By Paul Malpas, ESG Distribution Lead at Nordea Asset Management

Environmental, social and governance (ESG) considerations are now firmly entrenched in the minds of many investors. While the stunning rise of responsible investing is undeniably positive for society and the future of our planet, vast differences remain in approaches to ESG. Nowhere is this more evident than in the rapidly expanding ‘impact’ investing space.

Impact investing, where capital allocation is made to explicitly address social or environmental problems, has traditionally been associated with the private markets space. However, we are also convinced of the long-term merits of ‘investing with impact’ in public markets.

By harnessing the massive momentum behind both the environmental and social megatrends, we truly believe investors can achieve both sustained financial performance and positive impact. Within listed equity markets, we see tremendous opportunity to allocate capital to companies at the forefront of an inclusive green economy.

A concept backed by the UN, the inclusive green economy aims to improve human wellbeing and social equity, while significantly reducing environmental risks and ecological scarcities. Indeed, the investment opportunity in achieving the UN’s 2030 Sustainable Development Goals (SDGs) is unprecedented, with economic prospects worth at least US$12trn a year by 2030.

Eco-friendly transportation solutions are essential

Investing in sustainable transportation – which is aligned to SDG 11, sustainable cities and communities – is one such compelling opportunity. The transport sector is a major contributor to climate change, responsible for about 14% of annual emissions, so providing environmentally friendly transportation solutions will be imperative for a sustainable future.

Even though Japan’s rail industry is already viewed as a world leader, we envisage continued positive developments for this industry – particularly as Japan aims to reach carbon neutrality by 2050. At company level, we see Central Japan Railway Company as a key beneficiary of the planet’s sustainability drive.

The second-largest rail operator in the Asian powerhouse, Central Japan Railway generates more than 80% of its revenues from the Tokaido Shinkansen high-speed train line, which connects the mega cities of Tokyo and Osaka. Compared to a passenger aircraft on the same route, the Shinkansen bullet train uses 88% less energy, while carbon emissions are 92% less per seat than its aviation equivalent. Even though the daily Tokyo-Osaka airline passenger capacity is just 6.25% of the Tokaido Shinkansen capacity, adopting a train-only approach could lead to a 40% reduction in carbon emissions.

Sustainable practices must be constantly encouraged

While it is important to identify a company’s specific metrics and track contributions to SDG-aligned activities, a key component of investing with impact is corporate engagement. By engaging in active dialogue with companies on specific sustainability risks and opportunities, investors are able to guide management teams towards the adoption of more sustainable practices. These sustainability improvements can enhance long-term value for companies and investors, while benefitting society overall.

In our view, companies are ready and willing to embrace change. A good example here is Republic Services, the US provider of waste collection and disposal services. Historically, Republic Services had been plagued by a poor ESG profile, but during initial engagement efforts in 2019, we were encouraged by the CEO’s willingness to publish more transparent ESG data and targets – including 2030 sustainability goals. Subsequent engagement activities led to multiple ESG improvements, such as improved reporting that displays science-based targets and progress tracking.

While Republic Services has made solid strides in improving sustainability, we are committed to continued engagement to ensure the company remains on track to achieve its 2030 goals – including new targets to increase recycling and reduce landfill waste volumes, as well as a further reduction in toxic discharge.

Every investment creates an impact on society, whether it be positive or negative. The goal for impact investors must be to make lasting difference by backing companies able to deliver better social and environmental outcomes. We believe the market continues to underestimate the cash flow generation potential for these solution providers, and this market inefficiency presents a sustainable value creation opportunity for fundamental long-term investors.