Head of Sustainable Investment Communications Emma Sjöström outlines how universal ownership informs AP7’s approach to biodiversity loss and other systemic risks.
To be a universal owner is to be at odds with your portfolio companies. At least, a universal owner must be prepared to take a different view from the management of individual holdings.
This is largely because of the impact of negative ‘externalities’ that transcend any one company or industry. “The focus on externalities means that universal owners may at times have different interests than company management,” according to a report released last month by Swedish pension fund AP7.
To be a universal owner is to be a system thinker too. Only by understanding and addressing the complex interdependencies within and between systems can universal owners like AP7 properly grasp the effects of systemic risks as they ripple across their portfolios.
Systems thinking can also help universal owners identify their points of leverage for effective intervention, guide their corporate engagement activities, and inform collaborative dialogue with fellow asset owners, companies and policymakers.
“When you have more than 2,000 portfolio companies, you cannot diversify away from risks such as climate change or antimicrobial resistance or biodiversity,” says Head of Sustainable Investment Communications Emma Sjöström.
“We try to think about these risks in terms of a root cause approach, rather than trying to solve at the symptom level.”
The report – ‘Universal Ownership: Systems Thinking for Asset Owners’ – takes a non-nonsense approach to the challenges of diversified investors, backing up its logic with rigorous academic evidence.
This should be no surprise, given Sjöström recently joined AP7 from the Stockholm School of Economics, where she was Co-director of the Misum Sustainable Finance Initiative.
“Along with other public pension funds, I’ve been following their work for the past 20 years. It’s a great opportunity to be on the inside and get to do more hands-on work,” says Sjöström, whose PhD dissertation was titled ‘Shareholder Influence on Corporate Social Responsibility’.
The concepts of universal thinking and universal ownership were embedded at AP7 well before Sjöström arrived, however. The new report is the culmination of a three-year thematic project – itself a reflection of the considered approach taken by the fund.
Further, it is just the latest of several three-year workstreams undertaken by AP7 to get under the skin of the biggest and most complex issues it faces. Among those that preceded it was a project focused on deforestation and biodiversity, carried out across 2021-23. AP7’s thematic work on board responsibility and nature will conclude in 2025 and 2026 respectively.
According to its latest annual and sustainability report, AP7 manages US$150 billion in assets on behalf of 5.9 million savers. A recent reorganisation saw the sustainability team fully integrated with investment management colleagues.
TNFD trailblazers
In parallel with its deforestation and biodiversity project, AP7 joined steering committee of the Task Force for Nature-related Disclosures (TNFD), conducting an assessment of its own nature-related risks, impacts and dependencies in accordance with the body’s recommendations.
Initially, AP7 was one of only two asset owners on the TNFD steering committee, alongside Norges Bank Investment Management (NBIM), the Norwegian sovereign wealth fund, with much of the rest of its membership taken by corporates, asset managers and service providers. “It was important to have two asset owners taking that broad system-level perspective,” says Sjöström.
Using the TNFD methodology, AP7 identified that 86% of its equity portfolio is highly dependent on ecosystem services. The exposure was across all sectors, with utilities and materials particularly at risk.
However, the value of firms depended on a wide range of different ecosystem services, including mass stabilisation and erosion control, bio-remediation, and flood and storm protection.
“We did it partly for ourselves, but also partly to trailblaze for others, showing how this can be done and that it can be done,” explains Sjöström. “It has helped us to focus our stewardship activities on various kinds of demands on companies to be transparent and assess their risks, dependencies and impacts.”
Overall, AP7’s deforestation and biodiversity project was structured to focus on three key areas: the development of norms and standards, the role of active ownership in mitigating risks, and the identification of collaborative initiatives to augment internal capabilities.
It led to at least three key outcomes of relevance to peers: a belief in the urgent need for large firms and financial institutions to assess and report their nature risks and dependencies, the development of a voting policy for deforestation, and a reinforced conviction that collaborative engagement can be beneficial for both investors and investees.
Tailored collaboration
As a universal owner dealing with multiple systemic risks across a large portfolio, engagement is essential to AP7’s execution of its fiduciary duties.
Having taken a step back to gain a “broader perspective”, the fund surveys the available channels to address underlying causes – weighing up the merits of engagement at the policy, standards, industry or value chain level, rather than taking up single issues with individual firms.
Collaborative stewardship critical to this systems-led approach, not least from a resource perspective.
