The Climate & Environment Megatrend
Henning Padberg and Thomas Sørensen, managers of Nordea’s Global Climate and Environment Strategy, talk about investing in the future
Climate change and resource scarcity are shaping the future and impacting the global economy. The need for sustainable solutions is imminent. As consumers and companies become more aware and adjust their behaviors, opportunities arise for investors looking to invest responsibly without sacrificing returns. Henning Padberg and Thomas Sørensen, managers of Nordea’s Global Climate and Environment Strategy, invest in global companies that provide solutions working toward achieving a more sustainable and efficient society. In this interview, they discuss their bottom-up strategy, the performance of climate-oriented strategies, and how they integrate ESG into their portfolio.
How do you go about investing in climate solutions?
Our skillset is to identify stocks where the market is underestimating or overlooking the impact from Climate and Environment as a driver of future cash flows. We seek to identify stocks where the current market price implies future expectations that are materially different from ours. We call this the “Expectations Gap” and it can arise from underestimating future growth from climate opportunities, failure to value structural impact from regulation correctly, underestimating technology change as a risk or opportunity for a company, failure to incorporate ESG/sustainability aspects in the investment analysis or fading returns on capital too quickly.
Can you describe the investment process?
The idea generation process concentrates on identifying global equities that derive significant future cash flows from their exposure to the Climate and Environment megatrend. A company needs to have at least 20% revenue exposure to the Climate and Environment megatrend to be included in the universe. The threshold is set relatively low to be able to capture companies that are transforming their business into being more focused on climate solutions, but the majority of the investments in the strategy will typically have more than 50% revenue exposure to the Climate and Environment megatrend.
The investment universe is categorized into three investment clusters and a range of underlying strategies. The first, Resource Efficiency, consists of companies that help optimize the existing resource base and improve efficiency. In the second category, Environment Protection, we target companies with strong offerings around protecting the environment and safe-guarding nature. Finally, in Alternative Energy, our investments are made up of companies that focus on eco-friendly and innovative technologies to generate cleaner energy. The investment philosophy of Global Climate focuses on Climate and Environment beneficiaries, which we tend to find in sectors like Industrials, Information Technology, Materials (also in Consumer sectors), less so in Healthcare, Financials, Energy, and Telecoms.
How are climate strategies performing?
Historically, this segment has clearly been misunderstood by the market and we still think it doesn’t get the recognition it deserves. This offers opportunities for us as we have been following the Climate & Environment area for years and have had a dedicated product since 2008. We think our approach to climate solutions is competitive and we are pleased with the performance of the strategy.
What is the best investment strategy for this kind of product: short, medium, long?
Our view is that in the long-run, opportunities clearly outweigh risks, which makes Climate & Environment a megatrend for all types of investors. The fact that the involved industries have matured, and many solutions make economic sense today, provides a really good basis for finding attractive investment cases.
What is the target investor profile?
The strategy’s key biases (mid cap and typically growth) make it a strong building block for asset allocators looking for diversification options. Currently, we are seeing increased attention from pension managers, driven by two key trends: Firstly, pension funds are in the process of integrating ESG (Environmental, Social and Governance) factors into their asset allocations to comply with their fiduciary duty. Secondly, pension members are increasingly asking for more climate awareness when it comes to their investments for retirement.
How does your strategy integrate ESG factors?
The strategy is a thematic investment approach designed to address key ESG challenges facing society. Its core theme is about investing in companies that provide solutions to climate and environment challenges. The outcome of such an approach is an investable universe of climate solution providers that generally have higher ESG ratings and do not include many controversial areas.
Nevertheless, in keeping with Nordea’s Responsible Investment Policy, all Nordea portfolios undergo an annual norm-based screening—our strategies are not permitted to hold any stock from Nordea’s exclusion list. Moreover, we do take into consideration the ESG profile of the company when performing company valuation as part of the fundamental research.
The strategy aims at contributing to positive change in the world. We believe capital plays a crucial role in achieving this. Our solution-oriented approach emphasizes active contribution towards sustainability. Our primary objective is to maintain an investment universe that focuses purely on climate solutions.