Sweden’s AP7 has introduced a new framework for risk-based exclusions that will see it exclude companies with particularly high and difficult-to-assess sustainability risks.

The framework will initially focus on risks of human rights violations in conflict areas, after which it will be broadened to other issues.

For norm-based exclusion, such as human rights, labour rights, environment and anti-corruption, the framework will be implemented gradually over the coming years.

The stricter selection under the framework will result in more companies being excluded and resources becoming more concentrated on fewer companies with greater transition potential.

In the years that followed the Paris Agreement, there were increased sustainability ambitions in politics, business, and the financial sector, the fund noted. AP7 also intensified its ownership engagement, international collaborations, and norm development.

However, the fund indicated that in recent years, as the world has become "more conflict-ridden and unpredictable", it has brought new sustainability challenges for both investments and ownership engagement. Due to this, AP7 is expanding the basis for excluding companies.

Commenting, AP7 head of communications, Johan Florén, said: "We need more tools to manage risks that are becoming increasingly complex and unpredictable. In addition, we want to be able to allocate more resources to the opportunities that exist."

On 8 December, AP7 excluded an additional 35 companies, with three excluded for human rights and labour rights, one for other norm areas, and the remaining 31 excluded for environmental and climate reasons.

The fund invests in companies that adhere to the 10 principles of the UN Global Compact regarding corporate responsibility for human rights, labour conditions, the environment and anti-corruption. Companies that act in direct violation of these principles are excluded.

Furthermore, AP7 also exceeded its target for 2025, which called for 50 per cent of its highest-emitting priority portfolio companies to be engaged in credible transition work toward net-zero.

As reported in its updated version of its Climate Action Plan, 56 per cent of AP7’s prioritised portfolio companies with the highest emissions conducted credible transition work towards net-zero emissions in 2025.

The plan also found that, of these companies, 49 per cent have made a commitment, and 5 per cent have begun transition efforts.

Meanwhile, 3 per cent of these companies are aligned to a net-zero pathway, while 44 per cent of the companies have not yet started their transition. AP7 highlighted that, unlike previous years, none of the companies lack a complete analysis.

As a result of meeting its goals, it has now set new targets for all asset classes for 2030.

The new targets, AP7 said, enable it to allocate capital more effectively toward solutions that reduce emissions, support and encourage the companies it invests in transition, and manage risks. 

The plan also highlighted that new opportunities have emerged for its climate work, due to the sustainability team's integration into the asset management organisation.

Additionally, AP7 has expanded investment mandates that allow it to invest in corporate and foreign bonds, and in 2023, it made its first real estate investment.

Since 2022, the fund has had a transition portfolio, in which it invests in high-emission companies with sufficient transition potential and in businesses focused on climate solutions.

In addition to contributing to the transition, this portfolio has also increased AP7’s exposure to companies that could benefit from a shift to a fossil-free economy.

“A clear step forward was taken in 2023 with the launch of a transition portfolio. Over the past year, we have advanced this work further by introducing an internal management mandate that gives us new and expanded opportunities to integrate investment management and active ownership,” AP7 CEO, Pål Bergström, said. 

“At the same time, we have raised our expectations of the companies with the greatest climate impact, by limiting investments to those with the highest transition potential and excluding a larger number of firms.”

On the bond side, AP7 targeted green bonds to account for 50 per cent of the fixed income fund by 2025, and it achieved this goal in 2024.

Looking ahead, the fund said one of its goals is for all companies in the corporate bond portfolio to reach transition level “Aligning to net-zero pathway” or higher according to the Net Zero Investment Framework model by 2030.

The fund’s other goals include that 100 per cent of the companies in the
transition portfolio will be conducting credible transition work by 2030 and that the transition portfolio will account for 10 per cent of the equity fund. It said the portfolio development has continued according to plan.

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