The unprecedented opportunity to make an impact

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

Environmental, social and governance (ESG) considerations are now firmly entrenched in the minds of many investors. While the stunning rise of responsible investing is undeniably positive for society and the future of our planet, vast differences remain in approaches to ESG. Nowhere is this more evident than in the rapidly expanding ‘impact’ investing space.

Impact investing, where capital allocation is made to explicitly address social or environmental problems, has traditionally been associated with the private markets space. However, we are also convinced of the long-term merits of ‘investing with impact’ in public markets.

By harnessing the massive momentum behind both the environmental and social megatrends, we truly believe investors can achieve both sustained financial performance and positive impact. Within listed equity markets, we see tremendous opportunity to allocate capital to companies at the forefront of an inclusive green economy.

A concept backed by the UN, the inclusive green economy aims to improve human wellbeing and social equity, while significantly reducing environmental risks and ecological scarcities. Indeed, the investment opportunity in achieving the UN’s 2030 Sustainable Development Goals (SDGs) is unprecedented, with economic prospects worth at least US$12trn a year by 2030.

Eco-friendly transportation solutions are essential

Investing in sustainable transportation – which is aligned to SDG 11, sustainable cities and communities – is one such compelling opportunity. The transport sector is a major contributor to climate change, responsible for about 14% of annual emissions, so providing environmentally friendly transportation solutions will be imperative for a sustainable future.

Even though Japan’s rail industry is already viewed as a world leader, we envisage continued positive developments for this industry – particularly as Japan aims to reach carbon neutrality by 2050. At company level, we see Central Japan Railway Company as a key beneficiary of the planet’s sustainability drive.

The second-largest rail operator in the Asian powerhouse, Central Japan Railway generates more than 80% of its revenues from the Tokaido Shinkansen high-speed train line, which connects the mega cities of Tokyo and Osaka. Compared to a passenger aircraft on the same route, the Shinkansen bullet train uses 88% less energy, while carbon emissions are 92% less per seat than its aviation equivalent. Even though the daily Tokyo-Osaka airline passenger capacity is just 6.25% of the Tokaido Shinkansen capacity, adopting a train-only approach could lead to a 40% reduction in carbon emissions.

Sustainable practices must be constantly encouraged

While it is important to identify a company’s specific metrics and track contributions to SDG-aligned activities, a key component of investing with impact is corporate engagement. By engaging in active dialogue with companies on specific sustainability risks and opportunities, investors are able to guide management teams towards the adoption of more sustainable practices. These sustainability improvements can enhance long-term value for companies and investors, while benefitting society overall.

In our view, companies are ready and willing to embrace change. A good example here is Republic Services, the US provider of waste collection and disposal services. Historically, Republic Services had been plagued by a poor ESG profile, but during initial engagement efforts in 2019, we were encouraged by the CEO’s willingness to publish more transparent ESG data and targets – including 2030 sustainability goals. Subsequent engagement activities led to multiple ESG improvements, such as improved reporting that displays science-based targets and progress tracking.

While Republic Services has made solid strides in improving sustainability, we are committed to continued engagement to ensure the company remains on track to achieve its 2030 goals – including new targets to increase recycling and reduce landfill waste volumes, as well as a further reduction in toxic discharge.

Every investment creates an impact on society, whether it be positive or negative. The goal for impact investors must be to make lasting difference by backing companies able to deliver better social and environmental outcomes. We believe the market continues to underestimate the cash flow generation potential for these solution providers, and this market inefficiency presents a sustainable value creation opportunity for fundamental long-term investors.

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: 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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