AP2 invests 99 billion according to internally developed ESG indices

During 2017 AP2’s employees designed new indices for the global equities asset class. This means that the Fund now has ESG exposure on all internal capital in the foreign equity asset class, totalling SEK 99 billion. This is an important part of the Fund’s continued work with implementing ESG factors (Environmental, Social and Governance) in investment decisions. The new indices are fully in line with AP2’s mission, as they are expected to give a greater return at a lower risk and at the same time take into account aspects of sustainability.

“We analysed which properties that were interesting to have in our new indices and concluded that we wanted to have exposure to four properties, but just two indices. This means that we have designed the indices for the benefit of equities in companies that have a low value and a good ESG profile, and equities whose returns are low volatile and independent of the returns of other equities,” says Tomas Morsing, Head of Quantitative Strategies at AP2.

At the end of 2016, a project was initiated with the aim of replacing the current six single factor indices with two new ones; one for developed countries and one for emerging countries. These two indices would reflect all the properties that AP2 is seeking exposure to, so-called multi-factor indices.

Including exposure to companies with a good ESG profile in the indices has been especially important for AP2. That is why the Fund’s new indices consider many different aspects of climate and environment, social factors and corporate governance factors during index construction. For example, equities in companies
with low carbon dioxide emissions or that have many women employees are favoured, while equities in companies that are often involved in a variety of controversies or that attempt to devote themselves to manipulative accounting will receive a lower index weighting.

“Our new indices include many properties in ESG. To determine what we should focus on, we have turned to our sustainability strategy, our previous ESG work and to research within the area,” says Tomas Morsing.

Previously, AP2 purchased finished indices from an external party, but the indices will now be designed internally. For this purpose, the Fund has developed a methodology that makes it possible to compare and study how the different properties affect an index return and risk profile.

“When we tested the indices on historical data, we saw that we could evaluate the ESG higher than the other three properties without sacrificing the return or increasing the risk. This is completely in line with our assignment at AP2,” says Claes Ekman, Quantitative Portfolio Manager at AP2.

For further details, please contact Tomas Morsing, Head of Quantitative Strategies at AP2, +46 31 704 29 00, or Ulrika Danielson, Head of Corporate Communications, on +46 31 704 29 29.