Hilde Jenssen, Head of Fundamental Equities at Nordea Asset Management (NAM), discusses the global decarbonisation drive and how activities at portfolio level can make a difference.
Can you set the scene for us and explain why decarbonisation is so important?
"I am sure all investors recognise that climate change is a global crisis, one that not only threatens the environment, but also the future of our society and economy. As carbon emissions are a key driver of climate change, achieving net zero carbon emissions would put a stop to the damage we are currently inflicting on the planet. This is why governments and asset owners continue to sign net zero targets and outline steps to decarbonise. Investors also understand the gravity of the situation, which is why NAM joined forces with a number of asset management peers in launching the Net Zero Asset Managers (NZAM) initiative."
Could you tell us more about the NZAM initiative and how NAM plans to achieve net zero?
"Certainly. Launched by NAM and 29 other asset managers in 2020, NZAM has since grown to more than 301 signatories, which represent USD 59trn of assets under management.[1] Put simply, all NZAM signatories are setting decarbonisation goals consistent with net zero emissions by 2050, with interim reviews and targets along the way. As for NAM, the steps we are taking to reduce emissions within our portfolios are quite straightforward. Ultimately, we do not believe we can achieve net zero purely by avoidance and exclusion. While we will divest from companies not supporting the transition and direct capital towards climate solution providers, engaging with businesses is a key part of our process, as this is where the most meaningful carbon emissions reductions will occur."
Can you outline your decarbonisation efforts at the portfolio level?
"Let’s use our Global Stars Equity Strategy, one of NAM’s flagship ESG STARS strategies, as an example. As you would expect, the portfolios within our ESG STARS range typically avoid heavy-emitting industries like oil and gas. By avoiding such sectors, the portfolio’s overall emissions are naturally lower than its MSCI All Country World Index (ACWI) benchmark. As of end of March 2023, for example, the portfolio weighted average carbon intensity was 30% lower than that of the MSCI ACWI Index (Net Return). However, when looking at the individual sectors we do invest in, it is not uncommon for our stock selection to result in higher sector-level emissions."
But surely this is counterintuitive to the net zero goal you outlined earlier?
"No, it is actually not. Remember, the overall portfolio’s emissions level is considerably lower than the benchmark, so investors in this strategy are still making a positive difference compared to buying an index-tracking product. While there are instances when our stock selection results in elevated emissions relative to an individual sector, this is in perfect alignment with our desire to enact change. What we do not want to do is simply offer investors a lower-carbon portfolio by avoiding every high-emitting company. Sure, this would be an easy way of having a low carbon footprint, but it would not make any real-world difference and certainly would not drive the planet towards net zero. Our philosophy is clear: we want to engage with high emitters to deliver real change. To demonstrate what we mean: just four of the 74 companies within our Global Stars Equity Strategy account for roughly 70% of the portfolio’s total emissions. If we could encourage these entities to reduce CO2 emissions by half, the carbon footprint of the portfolio would be lowered by 35%."
Can you point to a company in the Global Stars Equity Strategy portfolio that has made major recent strides forward?
"Definitely. One great example is Waste Management Inc, a US company that provides waste collection, disposal and recycling services. Waste services are typically high-emissions activities, and the company is committed to limit global warming to 1.5 degrees by reducing absolute greenhouse gas emissions for scope 1 and 2 by as much as 42% by 2032 compared to their 2021 baseline. We have also seen that the company has submitted their ambitions and targets to the Science-based Target Initiative and is awaiting validation. In addition, the group is boosting its investment in recycling facilities with around USD 825m in low-carbon energy generation, as well as USD 800m in recycling infrastructure by 2025.[2]
Not only will this increase their recycling capacity, which is a good thing for the environment, but it will also further reduce their own emissions. Furthermore, this investment will also reduce their costs, so they will be winning on both the environmental and emissions side as well as the financial side. When current high-emitters make reductions like this, the overall portfolio emissions go down, taking us and our investors closer to our net zero goals."
Finally, with changes to MiFID II*, are NAM’s ESG STARS solutions suitable for sustainability portfolios?
