Nordea Asset Management Our Approach on Climate Change
Introduction Scientific fact base The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report concludes that Climate change and the warming of the climate is unequivocal and that the human influence on the climate system is clear. Recent anthroprogenic emissions of greenhouse gases (GHG) are the highest ever, driven by economic and population growth, by energy use, lifestyle, land use, technology and climate policy. The physical impact of climate change range from extreme weather events to food security. Climate risks will be amplified and new risks for natural and human systems will occur if the rate and magnitude of climate change is not contained and for every degree of warming above 2 degrees. This scientific fact base of climate change impact is widely accepted.
Responding to climate change There are two fundamental response strategies to address climate change mitigation and adaptation. Adaption strategies focus on lessening the negative impact and costs of negative climate change. Such strategies can support countries, companies, suppliers, and other stakeholders, and to adapt to a changing climate. Adaption can be aimed at value protection or value creation or innovation. The latter is very important as they are an important driver to economic growth. Mitigation strategies focus on limiting climate change by reducing or preventing the emissions of GHGs (greenhouse gases) by for example using new technologies and renewable energies, energy efficiency measures and consumer behavior. In order to encourage the transition to and direct investments to a low-carbon economy, the right market signals from policy makers is necessary. In the absence of policies to mitigate climate change, GHG emissions may rise significantly over the 21st century to critical levels. Aiming for a globally binding agreement In December 2015 heads of representatives of states will gather in Paris for the UN COP 21 meeting. The aim of the meeting is to reach a global legally binding agreement designed to keep the global temperature increase to below 2 degrees Celsius. This is the level designed to avoid catastrophic global warming and the worst effects of climate change. In July 2015 the Group of Seven of the world s largest advanced economies, or G7, reaffirmed their commitment to keeping the globe s average temperature from rising past 2 degrees Celsius.
Climate change impact on investment The impacts of climate change are already resulting in economic losses around the world. Climate change can have significant impact on investments and can entail risk as well as opportunity. Climate change related risk can strand assets in different sectors. Stranded assets are assets that have suffered from unanticipated or premature write-downs, devaluations or conversion to liabilities and lose their economic value way ahead of their expected life. The loss of value typically comes as a result of changes in legislation, regulation, market drivers, societal norms or major environmental events. Assets may become stranded through regulatory measures requiring for example the closure of certain business operations with high emissions, or impose emissions constraints increasing costs and making assets unviable economically. Other energy sources could also become increasingly competitive. This would leave many companies holding vast reserves of essentially worthless fossil fuels. In 2011 Carbon Tracker introduced the idea of a carbon bubble, the overvaluation of the fossil fuel industry. A key part of their argument was the idea that carbon intensive fuel sources would become less valuable because of increasingly stringent regulation from international and national bodies. Coal and other hydrocarbon resources have been identified as having potential to become stranded. In 2013 Coal represented 43% of annual CO2 emissions, oil 38% and gas 18%. The main driver of growth of the coal market, China, reported the first drop in production and consumption of coal for the first time in 14 years. And the commitment by the Chinese government to greener energy is shrinking the market even more. In order to curb emissions and to direct capital to other energy sources the European Union will be phasing out subsidies for coal plants by 2018. A report by Carbon Tracker found that between 2010-2015 US coal industry lost 76% of its value due to structural decline, cheap shale gas and regulatory measures by the Environmental Protection Agency (EPA). And as we have seen social norms such as the global fossil fuel divestment campaign also had an influence. Climate Change will affect the risks that companies are already facing. Adaption strategies and ensuring the long-term resilience of physical assets and planning responses to maintain business as usual will be essential, but can also be very costly. Companies also need to identify new opportunities related to climate change such as those that can be found within, energy and natural resource efficiency, renewable energy and new technology, but also look into innovative solutions.
