Swedish buffer fund, AP2, has incorporated Paris-aligned rules into its benchmark construction for global and emerging market equities. This year it turns its attention to Swedish and Chinese equities. The moves come on the back of the best-ever half year return for the SEK421.2 billion fund and its lowest ever costs.

AP2 is one of the originals, a long-time ESG investor that has sustainability at its core.

It started to divest from fossil fuel exposed companies in 2014 with a rationale they were not appropriately priced, due to policy risks not adequately considered when valuing firms.

“We would go through our exposures using our metrics for which companies have the largest mispricing, and so where we would take the biggest financial climate risks, and we would divest from them. So we have been slowly lowering our carbon footprint over time,” CIO Hans Fahlin told Top1000funds.com in an interview.

Last year this proprietary methodology was switched over to the EU Paris-Aligned Benchmark (PAB) which resulted in about 250 divestments due to income from coal, oil or gas.

“Our own methodology was open to challenges, with some parties questioning why we were doing it a particular way,” Says Fahlin. “With the emergence of Paris-aligned benchmarks it was very attractive because it’s a credible third party deciding how portfolios should take it into the account. It’s scientifically-based and provides a glide path to net zero.”

Applying the EU rules to the construction for the fund’s proprietary smart factor indexes was a big endeavour on the data front. But the result is the fund has effectively exited the energy sector.

“Our view is that policy is coming or is already there. The carbon price now in Europe is quite high, higher than it used to be. Firms with high carbon-emissions need to do a lot to change. To the extent that is fully priced, I don’t think it is,” he says. “In the long run we will be investing in low emission companies and they will do better in the future.”

The global credit portfolio, which makes up 11 per cent of the fund, is also Paris-aligned, and also has a smart beta index.

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