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Stockholm (NordSIP) – While some responsible institutional investors are busy debating the pros and cons of divestment vs. engagement, others focus on driving positive change by seeking out and investing directly in companies that provide sustainable products and solutions. Swedish state pension fund Fjärde AP-fonden (AP4) is one of the institutions that subscribe to such a proactive approach. According to the fund’s latest annual report, in 2023, AP4’s sustainable thematic investments amounted to SEK 7.6 billion. For the period 2020–2023, these investments have totalled SEK 36.8 billion.
AP4 has been intentionally on the lookout for sustainable investment opportunities since 2018, expecting those to provide good returns as well as a positive impact in the long run. On 9 April, the fund published an update, highlighting the latest developments in their thematic investments. According to the fund, the strategy has recently undergone a facelift, providing the asset management organisation with more knowledge and refined analysis tools.
“We remain focused on the areas where we have been making investments for several years, such as wind and solar power,” sums up Mikael Anveden, Head of Portfolio Analysis at AP4. “But we have also identified other interesting areas to monitor going forward. Examples of these include biomaterials from wood and green metals.”
After conducting a broad analysis of external factors and identifying the underlying megatrends, AP4 picked up the most relevant and significant among those and eventually settled on five investment themes: decarbonising the industry by investing in smart, efficient, and flexible production of fossil-free energy; cleaning it up through production, use, and recycling of climate-friendly materials and products; decarbonising transport of both passengers and freight; protecting the biosphere through sustainable management of land and water, agriculture, forestry, and biodiversity conservation; and investing in green buildings and infrastructure – from climate-friendly design to construction and recycling. According to AP4’s analysts, each of these themes accounts for a large proportion of the carbon emissions in society and together they stand for around 90% of global emissions.
Recognising the inherent dynamics of each of these themes, AP4 has developed a framework that allows for an active and continuous evaluation. “It is important to find a way to continuously monitor and update the underlying investment areas,” explains Anveden. “We have created an annual wheel for our thematic analysis work, and we have established a new working group that is responsible for monitoring the themes and training the organisation.”
As to the practical implementation of the thematic analysis into the investment process, AP4 acknowledges that two more factors need to be accounted for. The first of these is the investments’ relative attractiveness, determined by their market size, growth, and the regulatory head- or tailwinds they are facing. The second factor is how investable each theme is, which depends on its technological maturity and is linked to relevant megatrends and expected capital inflows.
With an updated framework and processes in place now, the work to develop knowledge and evaluate further investment opportunities continues.
