AP4 returns 9.6% in 2020, sets 2040 net-zero carbon target
“On the surface it could appear as a calm year with favourable returns. But this couldn’t be further from the truth!” Niklas Ekvall, chief executive officer of Swedish public pension fund AP4, hardly believes 2020 ended on a positive note for the scheme. After posting a record net return of 21.7% in 2019, AP4 has delivered a 9.6% net return for the full year 2020, it said on Friday. The scheme’s active management outperformed its benchmark by 2.4% (vs. 4.4% in 2019) to the figure, contributing to SEK 10bn (€1bn). As of end 2020, AP4’s asset allocation was 39,6% global equities, 16,7% Swedish equities, 20% global bonds, 10,6% Swedish bonds and 13,1% real assets.
AP4's most performing investment in 2020 was Swedish stocks which provided a 30.2% return whereas global equities yielded 13.5%, real assets 5% and global bonds 4%. The Swedish buffer fund's 2020 net result stood at SEK 39.3bn (€3.9bn), just over half of the 2019’s record result (SEK 75.2bn). In addition, SEK 7.9bn were paid from AP4’s portfolio to the pension system. Assets under management at AP4 rose to SEK 449.4bn (€44.8bn) at the end of 2020 from SEK 418bn (€41.7) as of end 2019.
'Less pollution than a broad global equities index'
AP4 achieved a 15% year-on-year reduction of the carbon footprint in its listed equity portfolio in 2020, of which changes in portfolio accounted for 12% and companies’ changed emissions for 3%. Total carbon emissions of AP4’s equity holdings amounted to 1.84 million of tons of CO2 emitted last year, down from 2.16 millions of tons in 2019. Overall, the portfolio-weighted average carbon intensity ratio stood at 8.7 tons of CO2 emissions per SEK million (vs. 10.3 tCO2e/SEKm in 2019). The share of equity market value for which reported emissions data was available in 2020 rose 6% yoy to 66%. AP4 also made progress in decarbonising its unlisted real estate portfolio as total CO2 emissions dropped to 0,019 million of tons from 0,032 million of tons the year before.
“We have cut carbon emissions in half from our investments in equities, which are now less than half of what they are for a broad global equities index. Our target is to once again halve the carbon footprint from the current level by 2030 with a view to have net-zero emissions by 2040 at the latest. Our historical reduction of the carbon footprint and our targets are more ambitious than those set out in the Paris Agreement,” said Ekvall.
He added that one challenge AP4 encounters in refining its methods is access to data of sufficiently good quality. “Up until last year we were forced to rely only on historical data that has not always been pertinent. In 2020 it became possible for us to complement our models with data that is more forward-looking and thereby has the potential to significantly increase our ability to forecast.”
Sustainable infra in focus
Over last year, AP4 reviewed its holdings in the energy sector following a thematic sustainability and fundamental company analysis. That has resulted in “an extensive restructuring of that sub-portfolio”. In 2021, AP4’s unlisted infrastructure investments will be reviewed too.
“We are now currently in a phase in which we are conducting initiatives in three strategically and entirely necessary areas. In 2019 the AP Funds were given new investment rules which allow for a larger share of investments in unlisted assets. We are therefore in the midst of a process in which we are adding competence and resources to this area as well as increasing the pace of investment particularly in real assets such as sustainability-promoting infrastructure,” pointed Ekvall.
AP4 will strengthen its sustainability resources, adding that additional ones will be needed “to remain at the forefront in areas such as sustainability reporting and advocacy work.” Besides, the fourth Swedish national pension fund will make further investments coupled to the modernisation of its IT platform and digitalisation of its operations.