The AP funds’ ethical council, which co-ordinates the ethics of the four Swedish buffer funds, has so far engaged with 14 companies to improve their ethical standards. But its first annual report shows that the council only managed to change the ethics of two of the firms it engaged with.

The results fall short of its goal to alter the ethics of a least three to five companies. Its chairman and head of corporate governance at AP 2, Carl Rosén, admits he is not satisfied with the results.

“I don’t think one will ever be satisfied – there is of course always more that we could have achieved. But we are happy that we’ve got the process started,” says Mr Rosén, who would not comment on whether the aim of changing up to five firms, revealed last year by former chairman and head of corporate governance at AP 1 Nadine Viel Lamare, was still important.

Mr Rosén does not rule out adding more firms to its blacklist this year, but says it depends on the progress of the cases selected so far.

“In some cases we’re optimistic, in other cases less so. But the important thing is to have a long-term perspective, patience and the resources to follow through.”

The ethical council, which was formed last year to make better use of the funds’ resources, is currently engaged with 13 firms. The US energy company Halliburton, accused of bribery and business ethic breaches, was blacklisted earlier this year. Chevron, another US energy firm, which has shown signs of improvement in dealing with human rights breaches in Nigeria, remains on the council’s blacklist. The remaining 12 firms show little signs of improvement.

But Mr Rosén is optimistic that teaming up with the other AP funds has made it easier for foreign firms and other institutional investors to know who to speak to. It has also raised the funds’ profile abroad.

“We not only disclose who we engage with, but we’re also creating awareness of the fact that we are voting and putting forward resolutions at board meetings,” says Mr Rosén.

GES Investment Services, the AP funds’ consultant on ethical and environmental analysis, screens the 3,500 companies the buffer funds invest in and comes up with a shortlist of 20 to 25 companies for possible engagement. The ethical council then selects about 10 companies to engage with, but the selected firms are not necessarily the worst offenders.

“We look to have good diversification among the cases we engage with and spread those cases among different sectors as well as different kinds of infringements,” explains Mr Rosén. All selected firms violate international conventions.

Unsurprisingly, both Yahoo and Wal-Mart, which the AP funds have previously spoken out against, are on the list. The list is dominated by energy and commodity firms, such as the Chinese PetroChina and the US Freeport-McMoran Copper and Gold, but also includes consumer and IT companies.

If a dialogue does not lead to any results, the ethical council recommends that the AP funds stop investing in those firms. However, there are no specific criteria for what will prompt exclusion.

But the AP funds own structure for ethical and environmental analysis might not be enough. The funds have been criticised for their investments in land mines, nuclear weapons and for not having enough green investments. A committee, set up by the ministry of finance, will propose changes to the AP funds ethical guidelines by November this year. The structure of the Norwegian fund, where the ministry of finance decides which firms to exclude, has been touted as a possible blueprint.

The blacklisted firms are BHP Billiton, Bridgestone, Chevron, Duke Energy, Freeport-McMoran Copper and Gold, Grupo Ferrovial, L-3 Communications, PetroChina, Sodexho Alliance, Thales, Toyota, Wal-Mart and Yahoo. It also has a passive dialog with Singapore Technologies, which all the funds have excluded due to its production of land mines.

OUR VIEW

It is certainly a step in the right direction that the four AP funds are working together to improve the ethics of the foreign firms they invest in. By joining forces, their voices have become stronger and there profile has been raised abroad.

Perhaps the funds were too optimistic in believing they could influence up to five companies a year. The fact that 12 of the 14 firms show no signs of improvement demonstrates just how difficult it is to achieve any change. It must, however, be regarded as a failure that the council has fallen short of its five-company target. It is also surprising that the ethical council does not necessarily select the worst cases of ethical mismanagement. Instead, it is more interested in spreading the cases over different sectors and infringements, which raises doubts over just how serious the council actually is about ethical change.

The AP funds have for a long time been criticised for investments in nuclear weapons and cluster bombs as well as for holdings in companies with human rights and environmental failings. The government’s ongoing evaluation of the AP funds’ ethical investments and their policies for corporate governance will in November shed some light on any necessary changes to the structure. Perhaps the government should have more say.

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