AP7’s Charlotta Dawidowski Sydstrand: ‘we invest in what the reality looks like’
The ESG head at one of Sweden's largest pension funds shows how a portfolio can help markets develop sustainably
Top pension fund professional Charlotta Dawidowski Sydstrand started to take an interest in all things sustainable when she was just a student.
“It was back in the days when the Rio Conference (known as the 'Earth Summit’) first made the connexion between environmental issues and human development issues and that the sustainability agenda came to be,” she told Net Zero Investor during a phone call from Sweden.
From socially responsible investment (SRI) analyst to sustainability strategist, Dawidowski Sydstrand found her way to Swedish state pension fund AP7 as its head of environmental, social and governance (ESG) standards.
“The road has been long, but I have been focused on sustainability issues the whole time,” she stated. “But now I'm back to where I started out having AP7 as a client 20 years ago.”
For Dawidowski Sydstrand, AP7’s mission to generate pensions for 5,000,000 savers is “dependent on the global markets developing sustainably,” meaning it focuses on what constitutes the market more than individual companies, wary that some business models won't be relevant in a few decades.
“All the challenges that the world is facing is basically in our portfolio,” she stressed, leading the pension fund to not divest from fossil fuel companies, but using its ownership influence at a time when climate experts have warned that the 1.5°C trajectory requires the phase-out of fossil fuels.
“We're not interested in tilting our portfolio in order for it to look good because we can't divest ourselves from the systemic risks that we are facing,” the industry veteran added. “We invest in the reality, in what the reality looks like.”
But Dawidowski Sydstrand also pointed out that asset owners were only “one piece of the puzzle.” “We need other actors in society to work in the same direction as us,” she said.
“We need public policy, we need regulation, we need incentives from politicians, we need strong climate policy.”
Less than a year into her role as AP7’s head of ESG, Dawidowski Sydstrand pointed to the importance, for an active owner, to try to create “real-world effects,” key to the Swedish pension fund’s strategy.
“That is why we stress active ownership,” she said. “We think that it's actually a risk that many ambitious and sustainable investors are divesting from the companies that most need to be governed responsibly.”
In a bid to help the world transition, AP7 looks at companies, markets and regions where it can see ripple effects.
“We don't do any pre-investment screening, we're not a stock picker,” Dawidowski Sydstrand explained, as the state pension fund invests in companies in the MSCI All Country World Index (ACWI). “We have made an active decision to invest in the whole market, the way it looks.”
“Then we work with that part of the whole global economy that we have direct influence over.”
In her view, climate is one of the paramount issues, especially among firms that have a strong influence over public policy. “These companies need really determined strong owners that pull their ownerships together and roll up their sleeves and influence the companies in a constructive direction.”
AP7 is currently in the process of developing a transition mandate to invest in the companies that need to transition, Dawidowski Sydstrand flagged, and is now discussing with asset managers on how to deliver on it.
“Active ownership is something that more both asset managers and asset owners should really look at,” she argued.
“That is the only way for investors to influence real-world emissions reductions and transitioning up companies,” she added, pointing to the risks around measurements incentivising investors to focus on their portfolios rather than the impact they can have.
“Asset owners have a responsibility as they are the ultimate client of the whole investment community.”
With about $100bn under management, AP7 uses divestment as an active ownership tool.
“We would never divest … only to get rid of an uncomfortable company from the portfolio, to not get blamed for owning it. The goal is to make the company change its behaviour,” Dawidowski Sydstrand claimed.
But the Swedish pension fund has a public blacklisting process for firms involved in norms breaches for human rights, labour rights, environmental and climate issues and anti-corruption. For that purpose, it screens its portfolio twice a year.
“If we have verified information that companies are in breach of this, we will enter into dialogue with the company and say ‘if you don't take responsibility for this situation by doing ABC, we will divest and publicly blacklist you’,” Dawidowski Sydstrand noted.
“We don't think that just by silently sell the shares in these companies, we would achieve any change,” she stated. “The companies would just be happy to get rid of an investor who was asking questions at the AGM.”
“Instead, we use our ownership influence to drive change within the companies.” This includes, apart from blacklisting, voting at annual general meetings (AGMs) at all companies AP7 holds, filing shareholder proposals and using litigation.
Even though AP7 is not easily divesting companies to not lose access to them, Dawidowski Sydstrand nonetheless said that when the companies were sold, the pension fund was maintaining communication with them.
“We don't promise our savers that their portfolios will be rid of everything that is uncomfortable or brown or dirty, but our promise is that we will do everything in our power to influence companies that we own,” she added, as the pension fund does not exclude taking them back under its wing.
Litigation is another tool of AP7’s active ownership toolbox. Although it has mostly used it in the United States, the pension fund took with the Church of England Pensions and other European investors last year Volkswagen (VW) to court, urging it to explain how its lobbying activities helped address climate risks.
“What we expect from companies … is that they commit to lobbying responsibly,” Dawidowski Sydstrand explained. “Through their relationships with policymakers and their industry associations, they should have made a public commitment that they will do this aligned with the Paris Agreement.”
She said that a robust governance process was another priority, as many multinationals like VW are part of thousands of different industry associations involved in national and international legislations in various parts of the world.
“We have been quite successful in getting companies to understand that this is something that they need to govern and manage and report on. However, we haven't been successful with VW. They have been lagging behind their peers,” she added.
The investors said that the German automaker had refused, after over three years of dialogue, to table an agenda item at its 2022 AGM which aimed at ensuring that future reporting includes an assessment of its lobbying’s impact and alignment with its stated climate ambitions.
“So, what we are left to do is to test German legislation and in order to do that, we need to sue the company,” Dawidowski Sydstrand argued.
But she stressed that it was a bigger issue than just climate lobbying. “The outcome of this legal case will be very informative for active owners in Germany, as well as other markets in Europe that have similar legislation.”
“This is a typical issue that we think we should be focused on because it has to do with the bigger picture, the bigger systemic risks, that have ripple effects across our portfolio.”