The new target is to once again halve the carbon footprint by 2030 with a view to have net-zero emissions by 2040 at the latest. The entire global equities portfolio is now being managed according to strategies that reduce the carbon footprint – a target for 2020 that was set ahead of the Paris Agreement in 2015.
AP4’s historical reduction of emissions and the targets going forward are thus more ambitious than the targets set by the Paris Agreement. Since 2012 AP4 has been working long-term to reduce climate risk in the portfolio, and as a result, the portfolio today has a carbon footprint that is less than half of what it is for a broad, global equities index. To reach the new targets, AP4 conducted an extensive review of its climate strategies in 2020:
- AP4 has implemented new, forward-looking data sources to assess the portfolio companies’ actions in relation to the Paris Agreement as well as their ability to manage carbon pricing. These new metrics have been integrated with existing metrics that measure the companies’ historical carbon intensity (emissions in relation to sales). Weighted together these form the AP4 Environmental Score, which is used for company selection in the entire internally managed global equities portfolio.
- During 2020 an analysis of the climate transition and its impact of fossil-based companies was conducted. As a consequence of this, companies whose plans and goals are not considered to be aligned with the Paris Agreement have been divested from the portfolio.
- A work group for fundamental, sustainability-oriented asset management was established in 2020 whose management focus is on identifying specific companies that are either winners or losers based on identified long-term sustainability trends. A thematic sustainability portfolio with companies that have a refined approach to resource efficiency and renewable energy has begun to be built up with the ambition to step-by-step address additional carbon-intensive sectors in the thematic analysis and company selection.
- Based on the thematic sustainability analysis, during 2020 AP4 continued to make proactive sustainability investments. New commitments within the unlisted portfolio of SEK 6 billion have been made. AP4 continuously evaluates thematic investments that are considered to be favourable from both financial and sustainability perspectives.
Targets Climate & Environment
Integrating climate and environmental aspects in the asset management has high priority. AP4 has the following targets for this work:
1. Contribute to the climate transition to a sustainable society
AP4 supports the Paris Agreement and the more ambitious Swedish environmental objective to achieve net-zero GHG emissions by 2045. AP4’s portfolio and investments are to support these
goals. AP4 has essentially cut carbon emissions in half for the listed equity portfolio since 2010, with a decrease of 48%. AP4’s target is to further cut emissions from the current level in half and to have net-zero emissions by 2040 at the latest. Carbon intensity – (CO2 emissions in relation to the portfolio companies’ sales) has decreased by 73% since 2010.
2. Investments that reduce climate risk in the portfolio
AP4 applies low-carbon strategies in the global equity portfolio. These are optimisation strategies that reduce exposure in each sector to companies with high CO2 emissions or fossil fuel reserves. The strategies are developed continuously, and in 2020 they also incorporated forward-looking data pertaining to how companies’ operations are aligned with the Paris Agreement and how various levels of carbon pricing will impact companies’ margins. These parameters affect divestments in AP4’s entire internally managed global equity portfolio. During 2020 AP4 established thematic global asset management, which analysed the climate transition and impact on fossil-based companies. This resulted in divestments of holdings in energy companies that are not considered to have plans and goals that are aligned with the Paris Agreement. Since previously AP4 does not own shares in companies with significant operations in thermal coal or oil sand. The overall result of this is that AP4’s carbon footprint is approximately 55% lower than that of a broad global equity index.
3. Proactive investments that contribute to and benefit from the climate transition
AP4 shall continuously analyse sustainability trends and seek out proactive investments in sustainability trends that contribute to the transition to a sustainable society and that also benefit from
this transition. The ambition is to make good investments from both financial and sustainability perspectives. To be able to meet both of these requirements in a market where the offering is not known in advance, AP4 does not set any absolute goals for how much capital is to be invested thematically. Based on the thematic sustainability analysis, in 2020 AP4 continued to make proactive sustainability investments. New commitments in the unlisted portfolio of SEK 6 billion have been invested, and in the fundamental thematic management, a thematic portfolio of niche companies has begun to be built up. AP4 continuously monitors the share of thematic investments in the investment flow and in the portfolio.
4. Based on identified indicators, evaluate possible asset management strategies
AP4 is working continuously to identify complementary indicators for Climate & Environment, both quantitative and qualitative, that can be used in its asset management. During 2020 AP4 implemented forward-looking climate factors in the global equity portfolio. These measure companies’ actions in relation to the Paris Agreement as well as companies’ ability to manage carbon pricing. AP4 has also worked with analyses to assess the fixed income portfolio’s CO2 emissions and has come to the conclusion that available data is still not sufficiently extensive to be able to measure and report on the fixed income portfolio’s emissions in a meaningful way.
5. Advocate for a climate transition
AP4 influences companies in its role as owner, cooperates with other investors in an effort to broaden knowledge about how the climate issue can be addressed in the asset management operations, and engages political decision-makers in a dialogue aimed at creating conditions for a climate transition. AP4 has reduced the carbon footprint of its portfolio through portfolio changes. To achieve the climate goals, the companies that AP4 invests in must also reduce CO2 emissions in their own respective
operations. AP4 also engages political decision-makers in an active dialogue for the main purpose to create a global system for pricing carbon emissions. Such pricing would impactfully and immediately
provide impetus to the climate transition by giving all economic actors a concordant and clear-cut incentive to reduce their CO2 emissions. AP4’s CEO is an active participant and speaker at various investor and sustainability conferences. During the year the CEO participated at the Nordic minister meeting ahead of COP-26 as well as at a number of other virtual conferences and seminars focused on carbon pricing and the formulation of support measures for a sustainable recovery of economies.
