Exclusions will not solve climate crisis

Advertising Material

By Paul Malpas, ESG Distribution Lead at Nordea Asset Management.

We are currently embarking on a great migration to a greener world – with public and private organisations both working hard to transition from fossil-based energy production and consumption to renewable sources. As this evolution gains momentum, new ecosystems are forming, and innovative technologies are emerging.

However, many companies are still lagging in the green transition, particularly those heavy emitters responsible for a considerable part of the world’s pollution problem. These groups continue to face meaningful fundamental and environmental risks.

With climate awareness intensifying in recent years, we have witnessed a significant flight of capital from heavy emitting companies. The rapid growth of ESG has been a key factor in this investor exodus, as asset managers seek to demonstrate strong sustainability credentials.

However, simply steering clear of high-emitting stocks and sectors is not the right approach for investors to take, in our view. While there will always be companies to avoid – namely those requiring a complete business model reinvention – there are vast swathes of businesses that just need a nudge in the right direction.

It is important for investors to engage with these largely forgotten companies, as like it or not, today’s heavy emitters will play a crucial role in our transition to a more sustainable future. The expertise capital allocators can impart on corporates be invaluable in efforts to curb real-world emissions.

In addition to this, many environmental laggards are currently trading at historically cheap valuations, so the value that can be unlocked by helping high emitters decarbonise over the coming years is immense.

Decarbonisation requires collaboration and action

In order to enact meaningful change through corporate engagement, we believe investors are best served by focusing on five primary sustainability factors. Unsurprisingly, the first key consideration is greenhouse gas emissions, which is the leading driver of global warming. If a large carbon emitter does not align its emissions trajectory to a sub-2°C scenario, it will continue to be highly exposed to escalating regulatory, environmental compliance, and reputational risks – which will likely increase its costs and risk profile.

Next, as economic production requires substantial energy inputs, energy management is paramount for successful climate action. With the rise in non-renewable energy prices and the implementation of carbon pricing, climate has become financially material – specifically in energy-intensive sectors like manufacturing. Through engagement, it is possible to help companies improve energy efficiency and energy resource diversification. This can mitigate exposure to volatile energy costs, reduce greenhouse gas emissions, and help improve costs and the reliability of the overall energy supply.

Water and waste management is another vital issue. The world’s limited resources cannot meet growing demand, which creates long-term uncertainty for companies highly dependent on natural assets. Water-related capital investments and water-efficiency improvements can reduce the risk of experiencing higher operational costs or shortages. By driving the adoption of circular models, we can help face the growing scarcity of natural resources and the increasingly visible environmental costs of resource production and waste generation.

Similarly, companies need guidance on natural resource management. This includes using recycled and renewable materials, reducing the use of key supplies, and maximising resource efficiency in manufacturing. Research and development investment in substitute materials is essential if we are going to stop harming the health of ecosystems through overexploitation.

Finally, corporate management teams must be willing to reposition businesses to be resilient to the transition and physical risks of climate change. In our view, sustainable long-term value creation will be almost impossible if corporates are not responsive to the permanent migration to a low-carbon and climate-constrained economy.

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 Investor Information Document (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/engagement-policy/EP_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 Investment Funds S.A. Unless otherwise stated, all views expressed are those of the Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and subsidiaries. This document may not be reproduced or circulated without prior permission. Reference to companies or other investments mentioned within this document should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration. The level of tax benefits and liabilities will depend on individual circumstances and may be subject to change in the future. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches and/or subsidiaries.

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