Maximizing ESG and Sharpe Ratio: A Dual Perspective on AP Fund Investments - An Analysis of Sustainability and Portfolio Optimization in Swedish National Pension Funds

This paper evaluates the efficiency of the distribution of pensionable income between the Swedish National Pension Funds – AP1, AP2, AP3, and AP4 – and their Environmental, Social, and Governance (ESG) investment preferences. Through portfolio optimization over 21 years (2003-2023), the results reveal nearly perfect correlations between the Funds, indicating limited benefits from diversification. The study supports merging the Funds to create economies of scale and policy compliance without significantly affecting ESG and environmental (E) performance. The Funds are identified as ESG- and E-motivated investors throughout 2015-2023, prioritizing sustainable investments in the Swedish financial market despite inconsistent improvements in performance over time. These findings offer insights into optimizing pension fund strategies and assessing the Funds’ sustainable financial practices.