AP4’s thematic sustainability analysis

10 April 2024

Fjärde AP-fonden (AP4) publishes on its website:

Investments with a specific focus on climate change are increasing rapidly. AP4 therefore continuously analyzes sustainability trends and actively looks for investment opportunities that, in the long term, can both contribute to climate change and provide a good expected return.

AP4’s thematic sustainability investments are based on the analysis that AP4 did for the first time in 2018 and which has now been updated for 2024.

– The updated analysis provided both knowledge development and refined tools for our management organization. Both of these aspects are important for our continued work in identifying good, well-balanced thematic sustainability investments, explains Mikael Anveden, Head of Portfolio Analysis at AP4.

The thematic analysis took as its starting point a broad environmental analysis, and to begin with, the megatrends were identified that make up a spectrum of events in, for example, consumer behavior and technology, as well as central trends such as, for example, limiting greenhouse gas emissions and loss of biodiversity.

– These trends change at different rates and have different effects on the climate until the year 2030, which is the horizon we have chosen to focus on in this analysis. We therefore started by discussing and ranking relevant megatrends based on their significance for the climate in 2030 and the rate of change in the trend itself, continues Mikael Anveden.

The most relevant megatrends were then summarized and grouped into five investment themes, where each individual theme accounts for a large part of carbon dioxide emissions in society. Together, they make up around 90 percent of global emissions. These investment themes were selected:

• Fossil phasing out in energy – system: smart, efficient and flexible production of fossil-free energy
• A cleaner industry: production, use and recycling of climate-friendly materials and products
• Fossil-free transport: efficient and sustainable passenger and freight transport
• Living biosphere: sustainable land and water management, agriculture, forestry and biodiversity conservation
• Green buildings and infrastructure: climate-friendly design, construction, use and recycling of buildings and infrastructure

Based on each identified investment theme, concrete areas with the opportunity to invest in for AP4 were then compiled.

Individual investment areas change over time and may be more or less mature. Therefore, AP4 has developed a framework to actively and continuously evaluate investment areas.

– The prioritization of investment areas was based on two dimensions. One is attractiveness and is defined as market size and growth as well as regulatory headwinds/headwinds.

The second is investability and is defined as technological maturity and is linked to relevant megatrends as well as expected inflow of capital. In addition, of course, the importance of climate change is central, Mikael points out and continues:

– We maintain focus on the areas where we have carried out investments for several years, such as wind power and solar power, but we have also identified areas that are interesting to monitor going forward. Examples of this are biomaterials from wood and green metals.

As a result of the work with the thematic analysis, AP4 has highly current and still relevant investment areas to work on.

– An important aspect is precisely to find a way of working to continuously monitor and update the underlying investment areas. We have created a year wheel for work with the thematic analysis and a new working group is responsible for monitoring the themes and training the organization.

Now the work continues with knowledge development and evaluation of concrete investment opportunities. Technological development is rapid and typically the cost of a particular technology is critical to its success.

– Here we carefully follow developments in, for example, hydrogen production, energy storage and carbon dioxide capture. At the same time that wind and sun are a basis for climate change, we want to consider a whole, concludes Mikael.

Source: Fjärde AP-fonden (AP4)