Fjärde AP-fonden (AP4)’s investment innovation recently has centered firmly on climate risk exposure in its portfolio and on the reduction of this risk. AP4 uses traditional metrics for climate investments, including companies’ direct emissions (Scope 1) and indirect emissions from energy purchases (Scope 2). In addition, forward-looking carbon dioxide metrics are used to identify companies with existing climate plans and ongoing transition efforts. It then employs scenario analysis for carbon pricing and assessments of alignment with the 2-degree target to create a sustainability screen, which guides the construction of equity portfolios.

AP4’s equity models assume an increasing carbon price, adjusted by sector and country, to project future margins and reduce holdings in companies with significant negative impacts. AP4 also assesses how well companies align with the 2-degree target, using a developed metric for estimated future emissions relative to a carbon budget. This assessment considers the essential role of companies in the climate transition, their future emissions targets, and their historical adjustments. Companies are evaluated on the feasibility of their plans to reduce emissions, not just long-term net zero targets.

The estimated future emissions for each company are compared with the required emissions to keep the temperature increase below 2 degrees, resulting in a residual carbon budget. This budget can be positive or negative, indicating whether a company is projected to have lower or higher future emissions than required. The strategy aims to shift portfolio weighting towards companies that support the Paris Agreement goals and actively improve their sustainability efforts. This approach significantly impacts investments outside traditionally high-emission sectors, such as consumer companies.

AP4 excludes nearly 75% of companies within the energy, power and raw materials sectors because they do not meet its requirements. To be included, companies must have goals and plans in line with the Paris Agreement and have the conditions and ambitions to contribute positively to the necessary climate transition.