NordSIP (Stockholm) – It is a great joy to talk to people who love their job and have a clear idea of what they want to achieve with it. Marcus Svedberg, Investment Strategist at AP4, is such a person. Before starting at AP4, he worked for the World Bank, which currently funnels a large portion of its lending to climate financing. Through his work there, Marcus Svedberg got a good insight into the operations of the World Bank and had the opportunity to build relationships with many international organisations. These experiences came well into use when he had a senior role in building up the Stockholm Sustainable Finance Centre. NordSIP met with Svedberg to talk about sustainability at AP4 and what the next step in their investment process will be.
Marcus Svedberg finds it somewhat surprising that not more sustainable products have been developed in finance. The investment organisation at AP4 have identified a number of themes and opportunities and the focus is now on finding companies and sectors that are likely to be winners in the transition to a low carbon economy.
In the choice between sustainability and return on investment, there is no hesitation at AP4. Above all else comes the AP Funds law (AP-fondslagen), which states clearly that the AP funds’ overarching goal is to create the highest possible return sustainably. This way of thinking is integrated throughout the organisation, from the board via the CEO to the whole investment organisation. That said, sustainability is embedded in the investment beliefs of AP4 and in all investment decisions. “One should not be at the expense of the other,” Svedberg explains. “On the contrary, sustainability and governance is a sound strategy from a business point of view, but financial analysis remains crucial.” Integrating sustainability aspects in asset management contributes over time to better management of risks and opportunities, and thereby to returns. At AP4, the level of competence is high in economics, as well as finance and quantitative analysis. Most analysis is therefore effectively performed internally.
Svedberg stresses the importance of taking into account the effect all investment decisions have on portfolio risk. “In some sectors,” he explains, “particularly titled towards sustainability, subsidies and other government measures may meaningfully skew the risk, such as in the case of solar panels or fossil fuels.”
For Svedberg, analyzing potential disruptions and stranded assets in investments related to fossil fuels still presents a challenge. “We need to weigh the risk/return tradeoff we make when choosing between fossil fuels and renewable energy. The highest possible risk-adjusted return in a sustainable way is what we have to deliver, but it can be difficult to rank the options when considering all the parameters.”
“Right now, we need to choose which areas to prioritise”, Svedberg says. The team at AP4 has worked hard to identify the climate transition risks. “By looking at the value chains, it is possible to define which sectors undergo a transition, wherein the value chain, and in what ways,” Svedberg explains. “We ask ourselves which transitions we believe the most in and which ones are maturing. Where can we find assets that are mispriced? Once we decide where we want to position ourselves, we need to find out how we can do so. To some extent, it depends on the availability of instruments, as well as the underlying liquidity of the assets.”
Svedberg has a clear view of the additionality of sustainable finance, and in particular when it comes to green bonds. “We will obtain a greater positive impact overall if all bonds become a little greener than if a few bonds qualify as very green, although it is not necessarily one or the other,” he states.
“Discussing sustainable investments is like discussing the financials of any investment proposition”, concludes Svedberg. “Our investment team has a strong quantitative background, so we often focus on the conclusions we can reach based on available data. We tend to prefer internally managed strategies, and we carry out most research in-house.”
“The newly updated law that regulates the AP-funds has opened up new opportunities in the choice of investments we have access to, and we will likely see some exciting changes in the AP4 portfolio going forward. Interesting areas we are evaluating right now are aggregation and weighting techniques, direct versus indirect investments, and how to achieve exposure to selected emerging markets and smart infrastructure.”
Picture © NordSIP