In 2020 the carbon footprint of the equity portfolio decreased by a further 15%, of which AP4’s portfolio changes accounted for 12 percentage points and companies’ emissions accounted for
3 percentage points. Since companies’ emissions are reported with a time lag, the decrease in emissions that is expected as a result of the lower level of activity in the world economy due to the Covid-19 pandemic is not expected to be visible until 2022 and 2023. Since 2010 AP4’s carbon footprint has decreased by 48%, of which AP4’s portfolio changes accounted for 33 percentage
points and companies’ reduced emissions accounted for 14 percentage points.
Targets corporate governance
AP4 adheres to the following principles in its corporate governance:
1. Participate on nomination committees
AP4 participated on 39 nomination committees in 2020, and in January 2021 was participating on 42 nomination committees ahead of the 2021 AGM season. During both years AP4 has participated
in all except for one nomination committee where it was offered a seat, corresponding to 98% of the nomination committees. The Swedish ownership model creates a good balance between shareholders and company managements and is regarded as an international model.
2. Interview all or certain board members in connection with board evaluations
In a nomination committee’s evaluation of a board, AP4 advocates that the nomination committee conducts its own interviews to gain a deeper understanding of how well the board is working and which complementary competences and experience the company is most in need of. This is an important complement to any written self-assessments that the board may have commissioned or to an external board evaluation. Ahead of the 2020 AGM season, AP4 interviewed board members in all but one company, corresponding to 98% of the companies in which AP4 served on the nomination committee. The reason why AP4 did not interview the board members for one company is that AP4 took a seat on the nomination committee after its work was already completed.
3. Advocate for greater diversity among board members, especially in terms of gender balance
To help ensure that Swedish companies have the best boards with relevant and complementary experience and competence, AP4 takes a broad and structured approach to its work in the nomination
process. To ensure breadth in the selection of directors, AP4’s goal is that on the nomination committees that AP4 participates on, at least one woman should be included as a final candidate
in nominations for new board members, and the nomination committee shall strive to ensure that the Swedish Corporate Governance Code’s recommendations on the proportion of women are met. On the nomination committees for 2020 AGMs on which AP4 participated, final candidates of both genders existed in 52% of the cases, and 15 (12) of newly elected directors were women, corresponding to 44% (44%).
4. Exercise voting rights at Swedish companies' AGMs
AP4 gives priority to companies in which it has major holdings, has a large share of votes, and such companies that address important issues of principle. During 2020 AP4 participated at the AGMs of 109 (87) Swedish companies, of which three (five) by proxy. This corresponds to 67% of the Swedish companies in which AP4 has investments in. During the prevailing circumstances, AP4 took
advantage of the opportunity to vote by post at 77 AGMs in 2020.
5. Exercise voting rights at foreign companies' AGMs
AP4 gives priority to the largest companies in the respective markets – companies that the Council on Ethics of the AP Funds works with and companies through which AP4 supports an international
initiative. AP4 voted at a total of 1,043 AGMs (1,025) of foreign companies during the 2020 AGM season, corresponding to 56% of AP4’s holdings. In 2020 AP4 voted on 13,506 resolutions at these AGMs. AP4 reports on these individual resolutions on its website. With respect to most board recommendations for variable remuneration programmes and protection against takeovers, AP4 voted against the boards’ recommendations. With respect to shareholder proposals regarding climate matters, health, corporate governance, and social issues and human rights, AP4 voted in favour of the shareholders’ proposals in a majority of cases. Sometimes similar shareholder proposals are submitted to several companies regarding various sustainability matters. In cases where shareholders have submitted a proposal on a matter that a company has already presented or achieved, AP4 usually votes against the proposal. Consequently, AP4 does not support certain shareholder proposals. In cases where the share of votes for and against do not sum up to 100%, this is because AP4 abstained from voting. See the summary of resolutions in global votes on page 35 in Annual Report 2020.
6. Support initiatives that advocate for shareholders' rights and companies' work with sustainability
AP4 provides constructive views when proposals for shareholders’ rights are submitted or updated. In this work AP4 often collaborates with other owners in various organisations and other forms of cooperation. During 2020 AP4 engaged itself in matters related to shareholders’ rights, combating climate change and reducing greenhouse gas emissions, among other things. During the year, proposals were submitted that infringe upon shareholders’ rights in the USA, such as regarding opportunities to submit proposals to general meetings. In Japan, issues arose regarding restrictions to how much foreign owners can own and act on in contacts with certain companies. These are examples of developments that are contrary to opportunities to act as a long-term and engaged owner. AP4 has therefore expressed its views through various organisations, such as the ICGN and PRI,
as well as together with other shareholders. In the climate area, AP4 works in various cooperation initiatives. For example, AP4 is one of 545 global investors participating in Climate Action 100+, whose purpose is to influence the some 160 companies with the highest CO2 emissions to work on reducing their carbon footprints. Within the framework of Climate Action 100+, AP4 is participating in dialogues with three companies, of which Daimler and Volkswagen are two of the companies in the initiative that
have set targets to be climate-neutral by 2039 and 2050, respectively.