and process. Depending on issue the investment team involves different sustainability experts within the organisation as support on an ongoing basis in the process, based on needs and relevance. Areas that govern which issues are important to consider include type of asset (credit, shares), type of fund (venture, growth, buy-out), possible geographical exposure (specific issues related to certain markets, including risk markets), possible sector exposure (specific issues related to certain sectors, including risk sectors), etc..
During 2020 AP4 started a permanent cross-functional group involving all internal entities working with external asset managers in order to further develop AP4's internal Due Diligence process of external managers within Alternative Investments. The project also had as a goal to further develop the internal process for "how" AP4 does the DD. A cross-functional internal group formed with representatives from Alternative Investments, Strategy & Sustainability, Compliance, Finance & Business Operation and Legal. The group meets regularly and cooperate through out the whole process of DD (and therafter - monitoring) to share each others assessments and thoughts. The written DD sent out to prospective exteranl managers was reviewed in total and updated.
Answers to the questions in the AP4's guideline are collected from written documentation, DD, written follow-up questions and during meetings / conversations with the manager. An interview with the investment teams together with the ESG manager (if there is one) is recommended. When the evaluation is completed, AP4's investment manager as well as the representatives from the cross-functional group summarizes their individual conclusions of the evaluation and, where relevant, briefly describes the implications for AP4's continued work (eg follow-up of specific issues after some time or as part of the ongoing follow-up). Evaluation and conclusions are documented as part of the overall investment recommendation.
Investment monitoring includes ESG follow-up. The follow-up is based on the DD questionnaire and conclusions from the investment recommendation. The follow-up is typically done in combination with a meeting with the manager. The frequency of evaluation depends on the amount invested and level of sustainability risks, usually every year or every two years, and more frequent if relevant. The evaluations are documented.