Fjärde AP-fonden (AP4) was founded in 1974 with a mandate to invest in Swedish listed equities. But this has evolved over the years and, since 2001, AP4 has invested globally in equities, fixed income and unlisted assets. It further updated its investment guidelines some years ago to give significant flexibility regarding its asset allocation to illiquid investments and the possibility to make direct unlisted investments. Climate risk is now very much central to its strategy.

AP4 integrates climate strategies across all investments in its global equity portfolio, tailoring these strategies to the specific conditions of different sectors and sub-portfolios. The primary objectives are to reduce climate risks, contribute to the climate transition and ensure a good return for the Swedish pension system.

Key sectors for the climate transition include energy, power generation, raw materials, and transport. AP4 focuses on these high-emission sectors, selecting companies that are expected to outperform their benchmark indices and contribute to the energy transition. It prefers to invest in companies with plans and targets that are aligned with the Paris Agreement. This approach results in a more concentrated portfolio, allowing AP4 to increase its shareholding in selected companies, thereby enhancing its influence over their transition efforts. For other sectors and external fund investments, AP4 selects companies using equity strategies based on quantitative factors.

Since 2012, AP4 has been developing and broadening these strategies, which have reduced the portfolio’s carbon emissions by more than half. The fund employs traditional metrics for climate investments, including direct emissions (Scope 1) and indirect emissions from energy purchases (Scope 2). It also uses forward-looking carbon dioxide metrics to identify companies with existing climate plans and ongoing transition efforts. It then turns to scenario analysis for carbon pricing and assessments of alignment with the 2-degree target to create a sustainability screen, known as the AP4 Alignment score, which guides the construction of equity portfolios.