Nordea Asset Management s aproach to climate change Climate change presents a challenge to our investments in terms of its physical impact as well as against the prospect of the implementation of radical policy measures in order to reduce GHG-emissions globally. There are a number of sectors that are particularly exposed to climate change. Companies in these sectors: need to demonstrate how they integrate climate change challenges into their business strategies, investment decisions and risk management, should be able to disclose how their long-term business strategy and profitability will be impacted by a different regulatory and physical environment, need to show how they identify and capitalize on opportunities related to climate change, should also be transparent in regards to their position on climate change regulation and interaction with regulators and policy makers
ESG integration Environmental, Social and Governance issues are an increasing source of risk and opportunity and we therefore seek to integrate ESG issues into our investment analysis methodology. All Nordea s Asset Management products include ESG data as one of the factors used in assessing investments. As part of our ESG analysis efforts we continuously assess and evaluate climate change risk and how companies position their products or services to a low-carbon economy. We underpin our approach with externally sourced ESG research and ratings. Divestment Nordea Asset Management decided in 2015 to exclude companies with large and sustained exposure to thermal mining, the most environmentally compromising fossil fuel resource and with 75% of revenues derived from sales of coal products and do not have a meaningful opportunity to diversify from coal.
Company and Policy Engagement We engage with companies and other stakeholders including policy makers on climate change. We engage with companies to understand how they have integrated climate change risks and opportunities in the companies business strategy and governance structure and how they engage with public policy makers. We engage with companies individually or through collaborative initiatives with global reach and supported by a large number of investors. Principles for Responsible Investment - PRI Nordea signed the Principles of Responsible Investment in 2007. We are involved in PRI collaborative investor engagement initiatives on climate lobbying. The Climate Lobbying initiative has two main elements. One element is The Investor Expectations on Corporate Climate Lobbying document that the working group in which we belong developed. The Expectations document states that investors expect that companies when they engage with public policy maker, support cost-effective policy measure to mitigate climate change risks and support a transition to a low carbon economy.
The other is engagement with companies, with different approaches and working groups for each region the USA, Canada and Australia. Target companies fit into one of these three categories on the basis of their lobbying practices. For example, a British or Chinese company may be targeted by the US sub-group due to their indirect lobbying in the United States (i.e. via a US trade association). The Institutional Investors Group on Climate Change - IIGCC We are a member of The Institutional Investors Group on Climate Change (IIGCC) - a forum for collaboration on climate change for investors to encourage public policies, investment practices, and corporate behaviour that address long-term risks and opportunities associated with climate change. IIGCC develops and publishes Investor guides aimed at creating greater understanding of the risks and opportunities posed by climate change and climate policy. These are used as part of our analysis and in a number of engagements with companies on climate change related issues.
The Institutional Investors Expectations of Corporate Climate Risk Management sets out how investors expect companies to minimize the risks and maximize the opportunities presented by climate change and climate policy. The Investor Expectations on Mining Companies, sets out expectations on more sustainable strategies with the aim of mitigating the long term risks, including carbon asset risk. The Investor Expectations: Oil and Gas Company Strategy outlines the changing policy, technology and demand dynamics that are creating material risks in the oil and gas sector. They set clear expectations on the management of boards and management of oil and gas companies on carbon asset risk. Nordea supports the Climate Change Investment Solutions, which outlines a range of strategies and solutions investors can use to address climate change, including low carbon investment, managing and reducing carbon exposure in portfolios, and engagement, as investors around the world work to scale up their efforts to invest in clean energy and shift to lower carbon assets. In May 2015 we were among the 120 investors sent a letter the Finance Ministers of the Group of Seven (G-7) urging them to support a long-term global emissions reduction goal in the Paris agreement as well as the submission of short to medium-term national emissions pledges and country level action plans.
CDP Carbon Disclosure Project We are a member of CDP- a global collaborative organization aimed at encouraging companies to measure and disclose environmental information. CDP collects self-reported climate change, water and forest-risk data from companies and provides data from more than 4,500 companies from 80 countries. CDP also provides an independent ratings system to benchmark corporate disclosure and performance on environmental stewardship. This information is used in our ESG-analysis and investment decision-making. We are also involved in collaborative engagements organized by CDP. CO 2 The Montreal Carbon Pledge The Montreal Carbon Pledge is supported by the PRI and UNEP-FI. By signing onto the Montreal Carbon Pledge we are committed to measure and publicly disclose our carbon footprint on an annual basis. We will publish the carbon footprint as part of the ESG score cards for our STARS funds. For more information on our work on climate change see nordea.com and ri.nordea.com