Don’t believe the myths, climate companies are thriving

By Thomas Sørensen and Henning Padberg, portfolio managers of the Nordea Asset Management’s Global Climate and Environment strategy

The popularity of the climate and environment space has grown exponentially in recent years, with investors increasingly recognising the multiple drivers supporting this long-term megatrend. Despite this, two deep-seated investor misconceptions remain difficult to overcome. The first misunderstanding is the belief that climate and environment solutions essentially begin and end in the alternative energy sector. However, this narrow description significantly understates the broad investment opportunities available in this megatrend – particularly in companies within resource efficiency. The second fallacy is the perception that companies offering positive environmental solutions cannot deliver shareholder returns. While many companies were not able to generate steady cash flows in years past, this rapidly evolving sector is now being driven by healthy fundamentals. The thought that investing in the climate and environment sector will only be fruitful in a generation is also flawed; these solutions are delivering right now.

A convergence of interests within society
Before the financial crisis, the climate and environment scene was mostly driven by politics, in areas such as subsidies and regulation. Today, it is all about economics. Investing in climate solutions is a rational decision for consumers and enterprises. The economic incentive, where it makes economic sense for both consumers and corporates to invest in climate solutions, has clearly reached an inflection point. Companies understand improving sustainability is vital to remaining competitive in today’s world. At the same time, taking positive action for the environment is something society as a whole is getting behind. However, the impact of climate and environment as a driver of company cash flows remains under-researched and underestimated by most market participants.

More than just alternative energy
We focus on three main investment areas in the climate and environment space – innovators within the alternative energy sector, companies aiming at resource efficiency, as well as adapters focusing on environment protection. Our exposure to alternative energy is roughly 5%, in companies focusing on eco-friendly and innovative technologies to generate cleaner energy. While the global share of primary energy from renewable sources is still very low, emission-free renewables like solar and wind have shown an economic feasibility and further improvements will lead to higher adoption. Our research leads us to believe that electricity will in the long run become the primary form of energy used for consumption, with the age of oil and coal coming to an end. We have a 25% allocation to companies with strong offerings in protecting the environment and safeguarding nature. This area is often driven by environmental regulation and risk management considerations, as well as constant improvements in the quality of products and services. Preventing potential future costs of negative externalities is of as much importance as dealing with issues of the past.

The opportunity in ‘optimisers’
The majority, or 70%, of our strategy is allocated to optimisers in resource efficiency – companies improving efficiency with products and services. An example of a company thriving in this space is Hexcel Corp, the leading carbon fibre producer in the world. Carbon fibres offer significant material advantages, being significantly lighter and stronger than steel and aluminium. New generations of airplanes, such as Airbus’ A380 and Boeing’s 787 Dreamliner, are built with approximately 50% carbon fibre, resulting in 20% more fuel efficiency than older airplanes of equal size. With fuel being one of the largest costs for airlines, Hexcel is providing significant savings for airline companies and value creation for shareholders – not to mention helping to decarbonise the aviation industry. In addition, carbon fibres are also making inroads into other industrial applications – such as wind turbines and high-end cars. The numerous tailwinds for Hexcel has helped drive its share price up almost tenfold since the beginning of the bull market in 2009 – far in excess of the rise for the broader market over the same period.

Trump cannot derail climate revolution
Finally, the withdrawal of the United States from the Paris climate agreement earlier this year was clearly a negative development, as we view the accord as positive for the planet over the long term.

However, political support is only one of the drivers of this mega-trend. Donald Trump aside, we remain convinced the world is witnessing a revolution in attitudes towards the climate and environment – with corporates at the forefront of this change.

About Nordea Asset Management|
Nordea Asset Management (NAM, AuM 221.5 bn EUR*), is part of the Nordea Group, the largest financial services group in Northern Europe (AuM 330.9 bn EUR*). NAM offers European and global investors exposure to a broad set of investment funds. We serve a wide range of clients and distributors which include banks, asset managers, independent financial advisors and insurance companies.

Nordea Asset Management has a presence in Cologne, Copenhagen, Frankfurt, Helsinki, London, Luxembourg, Madrid, Milan, New York, Oslo, Paris, Sao Paulo, Singapore, Stockholm, Vienna and Zurich. Nordea’s local presence goes hand in hand with the objective of being accessible and offering the best service to clients.

