The third Swedish national pension fund, AP3, has announced plans to drop Volkswagen AG as an investment option as the emissions scandal continues to affect returns.

The USD36.3billion fund will now evaluate the scandal, along with the ethical council it has with the AP1, AP2, and AP4 funds.

VW is struggling to regain its footing after it emerged that the carmaker used software to help its diesel vehicles cheat pollution tests.

About 11 million vehicles around the world were fitted with the defeat devices and the company has set aside 6.5 billion euros (USD7.3 billion) to cover damages including fixes, potential regulatory fines and lawsuits.

Its market value has plunged 27 billion euros since the scandal was revealed.

According to its head of corporate governance Peter Lundkvist, the fund is now trying to decide whether VW should be blacklisted based on any potential breaches of conventions signed by the Swedish state.

Lundkvist said based on what the fund has seen so far, it was unlikely they would drop VW because of the scandal, but "may decide not to hold shares because of our view on future returns."

He said: "This is completely unacceptable and must be fully investigated to minimize the risk that it happens again - it creates an enormous uncertainty for consumers and for the industry as a whole."

AP3, which is one of five so-called buffer funds within the Swedish national pension system, owned 244,100 Volkswagen shares valued at 390 million kronor at the end of June.

VW's plight is being watched closely in Sweden, where the government has called for a meeting with Volkswagen's local division and the Swedish Transport Agency to discuss the crisis.

The Swedish Prosecution Authority's National Anti-Corruption Unit is also evaluating whether to start a probe into VW.

It's not the first time Volkswagen has been at the centre of a corporate controversy in Sweden - the company was criticised by minority owners in Scania when it offered to buy all of the Swedish truckmaker in 2014.

First published 01.10.2015

Lindsay.sharman@wilmingtonplc.com