ESG investors must not exclude climate crucial miners

ESG investors must not exclude climate crucial miners

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By Eric Pedersen, Head of Responsible Investment at Nordea Asset Management

The investment industry’s attitude towards ESG has been permanently transformed. After years of being considered niche, sustainability has become a mainstream consideration for most investors.

However, while investors are now acutely aware of the numerous benefits of ESG, philosophies and approaches still vary widely. Nowhere is this more evident than in the debate between engagement and exclusion.

At Nordea, we are not afraid to exclude companies when we find it necessary, for example because of breaches of international norms, or of the specific ESG standards of individual portfolios. At the same time, we believe engagement can be a powerful tool to foster positive change, while protecting shareholder value and enhancing long-term returns.

The engagement or exclusion question intensified recently during the COP26 climate summit, with many participants calling for investors to essentially shun all high carbon emitters – particularly companies operating within the mining sector. In addition to climate considerations, investors understand the mining industry has exposure to many other significant sustainability risks – including those related to worker safety, biodiversity protection, and the protection of human rights and livelihoods.

Nevertheless, even though we have excluded companies with heavy exposures to for example coal mining and oil sands extraction for a number of years, we believe a blanket exclusion of the mining sector would be extremely damaging for the planet’s path to net zero. Rather, engagement with companies that have a visible pathway and a willingness to adapt to the requirements of tomorrow, can create positive outcomes both financially and environmentally.

Copper, for example, is an essential metal for the clean energy transition, due to its thermal and electrical conductivity and corrosion resistance. Copper is critical for solar panels, wind turbines, electric vehicles and battery storage – while it is widely employed in the manufacture of electric cables and wires, plumbing, and other electronic equipment.

As record quantities of copper will need to be mined in order to enable the large-scale decarbonisation of the global economy in the years ahead, is it possible for ESG investors to positively impact the sustainability characteristics of companies operating in this space? We certainly believe this to be the case, as evidenced by our continuous engagement efforts with Chilean private mining group Antofagasta, one of the largest copper producers in the world.

Antofagasta shows some miners are willing to adapt and act

We have repeatedly engaged with Antofagasta in recent years on topics related to labour rights and worker safety, water management, and climate risk. Over the course of these engagements, we have seen Antofagasta implement numerous positive initiatives – such as a commitment to develop climate risk reporting in line with the recommendations from the Task Force on Climate-related Financial Disclosures (TCFD). Here, the company mentioned our dialogue as a key factor in their decision.

Antofagasta has recently exceeded short-term targets related to greenhouse gas emissions and renewable energy deployment, while its board added climate risk to its list of its prioritised risk areas for the first time.

Our ESG team recently followed up with Antofagasta to continue the dialogue on its efforts to reduce greenhouse gas emissions – particularly as the company has announced it is adopting new, longer-term carbon reduction targets and strategies. As Antofagasta has recently entered the bond market, we also had an exploratory dialogue around the relevance of green or sustainability-linked bond structures for future issuances.

While positive dialogue is constructive, ultimately all engagement efforts must result in more ambitious commitments and action. Encouragingly, Antofagasta continues to take positive steps forward, such as recently announcing its goal to be carbon neutral by 2050. Importantly, the company is aiming to reduce total emissions by 30% by 2025.

As always, we sought to clarify how Antofagasta will be able to deliver on these ambitions. The company’s greatest challenge is in the ability to report on its indirect – or ‘Scope 3’ – value chain emissions. It is actively building its capability to report indirect emissions, which relies on close partnerships with shipping companies and smelters.

In response to our earlier efforts, Antofagasta informed us it will shortly be releasing reporting in line with TCFD recommendations, which will highlight how its operations are aligned with various climate scenarios. We also remain in dialogue about its ongoing climate strategy and will continue to press on its decarbonisation progress. Overall, the advancements Antofagasta has made in relation to climate risks and other ESG elements recently led us to upgrade our internal ESG score on the company from B+ to A.

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 related 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 the investment can greatly fluctuate and cannot be ensured. 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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