Stockholm (HedgeNordic) – The AP funds, including AP4 – the Fourth Swedish National Pension Fund, have a statutory duty to integrate sustainability into their investment strategies. As part of Sweden’s national pension system, the AP funds are obligated by law to manage the assets in a way that promotes the long-term financial security of the pension system while also considering environmental, social, and governance (ESG) factors. This dual mandate requires the AP funds to balance financial returns with sustainability priorities, focusing on areas such as climate impact, human rights, and ethical governance.

At AP4, sustainability is more than just a requirement; it is a strategic priority. The pension fund continuously monitors and analyzes sustainability trends and developments across various sectors, with its asset management teams actively seeking out investments expected to contribute to and benefit from the transition to a sustainable society. AP4 employs a thematic approach to sustainability investing, aligning its investments with long-term structural trends that provide positive ESG outcomes. By leveraging thematic sustainability analyses and other trend assessments, AP4 allocates capital to both capitalize on and contribute to the shift toward a sustainable global economy.

Thematic Approach to Sustainability Investing

AP4’s thematic sustainability investments are based on an analysis first conducted in 2018 and subsequently updated in 2023. “This analysis has both developed our knowledge and provided refined tools for our asset management organization,” explains Mikael Anveden, Head of Strategic Investment Analysis at AP4. “Both these aspects are important for our ongoing work to identify good, well-balanced thematic sustainability investments.” AP4 aims to pinpoint sustainability trends, assess their strength and timelines, and understand which value chains are affected. This analysis enables the identification of winners and losers, ultimately guiding the discovery of appealing investment themes for AP4’s asset management teams.

The thematic analysis update conducted by AP4 in 2023 was grounded in a comprehensive examination of external factors. The initial phase identified the megatrends encompassing a wide range of events related to consumer behavior and technology, alongside crucial trends such as greenhouse gas mitigation and biodiversity loss.

“These trends change at different rates and have different impacts on the climate leading up to 2030…We therefore began by discussing and ranking relevant megatrends based on their significance for the climate in 2030 and the rate of change of the trend itself.”

“These trends change at different rates and have different impacts on the climate leading up to 2030, which is the horizon we have chosen to focus on in this analysis,” argues Anveden. “We therefore began by discussing and ranking relevant megatrends based on their significance for the climate in 2030 and the rate of change of the trend itself.”

The most pertinent megatrends were subsequently summarized and categorized into five investment themes, each representing a significant portion of society’s carbon emissions. Collectively, these themes account for approximately 90 percent of global emissions. The selected investment themes are as follows:

• Decarbonize the Industry: Enabling smart, efficient and flexible production of fossil-free energy.
• Clean Up Industry: Advancing the production, use and recycling of climate-friendly materials and products.
• Decarbonize Transport: Promoting efficient and sustainable passenger and freight transportation.
• Protect the Biosphere: Ensuring the sustainable management of land and water, agriculture, forestry and biodiversity conservation.
• Green Buildings and Infrastructure: Fostering climate-friendly design, construction, use and recycling of buildings and infrastructure.

AP4 has compiled specific investment opportunities aligned with each identified investment theme. These individual investment areas evolve over time, varying in maturity and potential. To effectively navigate this dynamic landscape, AP4 has established a framework for the ongoing and active evaluation of these investment areas.

“Two factors came into play when prioritizing the investment areas,” explains Anveden. The first one is attractiveness, defined in terms of market size, growth and regulatory influences – both positive and negative. The second factor is investability, which relates to technological maturity, and its connection to relevant megatrends and expected capital inflows. “Their importance for the climate transition is also key, of course,” Anveden emphasizes. “We remain focused on the areas where we have been making investments for several years, such as wind and solar power, but we have also identified interesting areas to monitor going forward.” Notable examples include biomaterials derived from wood and green metals.

“We have created an annual wheel for our thematic analysis work, and we have established a new working group that is responsible for monitoring the themes and training the organization.”

Through its thematic analysis, AP4 has identified investment areas that are both timely and relevant. “It is important to find a way to continuously monitor and update the underlying investment areas,” notes Anveden. “We have created an annual wheel for our thematic analysis work, and we have established a new working group that is responsible for monitoring the themes and training the organization.”

The ongoing work focuses on deepening knowledge and assessing specific investment opportunities. Given the rapid advancement of technology, the cost associated with each innovation is often crucial to its success. “We are closely monitoring developments in areas such as hydrogen production, energy storage, and carbon capture,” concludes Mikael. “While wind and solar are part of the foundation for the climate transition, we aim to look at the whole picture.”