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.