With around 393 billion euros (R$ 2.5 trillion) in assets under management, Scandinavian Nordea Asset Management is one of the global references in investments from an ESG (environmental, social and governance) perspective.
In 2020, the manager made the news by withdrawing JBS meatpacker shares from the portfolio for not seeing the improvement seen as necessary in terms of environmental governance. After the episode, the company said it followed a “strict policy of controlling the purchase of raw materials”.
“We must make it clear that our patience has its limits and that foreclosure is, in some cases, necessary to send a clear message to companies that are lagging behind in this process,” says Eric Pedersen, director of responsible investment at Nordea Asset Management.
He points out Itaú Unibanco, BR Properties, Lojas Renner, Hapvida and Raia Drogasil among the Brazilian companies that he evaluates with the best ESG practices in the local market.
“We invest in companies that help accelerate the transition to clean energy and the elimination of fossil fuels, and we divest from companies that are delaying that transition.”
How has Nordea Asset Management accompanied the energy transition process underway in the global economy? The mitigation costs involved in preventing further temperature rises are likely to adversely affect asset returns until at least mid-century. In general, emerging economies seem to be the most affected by climate change.
On the other hand, there are substantial investment opportunities in the climate transition itself, where China is one of the biggest potential markets.
According to a Nordea study, as long as global temperatures are maintained at about two degrees Celsius above pre-industrial levels, European countries, and the Nordics in particular, appear to be the least affected, in relative terms.
This result is a combination of several factors—the current average temperature is low enough that a moderate increase would actually raise productivity. This is partly because of the range of conditions in which humans themselves are most productive, but also because most European economies depend less directly on natural capital that can be destroyed as a result of climate change than, for example, a country like Brazil.
What are the best ways for investors to position themselves to make the most of the energy transition process? Investors should look to companies that have sought to align their trajectory with the Paris Agreement’s carbon reduction targets, companies that have begun to invest in building solutions and processes for a greener economy.
Nordea Asset Management’s responsible investment policy dictates our commitment to having a portfolio in line with the goals of the Paris Agreement, which means that investment strategies must be consistent with limiting global warming to less than two degrees Celsius. And the most important step we can take to limit global warming is to reduce fossil fuel emissions.
That’s why we invest in companies that help accelerate the transition to clean energy and the elimination of fossil fuels, and we will divest from companies that are delaying that transition. We feel a responsibility to align our portfolios with the Paris Agreement, supporting a real transition with our investments.
We must make it clear that our patience has its limits — and that deletion is, in some cases, necessary to send a clear message to companies that are lagging behind in this process.
How does Nordea Asset Management’s responsible investment area work with the companies invested in the portfolios? We believe that improving risk management is vital to generating returns with responsibility and that engagement can result in competitive advantage, increasing the likelihood of success for companies in the long term, benefiting companies, customers and society in general.
Engagement with our investees allows us to address relevant sustainability risks and opportunities. Dialogue allows us to express our expectations about business behavior and support companies in improving their sustainability performance.
Mr. Can you name a few examples of companies where Nordea Asset Management has successfully promoted engagement work? Samsung SDI is an example. The company specializes in lithium-ion technology, producing rechargeable batteries for products such as cell phones, solar panels and electric vehicles. Cobalt is a fundamental raw material for the business.
However, 70% of the global supply of cobalt comes from the DRC (Democratic Republic of Congo), where mining is often unregulated — or even illegal — with numerous reports of human rights abuses, including child labour.
We asked Samsung SDI to ensure that its cobalt supply was certified sustainably sourced. After a field visit to South Korea in 2017, we asked the company to carry out an audit in order to increase the transparency of its supply chain.
In response, Samsung SDI created a risk management tool and began auditing its supply chain. The company has taken steps to ensure a fully transparent supply line, but it is also working with industry peers to resolve the issue at the government level.
In addition to continuing to work around supply chain transparency, we have commissioned a report due to be published next year, reviewing ESG risks in the cobalt mining industry in the DRC.
There is also the case of Xcel Energy, a company that supplies electricity and natural gas to retail customers in the United States. Before our engagement began, the company based 60% of its electricity generation on coal and other fossil fuels.
We worked to align the company with the goals established by the Climate Action 100+ initiative, which aims to ensure that the largest corporate emitters of greenhouse gases take the necessary measures to mitigate the effects of climate change.
A few months after the engagement began, Xcel became the first in the industry to commit to providing 100% emission-free electricity by 2050. It has also committed to an 80% reduction in electricity-associated emissions by 2030.
While the company does not yet have a detailed plan to achieve its goals after 2030, the 2050 goals are in place. The ongoing dialogue with the company is currently focused on efforts in the period 2020 to 2030 and the concrete possibilities of carrying out earlier-than-planned closures of coal-fired plants, with the addition of greater renewable capacity.
Which Brazilian companies stand out in Nordea’s ESG ranking? I can mention the five Brazilian companies that we currently hold in our “Emerging Stars ESG” equity strategy: Itaú Unibanco, BR Properties, Lojas Renner, Hapvida and Raia Drogasil. To enter this selection, we do a thorough analysis of ESG aspects, such as information regarding your business practices and disputes.
Lojas Renner, for example, has strong governance practices throughout its supply chain, with a code of conduct that must be followed by suppliers. Raia Drogasil’s policy of hiring people from the local community, thus contributing to the development of the region, is also an action that we evaluate positively.
In the case of Itaú, the fact that a large bank has few controversial issues related to its name already represents an important achievement, in our assessment. The bank has also adopted measures on the social responsibility front, as recently through the “Todos pela Saúde” program, or through the granting and extension of credit lines to customers affected by the coronavirus crisis.
How does Nordea Asset Management assess the evolution of recent years in engaging emerging markets in responsible investing, whether by companies or investors? In emerging markets, there is generally little disclosure regarding ESG risks. Therefore, before we buy a company’s stock, we need to meet, preferably in person, and ask questions.
We take many of the opportunities to actively engage with companies to bring about beneficial change. Our engagement efforts include working on improving information disclosure.
Fortunately, we are seeing improvements in ESG disclosure in emerging markets. For example, the Hong Kong Stock Exchange, one of Asia’s leading stock exchanges, is in the process of making ESG risk disclosure a board responsibility.
Emerging markets represent an exciting opportunity as we look for companies that can become “ESG Stars” in the future. When we identify companies that demonstrate this potential, we work with them to examine areas where their ESG credentials can be enhanced and standardized.
Raio-x | Eric Pedersen, 54
He is director of responsible investments at Nordea Asset Management, a Scandinavian asset manager with BRL 2.5 trillion under management. He holds a degree in economics from the University of Copenhagen (Denmark), and, after completing his master’s thesis on economic reform in India, began his career at the UN as a junior economist at the UNDP (United Nations Development Program) in the Republic of Mali, Africa.
In 1996, Pedersen joined Unibank of Denmark, the Danish predecessor bank of the Nordea group. He has previously served on Denmark’s corporate governance committee.
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