AP4’s contribution to the climate transition
Climate change is one the greatest challenges of our time, and AP4 underpins its asset management activities on the Paris Agreement and the more ambitious Swedish environmental objective to achieve net-zero greenhouse gas emissions by 2045. Our low-carbon strategies, which AP4 began implementing as far back as 2012 and have subsequently developed year for year since then, took additional steps in 2020.
During 2020 AP4 conducted a macro analysis of the climate transition and its impact on various industries and specifically the energy sector. This analysis complements the climate scenario analysis that AP4 conducts in accordance with the TCFD’s guidelines. As part of this work, asset management strategies have been developed that incorporate new, forward-looking sustainability data and new, fundamental thematic management. This has also resulted in significant portfolio changes, above all for holdings in the energy sector.
AP4 reduced the carbon footprint of its investments in listed equities in the portfolio by an additional 15% in 2020, which represents yet another step in the long-term work since 2012 to reduce climate risk in the portfolio. AP4 has cut carbon emissions in half from its investments in equities during the last ten years and today has a carbon footprint that is less than half of what it is for a broad global equities index. AP4’s target is to further cut climate emissions in half by 2030 and to have net-zero emissions by 2040 at the latest. AP4’s historical reduction of the carbon footprint and our targets are more ambitious than those set out in the Paris Agreement.
This is continually ongoing development work that AP4 reports on in its annual reports and website. One validation that our work is generating results is that AP4 was ranked as the leading pension fund in the world by the Asset Owners Disclosure Project, an international study that was most recently conducted in 2018
Implementation of new, forward-looking data sources in 2020
One challenge in developing methods for managing climate risks in the portfolio is access to data of sufficiently good quality. Up until last year, AP4 was forced to rely only on historical data that was not always pertinent. In 2020 it became possible to complement AP4’s models with data that is intended to be more forward-looking and thereby also has the potential to significantly increase AP4’s forecasting ability. Now, AP4’s strategies for selecting companies in the global equities portfolio also include data on whether the companies are considered to be aligned with the Paris Agreement and on their ability to manage carbon pricing. During 2020 AP4 also broadened its application of low-carbon strategies to the entire internally managed global equities portfolio. This means that the target that AP4 set in 2015 ahead of the Paris summit – that the entire global equities portfolio would be managed based on strategies that result in a lower carbon footprint – has now been achieved.
New group formed in 2020 for fundamental thematic equities management
During 2020 AP4 also built up an internal group for fundamental thematic global equities management. Based on AP4’s thematic sustainability analysis and quantitative company analysis, among other things, this group conducts fundamental company analyses and equity selections in AP4’s global equities portfolio. In an initial step the energy sector has been analysed, which has resulted in an extensive restructuring of that sub-portfolio.
Ensuring that the currently ongoing climate transition will be implementable over the long term requires that it is possible to align societal and economic development that is perceived to be socially acceptable. Responsible use of fossil fuels within the framework of the remaining global carbon budget – mainly conventional oil and natural gas – will therefore continue to be a precondition for a successful transition to a climate-neutral society. It is for this reason, among others, that AP4 continues to have a certain level of ownership in fossil fuel–based companies. However, AP4 puts strict demands on the fossil-based companies in the portfolio. They must conduct their operations with targets and ambitions that are deemed to be compatible with a transition according to the Paris Agreement and also preferably have a substantial and growing share of investments in renewable energy production. The latter is important, as several fossil fuel–based companies in the future will be among the largest investors in the world in renewable energy and will thereby be positioned to play a key role in the climate transition. With considerably more concentrated ownership in energy companies, AP4 will also be able to further intensify its active ownership initiatives to contribute to ensuring that the positive development continues in the companies that AP4 has ownership in.
Carbon pricing important
The baseline for the analysis is that the goals of the Paris Agreement are reached, which means that annual global greenhouse gas emissions must start to be reduced relatively immediately and at a fast pace. The transition must be conducted throughout society and globally, which affects governments, business and industry, investors and consumers. International collaborations and accords are important, as is focusing on the most urgent problems and overall measures that have the greatest benefit. AP4 believes that the single most important tool for creating tangible economic incentives that could affect all actors in society is global pricing of greenhouse gas emissions.
Today, greenhouse gas emissions represent a societal cost that the actors who are most responsible for the emissions often are not held to account. This must change in order for a successful climate transition to be possible, and the pricing will likely need to be complemented with support for the groups and regions that would be negatively impacted.
Coal must remain in the ground
In the transition that has now begun, reduced emissions can be put in relation to economic growth and societal development in general as well as to the fight against poverty. It is therefore essential that the remaining carbon budget for achieving the goals of the Paris Agreement is used wisely. Thermal coal that is used to produce electricity and heat is the energy source which, relative to oil and gas, emits the most carbon dioxide per produced unit of energy. Coal is the largest source of greenhouse gas emissions and also the energy source with the largest existing reserves, for which there is no scope in a global carbon budget. As a source of energy, coal can more easily be replaced by renewable energy sources such as wind and solar power due to its application areas. Part of the current reserves of conventional oil and gas should be used during a transitional phase, but coal must remain in the ground.
AP4 works actively on reducing climate risk in the portfolio. This is done by making sustainability investments that contribute to and benefit from the ongoing climate transition, by engaging our portfolio companies in an active dialogue to promote transparent reporting, and by setting goals in line with the Paris Agreement. AP4 believes that transparent reporting of climate-related risks and opportunities contributes to a faster transition to a low fossil fuel society. AP4 therefore supports climate reporting in accordance with the Task Force on Climate-related Financial Disclosures (TCFD), both for investors and for its portfolio companies. AP4 has reported in accordance with the TCFD since the framework was established in 2017 (read more in Annual Report 2019)
Carbon footprint reporting
AP4 measures the portfolio’s carbon footprint and has been publishing information about it in its annual reports since 2014. Together with other AP Funds, AP4 has standardised how the AP Funds conduct their carbon footprint reporting by introducing three joint metrics in that describe the carbon footprint of its investments.