Organisation details

Name: AP2

Signatory type: Asset Owner

HQ country: Sweden

AP2 is one of five buffer funds in the Swedish pension system, playing a key role in the financial stability and long-term value of the Swedish national pension system. It invests in a diverse range of assets globally, including equities, fixed-income securities, real estate and alternative investments to achieve a high long-term return at a moderate level of risk. AP2 is known for its commitment to sustainable investment practices.  

In terms of governance, AP2’s board establishes its sustainability policy for the CEO to implement. The executive management and the strategy department, along with officers responsible for corporate governance, lead the sustainability work. All employees are expected to be familiar with and adhere to the policy, and AP2 expects its suppliers, business partners and portfolio companies to uphold the policy. 

Covered in this case study

  1. Portfolio-level sustainability goal: To integrate human rights considerations into all AP2’s activities and contribute to net positive human rights development by 2030.  
  2. Motivations for setting and pursuing the goal: In addition to its corporate and legal responsibility as a government agency with asset management activities (aligned with the Swedish National Pension Insurance Funds Act), AP2 believes that violations of human rights represent a systemic risk; by integrating human rights considerations into investment activities, AP2 helps avoid risks linked to human rights violations. 
  3. Actions taken and outcomes to date: Actions included are jurisdiction-by-jurisdiction due diligence, engagement with investee companies, direct allocations (such as investing in social bonds), collaborative initiatives and responsible investment strategy updates.  
  4. Assess progress: Progress on human rights issues has been monitored through regulatory reporting, an annual sustainability report, a dedicated human rights report and due diligence processes.  

About the Legal Framework for Impact project 

How can investors pursue real-world sustainability goals in their decision-making? 

In 2021, Freshfields Bruckhaus Deringer published ‘A Legal Framework for Impact’, a groundbreaking legal analysis on exactly that topic.  

Commissioned by the PRI, UNEP FI and the Generation Foundation, the report found that investors in all 11 jurisdictions covered by the analysis should consider the systemic risks material to their investments. 

It also found that most of the 11 likely have a legal duty to pursue sustainability outcomes when those outcomes could affect financial returns.  

Investing for Sustainability Impact 

The key concept laid out in the report was ‘Investing for Sustainability Impact’ (IFSI). IFSI is not a legally defined expression but rather a concept which describes any activities that involve an investor intentionally attempting (through investment decisions, stewardship or engagement with policy makers) to bring about assessable behavioural changes – among investee companies, policy makers or other third parties – that are aligned with positive sustainability outcomes. 

A Legal Framework for Impact identifies two approaches to IFSI: 

  • Instrumental: Where achieving the relevant sustainability impact goal is ‘instrumental’ in realising the investor’s financial return goals. 

  • Ultimate Ends: Where achieving the relevant sustainability impact goal and the associated overarching sustainability outcome is a distinct goal pursued alongside the investor’s financial return goals, but not wholly as a means to achieving them. 

The PRI, UNEP FI and the Generation Foundation have together prepared a series of case studies to demonstrate IFSI in practice – this particular case study is in collaboration with Andra AP-fonden (AP2). 

Overview of AP2’s framework 

AP funds are required by law (the Swedish National Pension Insurance Funds Act, 2019) to manage their assets in a way that provides the greatest possible benefit for the insurance of income-based old-age pensions. The total risk level must be low, measured in outgoing pensions. The mission of the funds requires their assets to be managed in an exemplary manner through responsible investments and responsible ownership. When managing assets, special emphasis must be given to how sustainable development can be promoted without compromising the overall goal. Exemplary means that the investments should have the best risk and return, given the needs of the pension system, and that sustainability should be an integral part of asset management. 

In this way, AP2 is required to manage pension fund assets to ensure the greatest possible retirement pension, maintaining a low total risk level while securing high long-term returns. The Act stipulates that AP2 shall manage pension fund assets in an exemplary manner through responsible investments and responsible ownership, giving special emphasis to promoting sustainable development without sacrificing overall return and risk goals.  

The fund’s sustainability work, based on its mission, focuses on long-term value creation and protection from the economic, environmental and social perspectives. AP2 has incorporated sustainability into its investment strategies, acknowledging the importance of ESG concerns in its operations and scanning for systemic risks through an ongoing due diligence process. In commitment to responsible investment, AP2 acts upon ethical considerations in alignment with international conventions and coordinated, when applicable, through The Council on Ethics of the Swedish National Pension Funds.  

AP2’s efforts to focus on sustainability and responsible investment, in alignment with the Swedish National Pension Insurance Funds Act, highlights to investors the growing recognition of the importance of integrating ESG into financial decision-making.  

Case study on AP2’s actions to reduce risk and pursue impact related to human rights  

Investor action on human rights issues is a complex and developing field. Nonetheless, human rights issues are material, and therefore increasingly important for investors to consider, as they pose reputational, legal and financial risks for the poorest-performing companies. At the same time, ESG integration has so far been insufficient in mitigating human rights–related risks from portfolios. Additionally, due to the complexity of supply chains, among other factors, identifying and acting upon these risks can be particularly difficult for large asset owners.  

Frameworks such as the UN Guiding Principles on Business and Human Rights (UNGP) aim to address these issues by integrating ESG factors, screening the poorest performers, and adopting an ultimate ends IFSI approach, all with the goal of improving human rights at a systemic level.  