Nordea’s success is based on a sustainable and unique multi-boutique approach that combines the expertise of specialised internal boutiques with exclusive external competences allowing us to deliver alpha in a stable way for the benefit of our clients.  NAM solutions cover all asset classes from fixed income and equity to multi asset solutions, and manage local and European as well as US, global and emerging market products.

*Source: Nordea Investment Funds, S.A., 30.09.2017

Nordea Asset Management is the functional name of the asset management business conducted by the legal entities Nordea Investment Funds S.A., Nordea Funds Ltd and Nordea Investment Management AB (“the Legal Entities”) and their branches, subsidiaries and affiliated companies. Additional information for Nordea 1, SICAV: The sub-funds mentioned are part of Nordea 1, SICAV (the “Fund”), an open-ended Luxembourg-based investment company (Société d’Investissement à Capital Variable), validly formed and existing in accordance with the laws of Luxembourg and with European Council Directive 2009/65/EC of 13 July 2009. This document is advertising material and does not disclose all relevant information concerning the presented sub-funds. Any investment decision in the sub-funds should be made on the basis of the current prospectus and the Key Investor Information Document, which are available, along with the current annual and semi-annual reports, electronically in English and in the local language of the market where the mentioned Fund is authorised for distribution, without charge upon request from Nordea Investment Funds S.A., 562, rue de Neudorf, P.O. Box 782, L-2017 Luxembourg, from the local representatives or information agents, or from our distributors. The Depositary of the Fund is J.P. Morgan Bank Luxembourg S.A. For further details of investment risks associated with these sub-funds, please refer to the relevant Key Investor Information Document, available as described above. Further information can be obtained from your financial advisor. He/she can advise you independently of Nordea Investment Funds S.A. 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Additional information for investors in Italy: Fund documentation as listed above is also available in Italy from the distributors and on the website www.nordea.it. The updated list of distribution agents in Italy, grouped by homogenous category, is available from the distributors themselves, at State Street Bank  International GmbH – Succursale Italia branches (located in the main towns of each region), BNP Paribas Securities Services Succursale di Milano, Banca Sella Holding S.p.A, Banca Monte dei Paschi di Siena S.p.A, Allfunds Bank S.A. Succursale di Milano, Société Générale Securities Services S.p.A. and on the website www.nordea.it. Any requests for additional information should be sent to the distributors. Before investing, please read the prospectus carefully. We recommend that you read the most recent annual financial statement in order to be better informed about the fund’s investment policy. The prospectus and KIID for the sub-funds have been published with Consob. For the risk profile of the mentioned sub-funds, please refer to the fund prospectus. Additional information for investors in the United Kingdom: Approved by Nordea Bank AB, 5 Aldermanbury Square, London EC2V 7AZ, which is regulated by the FCA in the United Kingdom. Additional information for investors in Sweden: The Paying Agent is Nordea Bank AB (publ), Smålandsgatan 17, Stockholm SE-105 71. The Representative Agent is Nordea Funds Ltd, Swedish Branch, Mäster Samuelsgatan 21, Stockholm, SE-105 71. Additional information for investors in Denmark: The Information and Paying Agent is Nordea Danmark, filial af Nordea Bank AB (publ), Sverige, Strandgade 3, Christiansbro, DK-1401 Copenhagen K. A hard copy of the above-mentioned fund documentation is available here. Additional information for investors in Norway: The Paying Agent is Nordea Bank AB (publ), Filial i Norge, Essendrops gate 7, Postboks 1166 Sentrum, NO-0107 Oslo. The Representative Agent is Nordea Funds Ltd., Norwegian Branch, Essendrops gate 7, Postboks 1166 Sentrum, NO-0107 Oslo. Additional information for investors in Finland: The Paying Agent is Nordea Bank AB (publ), Finnish Branch, Satamaradankatu 5, FI-00020 NORDEA, Helsinki. The Representative Agent is Nordea Funds Ltd, Satamaradankatu 5, FI-00020 NORDEA, Helsinki. Additional information for investors in Latvia: The Representative and Paying Agent in Latvia is Luminor Bank AS, Skanstes iela 12, Riga, LV-1013. Additional information for investors in Estonia: The Representative and Paying Agent in Estonia is Luminor Bank AS, Liivalaia 45, 10145 Tallinn. Additional information for investors in Lithuania. The Representative and Paying Agent in Lithuania is Luminor Bank AB, Konstitucijos pr. 21A, 03601Vilnius. Shareholders must evaluate possible investment risks and take this into consideration when making investment decisions. 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