Why AP4 has decided to invest in first-time funds

How does AP4’s focus on sustainability inform its private markets investments?

Climate change and the sustainability transformation need to be translated into strategies to reduce risk and to invest in opportunities. Sustainability and ESG are therefore important and integral parts of our due diligence but also of our investment strategy.

We believe investments that contribute to the transition to a more sustainable society will also provide a good financial return, and we find most of these opportunities in private markets. We have confidence in thematically focused investment strategies, of which most are linked to AP4’s focus area of climate and environment. We base our work on AP4’s thematic sustainability analysis, which for instance addresses how climate change affects value chains in different industries.

We have identified three broad themes: energy transition/mobility, resource efficiency and renewable energy. My team in alternative investments has sourced and transacted investments in private equity and infrastructure based on the thematic analysis for a couple of years. During 2021, our alternatives team did commitments of about SKr10 billion ($1.1 billion; €970 million) based on this conviction.

How do you ensure GPs are aligned with AP4’s sustainability objectives?

Building relationships over time, meeting investment team members one on one and ensuring LPAs and sideletters reflect our requirements are some measures we use to ensure alignment. We also prefer to invest with managers where we are or become a significant partner and, likewise, where the manager makes a difference in our portfolio. Investing in strategies where sustainability is an integral part is a strong enabler. We also continue to develop our due diligence process to ensure good practices, adequate competence and resources, as well as a focus on material issues and topics.

What are the challenges over tackling climate risk in your alternatives portfolio?

To mitigate climate change, we need both traditional companies to transition and new technologies and solutions to evolve. Private markets are well positioned to support both. Like all investors aiming for a net-zero future, we would like to invest more in hard-to-abate sectors. New solutions and technologies are needed, but these industries are often capital-intensive, and there are currently few opportunities for institutional investors to cost-effectively invest. In Sweden, we have for example set up investment company 4 to 1 Investments together with AP1-AP3 for this purpose. Our first investment was in Northvolt last year. We hope to see more initiatives going forward.

There is a measure of greenwashing, and finding the strategies that actually address climate change is harder. Sometimes a new setting is needed to do something innovative. Supporting first-time teams is not something all institutional investors do, but we have decided to. This potentially comes with some additional challenges, but we believe they can be managed.

Do any sectors stand out for their opportunities?

We focus on our three broad themes. The transition and scaling up of renewable energy are preconditions for a sustainable future. Another sector starting to transition on a bigger scale is food, for instance related to alternative proteins or circular supply chains.

Jenny Askfelt Ruud is head of alternative investments at Swedish national pension AP4