“It’s been very important that we work together, not at least with regards to policymakers, because it would be quite resource intense for a single investor to set up a whole public affairs department,” says Sjöström.
But collaborative initiatives must be designed carefully to achieve meaningful results. “Composition depends not only on yourself and the issue, but also the target company,” she says.
AP7’s universal ownership report cites a recent academic paper which highlights the value of tailoring an engagement coalition to optimise the receptiveness of the target firm, using data from more than 500 engagements.
“Investors will become more sophisticated and strategic in building these collaborations, rather than opening the gates to anyone and anything,” notes Sjöström.
AP7 is involved in several initiatives that pool investor resources to address risks at the system level. When it comes to tackling the financial risks arising from biodiversity loss, these include Nature Action 100, which engages with the most exposed companies, and the Investor Policy Dialogue on Deforestation, which focuses on governments and policymakers.
According to a status report released last month, the former’s 240 investor members (worth US$30 trillion AUM) conducted more than a hundred meetings with target firms in 2024, with around half making plans to address nature-related issues and a third making progress toward the coalition’s investor expectations.
As well as working with like-minded investors, addressing systemic risks can involve collaboration with a wider range of organisations across society when there are high levels of alignment.
“It is important to link up to the scientific frontier,” says Sjöström. “This can be a matter of cross-fertilisation where we can provide data for academia to work with, but also we can use a scientific lens on our work. We always have dialogue with civil society [organisations] but have to be aware of agendas. You have to tune in on different wavelengths with different types of actors.”
Underused tools
AP7’s recent report flags several stewardship-related tools and amplifiers that warrant more attention from asset owners, include bondholder stewardship, engagement with asset managers, director votes, and pre-disclosure of voting intentions.
For Sjöström, one tactic of particular note is the use of expectations documents to establish an asset owner’s position on a particular issue, including systemic risks.
Academic research shows that an investor publishing its position on a specific theme will increase the likelihood of portfolio companies meeting its expectations over time, versus other companies. Sjöström expects to increase the breadth of AP7’s work in this area as part of her role at the fund.
“It is also a very useful internal exercise,” she says. “Beyond the fact that it will make it very clear to portfolio companies what you expect of them in a systems context, it also can help the investor itself to be very clear on how it views various issues.”
Both AP7’s cultural context and Sjöström’s academic research favour such consensus-building tactics over confrontation. The case for change can be strengthened by explaining the business benefits and recognising the complexities faced by management. But she insists escalation is a critical element of stewardship.
“The Scandinavian approach is very much about trying to work things out together. We would view a shareholder resolution as more confrontational. But I know that in other markets it might be the opposite: you start off with a resolution and that will set you off into being able to have a dialogue.”
The value of making asset owner expectations clear on key systemic risks also extends to asset managers.
“It’s important for asset owners to show what we expect, not least right now, where asset managers might have some conflicting demands. It will also make life easier for asset managers to have clear direction from actors like ourselves,” says Sjöström.
Setting out asset owner views on systemic thinking in an expectation document would be “helpful” to both parties, she adds.
One part of the puzzle
Ahead of COP30, investors’ expectations of policymakers are high, of necessity, despite the latter’s’ collective failure to address climate and nature risks with sufficient urgency.
Part of systems thinking involves a very clear understanding of your role within systems and your influence on them.
“There are limits to what investors can do, of course. We cannot directly solve a geopolitical conflict, or we cannot write laws or decide what laws are going to be in place that could potentially help the systemic risks we’re facing,” says Sjöström.
“Oftentimes we can push for increased transparency, which can spur the changes on the ground that we want to see. We obviously don’t want anything to just stop at the reporting level. But we can be one part of the puzzle that moves an issue forward.”
Motivated to protect portfolio value for reasons of fiduciary duty above all else, universal owners are highly dependent on policymakers to set the frameworks which allow them invest profitability and sustainably.
This means intense scrutiny of the nationally determined contributions to the 2015 Paris Agreement that are due to be laid out in Belem, as well as their nature-focused equivalents, which outline governments’ policies for implementing the Global Biodiversity Framework.
“We see this COP as an opportunity to link together climate change and biodiversity more than before, and for it to be more of a joint conversation on those topics going forward because they are so closely interlinked,” adds Sjöström.
“Expectations are high because we have to make decisions in the right direction and accelerate the work that we are doing. A lot of good work has been done since Paris, but clearly not enough. Ten years ago, we would have thought that we would have come farther than we have. So, we hope that this COP will be a new starting point for the next coming five years.”
