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 management¹. 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.