Written By: Stephen Hearle
Stephen Hearle of Nordea Asset Management UK outlines some of the ways investors can make a real impact in the climate environment
During the pandemic crisis, climate and the environment have been widely discussed on both mainstream and social media. With many countries in lockdown, our screens have been flooded with images of clear skies over cities and pictures of wildlife returning to previously abandoned habitats. Commentators have also suggested that environmental destruction and loss of diversity will contribute to an increased risk of future pandemics. So how can we change things?
Many have taken this opportunity to urge governments to prioritise climate and environment issues as they reopen their economies. However, for a lot of countries – and not just the less developed nations – the focus on economic stimulus may well come at the expense of environmental policy. The question now is whether environmental concerns and the potential for change will fall by the wayside if they are not supported by government policy – and how we as individuals can make a difference. We would answer that neither these issues nor the opportunity to create change will disappear, irrespective of the policy response.
Does change need policy to drive it?
There are many ways to bring about change – and they don’t necessarily require you to shorten your shower. Even as an individual, investing can drive change both with its “weight of money” and “money multiplier” effects – and this can be seen in the sustainable investing arena. Impact investing is becoming more wide-spread, with investors targeting specific issues as they invest and measuring the impact of each investment. However, this is not the only way to make an impact. In the environmental sphere we can also make a very tangible impact by investing into companies offering climate solutions.
There is no doubt that policy, such as legislation mandating a shift to lower-emissions across various industries, is a driver of environmental change. Consumer choice is another driver. One of the most powerful drivers for both corporates and consumers is simple economics. When a purchaser – whether at consumer level or within a supply-chain – can replace something with a lower-cost product or material and/or achieve a faster payback for his investment, the decision to change becomes an easy one to make. One way of making an impact, therefore, is to invest in businesses whose technologies or solutions make it cost-effective to move to an environmentally-friendly product or process. Let’s look at how this can work.
Cost-effective climate solutions are win-win
Electric vehicles are a high-profile example as the UK government has recently brought forward its ban on the sale of petrol- and diesel-powered cars from 2040 to 2035 in an effort to meet internationally-agreed reductions in emissions. Electric cars are reaching a break-even point now: they have been shown to have a similar or lower total ownership cost (which includes both purchase and operational costs) than conventional vehicles and, for a taxi fleet, slightly higher profitability than conventional cars¹. When Taxi Stockholm switched the majority of its fleet to electric vehicles, it estimated it would reduce annual CO2 emissions by approximately 100,000 metric tons. At the same time, it expected to save around $12 million p.a. (based on the average annual drive of Taxi Stockholm’s full fleet of regular internal combustion engine vehicles at the prevailing fuel prices). For Taxi Stockholm, this switch was a win-win decision and 95% of its fleet is now “green” vehicles.
Nevertheless, with the most powerful electric cars sitting at the higher end of the automotive market, cost remains a factor limiting the take-up of electric vehicles by consumers. Companies developing technologies to reduce the cost and further enhance the efficiency of green vehicles will help grow this market – thereby multiplying their environmental benefit while at the same benefiting financially from growing demand. One example of a company in this position is the German semiconductor company Infineon AG (spun off from Siemens AG in 1999). Infineon is a market leader in automotive semiconductors, manufacturing key elements for the electrification of cars. Its energy-efficient electronics are enabling increased electrification in the transport sector, the efficient generation of renewable energies and the reduction of energy consumption. This can improve resource efficiency in many applications.
The dual benefits of improved energy efficiency are not restricted to the automotive – or even the broader transport – sector. The same win-win logic for reducing energy usage to cut both costs and emissions applies to many other industries. Within the construction industry there is great potential for increasing resource efficiency in the area of “intelligent building” – and thus for climate protection. Buildings and their construction together not only represent 36% of global energy use but 39% percent of energy-related carbon dioxide emissions annually.² Solutions here range from the optimisation of the design and construction process to energy-efficient insulation materials, heat recovery systems, light automation and intelligent energy management software. All of these solutions make a positive contribution to reducing operating costs and the ecological footprint of buildings. The US company Autodesk is one of the companies that is making a difference here while also benefiting from this demand. Its building information modeling (BIM) software increases efficiency across the entire value chain in construction. Leading Japanese air conditioning and heating solution provider Daikin Industries satisfies the rising demand for products that provide superior energy efficiency, which is driven by the increasing environmental awareness as well as the need for improved functionality and attractive payback times.
Investing in climate solutions
When we look at the different investment possibilities in the search for climate and environment solutions, we can categorise the key contributors into three different clusters: Resource efficiency, alternative energy, and environment protection. All of these make an impact in different ways.
Resource efficiency solutions, as per the examples above, make economic sense by saving the user money while at the same time reducing the users’ environmental impact. Alternative energy is a much-needed development to meet global growth without further draining the world’s resources. Reducing the costs behind alternative energy production – such as cheaper and more efficient solar panels – is an important driver behind the roll-out of green energy. Environmental protection can include a multitude of areas ranging from waste management and green consumerism through to water and forest management. By investing in businesses that offer solutions to these growing problems, investors can have a positive impact and are themselves becoming part of the solution.
The global equity market offers plenty of opportunities for a well-differentiated solution-led investment approach. Looking beyond companies that generate their entire revenues from climate solutions can broaden the investment universe significantly. For example, setting a threshold of at least 20% of revenues coming from climate solutions leads to a pool of more than 1250 investable stocks with a combined market cap of over €6 trillion³. This universe has a bias towards growth-oriented mid-sized companies which offers diversification benefits against a wider global equity investment universe.
Becoming a driver of change
Irrespective of government policy, which plays a key role in defining local priorities and the speed of take-up of climate and environment solutions, growth in climate and environment solutions has developed its own momentum. Supported by their own company economics, businesses are adopting new methods, equipment and approaches without requiring legislation to drive them. Consumer demand is driven by personal choice as well as legislation, but this too will typically achieve the highest levels when change is supported by the economics. With rising demand from both business customers and consumers, increasingly cost-effective solutions are developed until this becomes a virtuous circle. The most effective solutions grow their own market. This is a very effective way for investors to benefit from the economic success of the climate megatrend while at the same time being part of the solution and making an impact on global sustainability.
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, subsidiaries and representative offices. This document 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. This document may not be reproduced or circulated without prior permission. © The Legal Entities adherent to Nordea Asset Management and any of the Legal Entities’ branches, subsidiaries and/or representative offices.
1. “Conditions for electric vehicle taxi: A case study in the Great Stockholm region” Hagman and Langbroek, 2018
2. “2018 Global Status Report: Towards a zero-emission, efficient and resilient buildings and construction sector”. International Energy Agency ; United Nations Environment Programme (2018)
3. Source: Nordea Investment Management AB. Data: 31.03.2020.