"This is a very important question, and I am pleased to say that they are. Distributors and advisers need to ask their clients about their sustainability preferences and ensure that the products they offer meet those, as well as the client’s financial goals and risk tolerances. All of NAM’s ESG STARS solutions are classified as Article 8 both by committing to a percentage of Sustainable Investments and by considering PAI (Principal Adverse Impacts) elements. Thus, our ESG STARS range is eligible for clients with sustainability preferences. With the ESG STARS solutions covering regions around the world as well as a wide range of asset classes – equities, sovereign, corporate and high yield bonds – these solutions can be used individually or in combination as building blocks to create whatever MiFID-eligible portfolio clients need."
*MiFID II applies to distributors and advisors who are in scope of MiFID guidelines
Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.
About Nordea Asset Management
Nordea Asset Management (NAM, AuM 241bn EUR*), is part of the Nordea Group, the largest financial services group in the Nordic region (AuM 362bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.
Nordea Asset Management has a presence in Bonn, Brussels, Copenhagen, Frankfurt, Helsinki, Lisbon, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Santiago de Chile, Singapore, Stockholm, Vienna and Zurich. Nordea's local presence goes hand in hand with the objective of being accessible and offering the best service to clients.
Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients. NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.
Having entered the ESG space over 30 years ago, Responsible Investment is deeply rooted in our Nordic DNA. As an ESG pioneer and market leader we established an award-winning RI Team in 2009—now one of the largest in Europe. We currently offer a broad suite of RI solutions to investors of all types across the globe.
* Source: Nordea Investment Funds, S.A., 31.03.2023
Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A. and Nordea Investment Management AB (“the Legal Entities”) and their branches and subsidiaries. This document is advertising material and is intended to provide the reader with information on Nordea’s specific capabilities. This document (or any views or opinions expressed in this document) does not amount to an investment advice nor does it constitute a recommendation to invest in any financial product, investment structure or instrument, to enter into or unwind any transaction or to participate in any particular trading strategy. This document is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instruments or to participate to any such trading strategy. Any such offering may be made only by an Offering Memorandum, or any similar contractual arrangement. Consequently, the information contained herein will be superseded in its entirety by such Offering Memorandum or contractual arrangement in its final form. Any investment decision should therefore only be based on the final legal documentation, without limitation and if applicable, Offering Memorandum, contractual arrangement, any relevant prospectus and the latest Key Information Document (KID) or the Key Investor Information Document (KIID) for UK investors where applicable, relating to the investment. The appropriateness of an investment or strategy will depend on an investor’s full circumstances and objectives. Nordea Investment Management AB recommends that investors independently evaluate particular investments and strategies as well as encourages investors to seek the advice of independent financial advisors when deemed relevant by the investor. Any products, securities, instruments or strategies discussed in this document may not be suitable for all investors. This document contains information which has been taken from a number of sources. While the information herein is considered to be correct, no representation or warranty can be given on the ultimate accuracy or completeness of such information and investors may use further sources to form a well-informed investment decision. Prospective investors or counterparties should discuss with their professional tax, legal, accounting and other adviser(s) with regards to the potential effect of any investment that they may enter into, including the possible risks and benefits of such investment. Prospective investors or counterparties should also fully understand the potential investment and ascertain that they have made an independent assessment of the appropriateness of such potential investment, based solely on their own intentions and ambitions. Investments in derivative and foreign exchange transactions may be subject to significant fluctuations which may affect the value of an investment. Investments in Emerging Markets involve a higher element of risk. The value of your investment can go up and down, and you could lose some or all of your invested money. Investments in equity and debt instruments issued by banks could bear the risk of being subject to the bail-in mechanism (meaning that equity and debt instruments could be written down in order to ensure that most unsecured creditors of an institution bear appropriate losses) as foreseen in EU Directive 2014/59/EU. Nordea Asset Management has decided to bear the cost for research, i.e. such cost is covered by existing fee arrangements (Management-/Administration-Fee). Published and created by the Legal Entities adherent to Nordea Asset Management. The Legal Entities are licensed and supervised by the Financial Supervisory Authority in Sweden and Luxembourg respectively. A summary of investor rights is available in English through the following link: https://www.nordea.lu/documents/summary-of-investors-rights/SOIR_eng_INT.pdf/. The Legal Entities’ branches and subsidiaries are licensed as well as regulated by their local financial supervisory authority in their respective country of domiciliation. Source (unless otherwise stated): Nordea Asset Management
[1] https://www.netzeroassetmanagers.org/
[2] Waste Management inc Sustainability Report 2022, https://sustainability.wm.com/downloads/WM_2022_SR.pdf
