The aim of AP4's long-term low-carbon strategies is - with limited risk – to opt out of companies with the greatest and most negative impact on the environment in terms of carbon dioxide. The companies where AP4 invests are regularly evaluated on the level of their emissions and their fossil fuel reserves.
Emissions of carbon dioxide and other greenhouse gases affect the Earth's climate negatively, which over time leads to a rise in average temperatures. AP4 believes that the cost of emissions on the environment is taken into account only to a limited extent in current valuations of public companies. AP4 estimates that this will likely look different in the future.
When transitioning to a climate-neutral society, AP4 estimates that emissions of carbon dioxide and other greenhouse gases will lead to higher costs, and that companies with high emissions and/or fossil fuel reserves will be at a disadvantage and valued and priced differently than they are today. The assets in such companies have a risk of becoming so-called "stranded assets".
A stranded asset is a financial risk and means that assets in possession become obsolete för any unanticipated reasons.
24 percent of the Global Equity portfolio
Total investments in low-carbon strategies amounted to 24 percent (22) of AP4’s global equity investments at the end of the year. In 2012, AP4 completed the first investment based on the low-carbon strategies. Since then, AP4 has developed a global platform with varying strategies to reduce climate risk in the assets, while providing a return in line with, or better than, the index.
Returns in line with the index and carbon emissions halved
The returns for all the low-carbon strategies have developed in line with the corresponding benchmark index, measured from the initial investment in each strategy.
Meanwhile, the level of carbon emissions has been halved compared with the index. The investment period, four years to date, is however too short for an evaluation of these long-term investments.
Increase the proportion of climate-smart strategies
AP4 continues to work on developing and investing in strategies to reduce climate risk in the Global Equity portfolio.
AP4 has a global platform with low carbon strategies
Below, Ulf Erlandsson, Senior Manager Corporate Bonds and Green Bonds at AP4, in a discussion during a conference in Paris, November 2016.
Interview with Ulf Erlandsson, Senior Manager Corporate Bonds and Green Bonds at AP4.
How have green bonds performed in 2016?
- It’s been a very good year - green bonds reached new record levels in 2016, with an almost doubling of the issuance volume. There has also been a greater diversity of issuers types, says Ulf.
- For example, during the second half of the year China issued a considerable number of green bonds. They even issued the first green style government bonds at the end of the year.
- Overall, more than USD 715 billion in green bonds has now been issued, Ulf continues, which is of course only about 0.15 percent of the bond market - but interest is increasingly growing.
Has AP4 been active in the trading of green bonds?
- Yes, during the year AP4 invested SEK 3.2 billion in green bonds.
Your vision is that the market for green bonds should work just as well as for an ordinary bond. How has this progressed?
- A strength of the green bond market has been that in most ways they have functioned like ordinary bonds, says Ulf. But this changed this year. Green bonds have become more popular with institutional investors, and the number of investors not driven by economics has increased.
- These investors want to demonstrate they have invested a certain amount of the assets in green bonds, or they want to say that they have "green" in the balance sheet. Unfortunately, they buy bonds without caring much about the price or if they incur a loss. Their focus is often to have a certain amount of green bonds in the balance sheet, develops Ulf. I think this kind of behavior does the green bond market a disservice.
- Without reasonable profitability requirements, truly sustainable investments that can grow and progress the market for various green projects risk being sidelined.
- This cannot work over time because it is an unhealthy risk and return relationship, says Ulf.
To foster the market
- To function long term, we are convinced that all sustainable investments must offer both sustainability and a return that is at least as good as other investment options. In discussions with investors and issuers, AP4 emphasizes the importance of the
perspective of sound returns for green bonds.
- Hopefully the investors that buy green bonds at a loss are only a late cyclical phenomenon in a growing market, says Ulf. No matter where in the cycle we are, AP4 continues to seek high positive total return on our green investments and a positive excess return in line with AP4’s other fixed-income portfolios - something AP4 has achieved over the past four years.