Sweden has announced a plan to promote Environmental, Social and Governance (ESG) oriented companies through the targeted investment of its pension fund. One trillion Krona (90 billion USD) of pension savings will be allocated for investment into firms that abide by ESG standards.

This plan is the most recent of a series of initiatives put in place by the Swedish pension system to contribute towards the fight against climate change, human rights and other pressing issues.

The wave of societal contributions made by the Swedish Pensions Agency, the nation’s public pension fund, has in the past been partly influenced by a fraud scandal involving the Swedish investment fund manager, Falcon Funds, which shook the country’s Premium Pension System (PPM) and cost them the confidence of the tax-paying population.

The scandal involved a string of fraudulent investments carried out in two steps. First, in 2013, 22,000 pensions were transferred to the “Optimus High Yield” fund through illegal means. Later, that fund merged with a sub-division of Falcon Funds based in Malta.

In 2016, it came to light that the fund had unlawfully shifted pension savers’ money without their consent.

Over 2.4 billion Krona went missing. The company is still being investigated, and only SEK 340,000 has been reimbursed so far. Verdicts were handed out in 2020 and 2021, consisting of fines and prison sentences for six people involved in the fraud.

As such, the Swedish Pension Agency is working to replace the previous system, still obscured by the scandal, and respond to the taxpayers’ requests to make the structure sturdier and the screening process more vigorous.

ESG-targeted investment would bring the Swedish pension system one step closer to distancing itself from the scandal and regaining the population’s trust.

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To apply for investment from the $90 billion pensions savings pool, firms need to be able to validate their ESG claims. Erik Fransson, Director of the Office of the Swedish Fund Selection Agency managing the initiative, asserts that an “exemplary approach to sustainability through responsible investment and responsible ownership” will now be required from pensions managers by law.

All funds must adhere to the guidelines of the United Nations Global Compact, the OECD’s guidelines for multinational corporations and the UN’s guiding principles for human rights, according to the Swedish Fund Selection Agency.

Fransson insists that “unlike in the current system, there will be a requirement that the manager systematically integrates sustainability aspects into its operations.”

Additionally, the firms will have to uphold the standards agreed upon and face reviews “on an ongoing basis.”

What about pension funds in the wider EU and US?

The new framework is an important stepping stone in incorporating ESG into mainstream investment.

The approach to rendering investment more eco-friendly differs from country to country. In Europe, a report released in September 2022 shows that pension funds do “not appear to be engaging proactively” with the EU and UK’s effort to create a “sustainable and climate finance-related policy.”

The report’s analysis was based on 25 of the largest pension funds in Europe and ten national pension funds. It also considers PensionsEurope, the national association of pensions funds at the EU level, which is responsible for over €4.6 trillion in assets and 100,000 pension funds in 21 countries.

The report found that only four out of the 25 funds and five out of the 10 national associations have shown “meaningful engagement with sustainable finance policy.”

ESG requirements are now being hardwired into financial regulations to force investments to target sustainability and societal wellbeing.

As ESG is becoming one of the main criteria for investment throughout Europe, pension funds are bound to follow.

On the other hand, in America, the Senate just voted to stop ESG goals from being taken into account by the pension industry when making investments.

Despite it being a Democratic-led US Senate, the vote favoured Republicans, teeing up President Biden’s first veto.

If the law is implemented, pensions and retirement plans would no longer be allowed to consider climate, social and governance issues in their investment decisions.

Under Sweden’s four AP Funds (the public sector pension funds) the Council on Ethics, responsible for managing the national public pensions in Sweden, has successfully adopted other measures in line with the UN’s Sustainable Development Goals (SDGs), by screening over 3200 companies they have invested in for possible violations of international conventions.

Of these reviewed companies, about 3.5% were found to have committed ethical violations or are at risk of committing them. The Council then engaged in dialogue with 86 companies to determine the extent of the violations.

One of the companies involved in this dialogue was chemical giant, DuPont, which agreed to stop its production of the harmful chemical PFAS following the Council’s involvement.

Additionally, for the past couple of years, the Council has worked to fight child labour in the cocoa industry in West Africa. It has collaborated with seven of the world’s largest cocoa and chocolate suppliers, successfully transforming the industry.

Their work resulted in children in cocoa-growing communities having better access to education and systems being implemented to overcome child labour by enabling cocoa farmers to earn an adequate living.

Sweden’s pension system is making substantial progress in ethical investment, a path that should serve as an example to many other state pension frameworks worldwide.

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