Johan Florén, head of communications and ESG at Swedish pension fund AP7, discusses collaboration between asset owners to address systemic challenges, setting and achieving realistic ESG policy goals and contributing to sustainability in real terms.
What are your top ESG priorities over the long-term and now, given that we are in a year largely defined by a global public health crisis?
Starting with a long-term perspective, or at least five years from now, our top priority that will guide us in our ESG strategies and activities going forward is real economy impact – that is, real-world impact. Our ambition is to create real-world impact as much as possible, and that is in contrast to portfolio effect. This is something we’re working with from a universal owner perspective, and that we see as a privilege in our position as a government-owned pension fund investing in the whole economy – we’re going to try and use that as an advantage to create world impact.
To be able to do that successfully, we think that collaboration with like-minded peers is one of the success factors – this is not something that you try to do on your own, it’s together with others who have a similar view that you can really change things. So, we are going to look at the most challenging problems to the whole economy – the whole investor universe – where systemic challenges are focused. This is where we try to go in-depth and gather our strengths, but of course we also have a complementing, wider, scalable approach, but that is a starting point and we prioritise systemic challenges.
Are you seeing enough of a push at the federal or state level to reduce oil dependency and enough of a push from the heavy emitters to transition to a more sustainable business model?
With the heavy emitters, I would say no, they are not doing enough even during the last year, where several of those have really changed their course. If they go all the way, then that is very hopeful, but we still have to see if they act on their plan and ambition. In many of the most challenging industries – oil and mining – but also in other big industry emitters – chemical and cement companies – there’s definitely a change going on; the problem is it’s not enough yet. It’s one thing to state your ambition and it’s another thing to implement the necessary activity. It’s a mixed message – I’m hopeful for the change, but at the same time, we are nowhere near meeting the goals that are stated in the Paris Agreement.
In Funds Europe’s previous ESG report, Günther Schiendl, chief investment officer of VBV Pensionskasse, said it is critical to have policy goals that are achievable in a short period of time because setting a target far into the future that cannot be tracked would be “nonsense”. What do you think?
I completely agree. If you want to have a long-term goal, there shouldn’t just be a big gap. In 2050, we’re going to achieve this. How? No idea. There is nothing in between there, it’s a gap, so that’s not credible or constructive. It’s great to have long-term strategy and then you can have short-term goals one after the other in a long line.
When you look at company statements that are positive – that they have committed to different types of emissions targets and so on – some of them are very much that they promise to do something far in the future, so you don’t really know if it means something. The person who does this – the CEO or whomever – may not even be there either when it’s supposed to happen, so it’s easy to promise something in 25 years if you’re not there.
2015 was a year of two big stories – the Paris Climate Accord and the Iran Nuclear Deal. In the five years since then, the US has broken with both of those and the global picture has become fragmented to the detriment of ESG. Does that impact you as an investor?
If you compare five years back, in 2015 and the beginning of 2016, things were optimistic, and we were very optimistic because, in fact, it was the first time that there was a global political agreement on climate change and we had to collaborate on changing our course. What has happened since then is completely in the other direction, and it’s not one particular leader or country, it’s in countries all over and all over the world, and some feel it’s a backlash, so that’s depressing if you think that global political collaboration is key to solving the problems – and I do think so.
Private equity is part of AP7’s investment strategy and it’s the tip of the spear when it comes to the energy transition as it helps serve as a funding and testing ground for solutions. How are you tapping into this asset class to help provide and scale up environmental technology solutions, or “clean-tech”, whilst achieving sustainable returns?
The good thing about private equity from an investor perspective is that if you’re trying to contribute to sustainability in real terms, financing can be a real challenge in this sector. So, as an asset owner and investor, you can really do some good for companies that depend on your money in particular, as opposed to general listed equity – in particular large-cap – where they have plenty of funding and it’s not a critical factor for them. You can really contribute if you invest in private equity and we have had a clean-tech mandate for more than ten years now and we learned from this and see the potential. Several other companies have been successful too, but if you look at it from a portfolio perspective, the valuation has gone up and down quite a lot. There was a bad period around 2012/13 and a lot of the private equity firms and GPs grew tremendously between 2005 and 2010 and then many of them disappeared. It’s hopefully coming back now, but it hasn’t been the best sector if you look at returns – not in line with private equity in general, and also it’s the same thing with green investments in private equity as with green investments in listed equity – the demand from investors is very high and there’s not as much opportunity to invest, so in that respect, the valuations too.
Europe is recognised as the global ESG leader, but people tend to forget that China has four different carbon-trading regimes, while Europe is still trying to figure out how to do that and implement something that works across all countries. Although those carbon-tax regimes are low, China is experimenting and trying to see what works. Do you see ESG examples more widely that you’d like to see Europe adopt?
Yes, and now we come into speculation, but if I do that for the moment, when you talk to economists, they are always very pro global carbon tax – that would be the perfect way to deal with this, it would be very fair and wouldn’t have to be very high and it would have an immediate effect on critical sectors such as the coal industry, which is particularly bad for climate change.
The only problem with that is that if you look at the global political landscape today, the situation is much worse than five years ago. How are you going to get the global political elite to agree to something like that? It seems unrealistic, at least today.
What would be the second-best way to go about it? In the EU, where there’s a lot of support among the populations for action on climate change and where there is also a culture of relatively high taxes and welfare states and so on, it means that people are accepting these types of economic ways to accomplish political goals. If we could agree within Europe – and that’s not an easy task, some of the countries are very reluctant – but if we could do that, the next step would be to identify other parts of the world, so it becomes like trade agreements. Within those zones, we have a price on carbon, and it might be that each region has their own solutions – some are more into taxes, some are into emissions trading. There should be an agreement that within those zones where you have a price for carbon, you can collaborate. On the other side, the other companies and parts of the world that are still in some way subsidising or accepting the externalities where emissions are free, they are going to have to pay some kind of toll to get into these zones. This is going to be a hard process, but it’s not completely unrealistic and we are on the way. We in Europe had to develop our emissions-trading system, but the price is much higher now than it was a couple of years ago, so this could be done.
Overall, are you optimistic or pessimistic about the ESG landscape over the next five years?
Both. I am trying not to be too pessimistic, in particular in public situations, because people get depressed and don’t want to listen. But if you look at climate change, there is no reason to be optimistic – things are not going the way they should, it seems like even though there’s so much effort, the effects are not enough in comparison to what they have to be.
A more optimistic perspective is when you look at investor collaboration. Since we think it’s so important, things have really improved in just a couple of years and of course, Climate Action 100+ is the biggest and well-known of those, but what it does is it changes the structure of the industry because a lot of main actors are suddenly coordinating courses and trying to agree on what to do and not do. A couple of years ago, everybody was on their own and if this process continues, the group called Global Investors can bring a real voice and a real force to improve sustainable development and it could also have impact on policy developments.
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