Sweden’s AP4 is integrating climate strategies for all its investments in its global equity portfolio.

Its goal is to reduce the portfolios' climate risks, contribute to the climate transition and provide a good return to the country’s pension system. AP4 head of systematic equities and implementation, Pontus Lidbrink, said energy, power generation, raw materials and transport are particularly important sectors in the climate transition.

“We focus on these high-emitting sectors and select companies that we believe will both outperform their benchmark index and contribute to the energy transition. We invest in companies with goals and plans that are in line with the Paris Agreement. The result will be a much more concentrated portfolio – we will be a larger owner in the companies we choose to continue to own, which will increase our ability to influence the companies' transition,” he said.

He continued: “This type of investment has been made since 2012 and we have developed and broadened the strategies as a share of the portfolio. The strategies we have chosen have led us to more than halve the portfolio's carbon emissions, but we are not satisfied with that. Our goal is to be net-zero in the portfolio by 2040 and to halve our emissions further by 2030, measured from 2020.”

AP4 uses both traditional measures for climate investments, the companies' own direct emissions (Scope 1) and their indirect emissions from energy purchases (Scope 2). The fund also uses forward-looking carbon metrics to identify companies that have already set climate plans and started their transformation journey.

“We do this using a scenario analysis for carbon pricing and assessments of how well companies are aligned with the 2-degree target. Based on this information, we create a ‘sustainability filter’ or AP4 Alignment score, as we call it, which we use when we develop our equity portfolios,” Lidbrink explained.

In regard to Scope 3, which refers to indirect carbon emissions caused by companies, AP4 only looks at the first level of upstream emissions. Upstream emissions come from the company's subcontractors and downstream emissions mainly from the use of the companies' products. Scope 3 involves double counting of carbon dioxide emissions and is difficult to estimate, especially for downstream emissions.

“The reason we do not look at the full range of Scope 3 emissions is that there is currently not enough reliable data to build robust equity strategies. Also, the way Scope 3 is calculated today, there is by definition double counting as the same emissions are counted both at the producer and consumer level. We are of course committed to developing our strategies in this area. Sectors where indirect emissions are more relevant include the energy sector and the automotive industry,” he said.

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