The Source Podcast: How Swedish pension AP1 evaluates ESG managers

26 January 2021

(15 min podcast) In this episode of The Source, eVestment’s podcast covering trends and insights in institutional investing, we’re joined by Majdi Chammas. He is responsible for external equity mandates within the external partnerships and innovation team at Första AP-fonden (AP1) which manages part of the capital in Sweden’s national income pension system.

Over the past several months, we’ve worked closely with the AP1 team to get their feedback and help guide the development of our recently expanded ESG questionnaire, where managers are able to provide much more information on their ESG philosophies, approach, and ultimately the impact.

If you want more information on how you can enhance your research and monitoring processes with eVestment data and analytics, just like AP1 and the more than a thousand investors and consultants around the world are already doing, reach out to

Highlights from the conversation:

Edited and condensed for clarity. 

Rich: Majdi, thank you for joining us. I know for the managers listening out there, it’s always nice for them to see beyond the curtain and get an idea of your manager evaluation process.

Majdi: We think this is a people’s business. It starts with people cultivated in the right culture with a defined philosophy and process considering ESG – they will outperform. Our research process is built around all those pieces of information. We evaluate people and we evaluate the company itself, because we believe that fosters the culture that will give better performance or make those managers excel. And you need to have a philosophy that is defined, should be very easy to understand how you think you can add value as a manager, and then you have a process that is disciplined, repeatable, documented. And ESG of course, is an additional level of information that you can use to enhance your analysis of the companies that you are considering to invest in or avoid investing.

Rich: Our teams have worked together over the past several months and you’ve been a great partner in providing feedback and input on the development of our new ESG questionnaire. But can you give us some more specifics about what you’re looking at regarding ESG for those managers you’re evaluating?

Majdi: One of the most common questions we always get from our managers is, what do you think is the best way to do ESG integration? And unfortunately I have the most boring answer: there is no one way, everybody should to do it their own way, but a couple of things that are important, even when you do it yourself.

When we look at the managers, we need to see that there is a chain of belief through the organization, from management to the portfolio managers, analysts, even the companies they invest in, that they believe this is important. So that’s the first thing. The other thing is that when management commits to ESG, they also allocate resources, and we want to see that is also happening.

We would like to see the managers use their own analysis, their own data and not rely on third-party providers, because it’s consensus, it’s out there, everybody has it and it’s always most often backward-looking. So we’d like to see the managers do the analysis themselves and do it in a way that fits into their philosophy and into their process.

Rich: So you mentioned some of those data providers. You’re using eVestment now to get that data provided directly from the manager. What other third-party providers are you using, and how willing and able are managers to provide the information that you’re asking for? I’m imagining some are a little bit more mature in the process around having that data available and some might be scrambling to get it.

Majdi: I think this is indicative of the manager and their confidence. Most often, we’ve never had a big issue to get the data from the managers. We use tools  that have some of the behavioral analysis data. We use Style Analytics to get more understanding of what the managers fit will be, what their style appeals, how is their factor exposures, etc. And we use MSCI, of course, for the benchmarking, to get a screening of the portfolio, to see the ESG scores in the portfolio and to get more questions to ask the managers.

When asking for data, sometimes we need to sign NDA because some managers would say, this is very sensitive data. That’s fine with us, we sign NDAs. But most of all, we get the information we need. This analysis is the piece that will confirm the story the managers are telling. When they tell us, we are this kind of manager, this is our philosophy, this is our process. We get a check on everything. What they are telling us should be reflected in the data.

Rich: I know there’s much debate about the impact on performance of an ESG focus. You recently partnered with Tobam to release fossil fuel-free strategies. Can you talk about that partnership and those strategies?

Majdi: We’ve been working with Tobam since 2011. The first mandate they managed for us was emerging markets. And in 2017, we invested in a global high yield strategy. In 2019, our board made a decision that AP1 is going fossil free, so we have to divest from all fossil fuel investments, across the portfolios, whether it’s any internally or externally managed, active, passive, everywhere. In the beginning, we thought high yield would be a big issue because 20% of the universe is in energies, securities, bonds, and that will clearly have an impact. Tobam is a very research intensive house, so they did very good work in the sense that when we informed them about the decision, they went back and they did a lot of analysis.

And to our surprise, when they came back to us and presented the data, they said, we can change the strategy to exclude fossil fuel companies. And according to the data we have run and their analysis, there’s no impact on performance, very minor difference, I think even slightly to the positive. The remaining characteristics of the portfolio, the rating, quality, the duration, everything was kept within the boundaries of the benchmark and still we could exclude such a big part of the universe. That was for us an eye-opener, and these are arguments we could use with other managers to convince them that we should also do this together with them.

Rich: You also worked with Legal & General in partnership with Solactive to create an emerging markets ESG index strategy. Can you give us some background on that?

Majdi: In 2017, we started a project researching how we can enhance our passive book of business, especially in emerging markets, to consider ESG. Every time we had an issue in the portfolio, it always showed up in our passive book of business. Legal & General cooked up with Solactive to create a benchmark based on their own criteria. And also they have their own process on how to score the companies that are part of the index. Based on that score, the companies will get either higher or lower allocation than the benchmark. The uniqueness in this strategy is that the score is transparent for the companies, so they know exactly why they’re getting the score they got, and by changing their behavior, their disclosures, their way of operating, they could increase their score so they get higher allocation of capital at the end. We use that as a characteristic.

Rich: At the beginning you talked about how you evaluate people. And I imagine a lot of that was done in person before March of 2020. How has that changed? What advice would you give to managers trying to get in front of you today?

Majdi: I think it’s a big challenge, to be frank. We have not been tested properly yet on that topic, because until now we didn’t have to make any new investments or initiate any new relationships with any manager. This year we’ve been very busy with the implementation of the fossil fuel-free strategy of AP1, but that was with our existing managers, and maintaining a relationship. That’s quite okay when using video conferencing and it’s actually quite efficient, because you can have a meeting at any time. You can always squeeze in something. It will be very difficult to initiate a new relationship, exactly for the reasons you mentioned previously, because part of our process is to make on-site due diligence with the managers we are considering to invest with, and to pick up the culture, to see all the resources.

When we have those meetings, we get in front of people from the whole company, from the analysts, risk management, operational, administration, back office, you name it. And that’s something that’s very hard to get in Zoom. So the answer is probably haven’t been tested yet, but I would be very hesitant to rely on just Zoom meetings to make any new investments. Part of it is watching the play between different people in the team, so when you have the PM and the analyst, or you have the CEO, CIO, and you see how they interact and how they behave in the same room and answer the questions, that is something that’s very hard to pick up on Zoom.

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