An interview with Henning Padberg, manager of Nordea Global Climate and Environment and Global Climate and Social Impact Strategies
Henning Padberg is one of the European pioneers when it comes to sustainable investment. In 2008 he started his career as a portfolio manager at Nordea Asset Management (NAM). Initially, he had to contend with doubters as to whether sustainable investing and performance can go hand in hand. But today, he manages over EUR10 bn AUM in sustainable funds.
The EU’s Green Deal aims to make the European Union climate neutral by 2050. Meanwhile, The US Inflation Reduction Act features an initiative to invest more into domestic energy production while promoting clean energy. By 2032, these two funding pots alone will represent over EUR 1 tn. How has this impacted your investment strategy?
When it comes to political programs, we are generally sceptical at first, because our creed has always been that the solutions with the best sustainability profile, i.e. profitability, will prevail anyway. So politics is now following suit here and helping to solidify the outlook. We welcome that, but one should avoid financing wishful thinking with taxpayers’ money. Anything that is not yet economically viable should not be expanded on a large scale, because bad investments can end up being expensive for the end user.
Of course, we need an expansion of the power grids and also of renewables worldwide. This is where these programs help—and we are also positioned accordingly in our funds. Other incentives to improve resource efficiency in sectors, such as energy, construction, industry, transport and end consumers, play into our investments, and we have been positioned there, in some cases for many years.
With and without these subsidies, growth will come in these areas, but they provide a kind of back-up in case the economic situation becomes more unstable. I still remember well what the aftermath of the financial crisis over 10 years ago meant for renewables and many other areas of innovation. It was quite simply not possible to finance the right projects, despite the attractive payback periods, because the financing options were not available. In such a situation, you need the subsidy programs because they secure the funds even in difficult market phases. Therefore, we expect more stable growth over the next 10 years than we had in the past.
The EU countries have just raised the target for the expansion of renewable energies significantly to up to 45% in 2030, which would be double the 2021 level. So growth is there – but will shareholders also be able to benefit from it?
We have seen in the past that there are ups and downs with renewables in particular. One must not forget that these are still relatively young industries in which progress is being made at a rapid pace. This is why yesterday’s market leaders are not always tomorrow’s stock market winners, which is why we have been rather selective in our stock selection in the past. Nevertheless, there will be good opportunities here, especially when you think of the necessary technologies such as efficient electronics and smart software for power management, as well as the expansion of the power grids mentioned above. For us, the most important criterion remains whether the companies we are considering are able to assert themselves on the market with differentiated products and generate the necessary cash flows to match the current valuation of the market in the share price over the medium to long term.
In 2022, many sustainable strategies suffered from performance disadvantages as there was a renaissance in oil stocks. How did you deal with this challenge?
For us, too, 2022 was a difficult year after the strong performance in 2021. In particular, the strong rotation in January from growth to value stocks did not leave us unaffected, because our investment universe in Nordea Global Climate and Environment Strategy tends to have a growth bias. However, we had already started taking profits in the portfolio in 2021, especially in some of these growth stocks where the risk/return ratio was relatively less attractive after strong performance. In the course of the year, some of our industrial stocks in the areas of agriculture and waste management picked up speed, which, like the oil price, tends to benefit from inflation, so that we did relatively well that year, especially compared to other sustainability strategies. Our risk management certainly benefits from our years of experience—hence, we were relatively well-balanced
Which sectors and themes do you currently focus on?
We are primarily invested in attractively valued individual stocks that we believe have positive impact potential for climate and environmental issues. We continue to find strong opportunities in the area of energy efficiency, as we continue to see excellent prospects here and the investments pay off relatively quickly. We also like the area of intelligent power grids, because these must be expanded in line with, or preferably in advance of, renewables.
We also see the topic of environmentally conscious consumers as interesting from a structural point of view, but one must act with some caution here in the short term, since, as we all know, household budgets have come under pressure due to high inflation. In terms of sectors, many of the most interesting stocks are in the industrials, IT and materials sectors, but some utilities can also be quite interesting as a defensive mix.
An important market topic is currently the growth trend of artificial intelligence. Does this topic also play a role in your funds?
Of course the AI hype is also an issue for us and, especially in the second quarter, it meant that we were unable to follow the strong performance of the market, driven by the IT sector and more specifically a handful of megacaps such as Nvidia, Microsoft and Apple1.
We do think that AI can lead to enormous increases in productivity and improvements, but these cannot yet be measured in the real economy. At the same time, the enormous expansion of the data centers also brings new challenges for resource efficiency. Here we are invested in a few stocks that help, for example, to optimize energy efficiency in data centers.
We have experienced such boom situations in our investment universe in the past, and each boom is typically followed by a bust. We therefore try to diversify our sources of performance relatively broadly so that we are not dependent on individual issues and do not take on any cluster risks.
1Reference to companies or other investments mentioned should not be construed as a recommendation to the investor to buy or sell the same but is included for the purpose of illustration.