Given this context, AP2’s approach to human rights issues is a prime example of how investors should approach these issues. This case study will specifically look at AP2’s motivations and efforts to minimise risk and pursue impact related to human rights. This information will be used to categorise its activities to help readers understand how motivation and action together create IFSI.  

In the following sections, AP2 explains its approach in more detail. 

Investment beliefs, strategies and policies 

AP2’s mission, aligned with the Swedish National Pension Insurance Funds Act, is to manage fund capital to benefit the national pension system, maintaining a low total risk level while securing high long-term returns. 

AP2 has a portfolio-level impact goal of net positive human rights development, achieved through various actions, including specific consideration of human rights in company assessments and engagements. 

A human rights portfolio goal is a key aspect of AP2’s responsible investment approach, which includes a public human rights policy, due diligence processes to identify and manage actual and potential adverse human rights impacts in the portfolio, and a remediation process. By ensuring that investments align with human rights principles, AP2 aims to mitigate risks and enhance the protection of human rights. 

Goal setting (investment approach) 

AP2 has made several goals, targets and commitments.  

Impact goal:  

  • By 2030, AP2 aims to contribute to positive net development in human rights.  

This goal targets real-world improvements in human rights issues. It is not pursued in support of a financial goal and is therefore an ultimate ends goal. This is supported by more granular goals/targets, as follows: 

  • By 2025 at the latest, AP2’s activities must be conducted in line with the UNGP. 
  • This includes implementing a human rights policy, due diligence processes for managing human rights in its management activities, and a remediation process. 
  • Human rights issues must be considered in every aspect of AP2’s activities by 2030. 

Actions taken (investment process): Explicit examples of asset allocation, stewardship/collaborative engagement and policy engagement in pursuit of sustainability goals. 

AP2 has undertaken a range of actions. 

To reduce human rights issues in alignment with its ultimate ends goal, AP2 has: 

  • Engaged in responsible investments; for example, by investing in social bonds and incorporating social factors in portfolio construction.  
  • Participated in collaborative stewardship initiatives, including ADVANCE, Investor Alliance for Human Rights, Platform Living Wage Financials (PLWF) and the Council on Ethics to manage actual and potential adverse impacts linked to holdings.  
  • One example of engagement activity occurred in 2021, when PLWF and AP2 sent letters to identified investee companies in Karnataka to address living wages, following reports of textile workers receiving less than minimum wage. Since then, all 21 of the largest producers have paid the minimum wage and AP2 continues to monitor the situation.  
  • Engaged in dialogue with the OECD on human rights guidelines for multinational enterprises.  

To improve its integration of human rights in its investment process, aligned with an ESG integration approach, AP2 has: 

  • Developed an in-house quantitative model to undertake jurisdiction-by-jurisdiction due diligence to effectively identify, assess and act upon human rights issues, and subsequently engage with investees identified as having significant risks. AP2 achieves this through a process involving risk identification, risk assessment, engagement dialogues, evaluation and follow-up. In a worst-case scenario, if dialogues do not yield progress, AP2 may choose to divest. The quantitative model operates at various levels of granularity, from the country level down to the sector level. The model uses third-party data focused on the actual risks posed by human rights breaches rather than the financial risks. This model is the foundation of AP2’s proactive human rights efforts, helping the fund identify the portfolio companies with the highest risks of breaching human rights, which are then prioritised for dialogue. 
  • Engaged in dialogue with companies assessed to have heightened risks of breaching human rights, including proactive discussions with 13 textile and mining companies, and provided a training course specifically for Chinese portfolio companies on the UNGP.  
  • Revised its human rights strategy to include the recognition of a clean, healthy and sustainable environment as a universal human right, highlighting the integration of environmental sustainability with human rights management.  
  • Supported the UNGP’s reporting framework and encouraged investee companies to do the same.  

Evaluation, reporting and goal revision (where applicable) (investment outcomes):

AP2 has undertaken a range of actions to evaluate and report on its goals, commitments and targets, including: 

  • Published an annual sustainability report, including updates on human rights–related progress. 
  • Set out human rights commitments in its corporate governance and sustainability policies.  
  • Created a specific human rights report aligned with the UNGP reporting framework, which is released every two years.  
  • Undertaken human rights risk identification to assess all the countries in the portfolio every six months. 
  • Quantified, ranked and tracked human rights risks over time through a quantitative data-driven model that is updated biannually. Analysed risks using sector analysis, company analysis and country analysis. 

Key takeaways 

AP2 has a leading approach to managing human rights issues and highlights the complexity of investor action on human rights.  

AP2’s portfolio-level human rights goal is to contribute to net positive human rights development by 2030. This can be achieved by implementing due diligence processes to manage human rights impacts, investing in social bonds and participating in collaborative initiatives to ensure that investments align with human rights principles. The motivation to pursue this goal alongside financial return objectives, coupled with actions targeting real-world sustainability outcomes, exemplifies ‘ultimate ends’ IFSI. Because impact is the primary objective, it remains an ultimate ends goal, even though achieving this impact also reduces financial risks and advances human rights and positive outcomes for people.  

AP2 also showcases best practices in ESG integration by mitigating risks at the entity level within its portfolio companies. This effort does not fall under the umbrella of IFSI because the motivation is financial, and the actions are aimed at reducing portfolio risk through extensive due diligence and the application of negative screens, rather than pursuing real-world sustainability objectives.