AP4, one of Sweden’s big four buffer funds backing the state pension, said it is actively seeking companies that have plans for sustainable change, using a process involving close scrutiny of individual firms before adding them to its SEK459bn (€41.9bn) portfolio.

The Stockholm-based national pension fund has a goal of carbon neutrality for its investments in 2040.

Jan Petersson, the fund’s senior portfolio manager tasked with investing in resource-intensive industries and companies, said: “In addition to the goal of achieving a good return for the pension capital, we must simultaneously reduce the carbon footprint in the portfolio.

“During the ongoing energy transition, we are actively looking for companies that have a plan to change in a sustainable way,” he said in a commentary on AP4’s website.

Petersen said climate change would affect companies active in energy extraction, power production and raw materials as well as society at large, and while the world was in transition, fossil fuels would be needed within the framework of the remaining global carbon dioxide budget.

AP4 said it believed firms active in these industries would continue to be important for the success of the transition for some time to come.

At the end of 2020, AP4 revamped its energy company portfolio by selling the firms judged as not meeting the requirements to shift from oil company to integrated energy company with a future focus on renewable energy, Petersen said, He added that the fund had also done the same with the power sector, where the focus was on businesses in renewable energy, electricity distribution and both hydropower and water supply.

“We have also gone through the raw materials sector with a focus on, for example, companies that are strong in recycling,” he said.

“This means that today we own larger shares in a smaller number of companies, and in this way AP4 can influence the companies to a greater degree to become both profitable and more sustainable,” Petersen said.

Energy, power and raw materials companies made up about 80% of global CO2 emissions, he said, adding that were the carbon footprint within these sectors to be reduced, the footprint for AP4’s portfolio as a whole would be positively affected.

When pinpointing companies to invest in, Petersen said AP4’s forward-looking analysis model was important for producing a first selection.

“We read up on the companies’ operations, their environmental work, and we have meetings with both the companies and external analysts to gain as much knowledge as possible,” the portfolio manager said, adding that this then led to the selection of a number of companies in each sector that the team chose to invest in.

“In parallel, we work with thematic investments globally, where energy transition and recycling are two themes that AP4 prioritises and where we see structural growth,” he said.

Some of the businesses AP4 invests in were also smaller cutting-edge companies active in areas such as renewable energy and circular economy, but at the same time leaders in their fields and expected to achieve high profitability in the long term, Petersen said.

Earlier this week, AP7, the largest of Sweden’s state-run pension funds and provider of the default option in the premium pension system, argued that capital owners should stick with high-emitting stocks to help them adapt to the low-carbon economy, and said transition companies would be one of its top sustainability priorities.

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