Download Our Approach on Climate Change

Nordea Asset Management
– Our Approach
on Climate Change
Introduction
Scientific fact base
The Intergovernmental Panel on Climate Change (IPCC) Fifth Assessment Report
concludes that Climate change and the warming of the climate is unequivocal and
that the human influence on the climate system is clear. Recent anthroprogenic
emissions of greenhouse gases (GHG) are the highest ever, driven by economic
and population growth, by energy use, lifestyle, land use, technology and climate
policy. The physical impact of climate change range from extreme weather events
to food security. Climate risks will be amplified and new risks for natural and
human systems will occur if the rate and magnitude of climate change is not
contained and for every degree of warming above 2 degrees. This scientific fact
base of climate change impact is widely accepted.
Responding to climate change
There are two fundamental response strategies to address climate change
– mitigation and adaptation. Adaption strategies focus on lessening the negative impact
and costs of negative climate change. Such strategies can support countries, companies, suppliers, and other stakeholders, and to adapt to a changing climate. Adaption
can be aimed at value protection or value creation or innovation. The latter is very important as they are an important driver to economic growth. Mitigation strategies focus on
limiting climate change by reducing or preventing the emissions of GHGs (greenhouse
gases) by for example using new technologies and renewable energies, energy efficiency measures and consumer behavior. In order to encourage the transition to and direct
investments to a low-carbon economy, the right market signals from policy makers is
necessary. In the absence of policies to mitigate climate change, GHG emissions may
rise significantly over the 21st century to critical levels.
Aiming for a globally binding agreement
In December 2015 heads of representatives of states will gather in Paris for the UN
COP 21 meeting. The aim of the meeting is to reach a global legally binding agreement
designed to keep the global temperature increase to below 2 degrees Celsius. This is
the level designed to avoid catastrophic global warming and the worst effects of climate
change.
In July 2015 the Group of Seven of the world’s largest advanced economies, or G7,
reaffirmed their commitment to keeping the globe’s average temperature from rising
past 2 degrees Celsius.
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Climate change
impact on investment
The impacts of climate change are already resulting in economic losses around
the world.
Climate change can have significant impact on investments and can entail risk
as well as opportunity.
Climate change related risk can strand
assets in different sectors. Stranded assets are ”assets that have suffered from
unanticipated or premature write-downs,
devaluations or conversion to liabilities” and lose their economic value way
ahead of their expected life. The loss
of value typically comes as a result of
changes in legislation, regulation, market
drivers, societal norms or major environmental events. Assets may become
stranded through regulatory measures
requiring for example the closure of
certain business operations with high
emissions, or impose emissions constraints increasing costs and making assets
unviable economically. Other energy
sources could also become increasingly
competitive. This would leave many
companies holding vast reserves of
essentially worthless fossil fuels.
In 2011 Carbon Tracker introduced the
idea of a ‘carbon bubble’, the overvaluation of the fossil fuel industry. A key
part of their argument was the idea that
carbon intensive fuel sources would become less valuable because of increasingly stringent regulation from international and national bodies. Coal and
other hydrocarbon resources have been
identified as having potential to become
stranded. In 2013 Coal represented
43% of annual CO2 emissions, oil 38%
and gas 18%.
The main driver of growth of the coal
market, China, reported the first drop in
production and consumption of coal for
the first time in 14 years. And the commitment by the Chinese government to
greener energy is shrinking the market
even more. In order to curb emissions
and to direct capital to other energy
sources the European Union will be
phasing out subsidies for coal plants by
2018. A report by Carbon Tracker found
that between 2010-2015 US coal
industry lost 76% of its value due to
structural decline, cheap shale gas and
regulatory measures by the Environmental Protection Agency (EPA). And as
we have seen social norms such as the
global fossil fuel divestment campaign
also had an influence.
Climate Change will affect the risks that
companies are already facing. Adaption
strategies and ensuring the long-term
resilience of physical assets and planning responses to maintain business
as usual will be essential, but can also
be very costly. Companies also need
to identify new opportunities related
to climate change such as those that
can be found within, energy and natural
resource efficiency, renewable energy
and new technology, but also look into
innovative solutions.
Nordea Asset
Management’s aproach
to climate change
Climate change presents a challenge to our investments – in terms of its physical
impact as well as against the prospect of the implementation of radical policy measures
in order to reduce GHG-emissions globally.
There are a number of sectors that are particularly exposed to climate change.
Companies in these sectors:

need to demonstrate how they integrate climate
change challenges into their business strategies,
investment decisions and risk management,
should be able to disclose how their long-term
business strategy and profitability will be impacted
by a different regulatory and physical environment,

need to show how they identify and capitalize
on opportunities related to climate change,

should also be transparent in regards to their
position on climate change regulation and
interaction with regulators and policy makers
ESG integration
Environmental, Social and Governance issues are
an increasing source of risk and opportunity and
we therefore seek to integrate ESG issues into our
investment analysis methodology. All Nordea’s Asset
Management products include ESG data as one of
the factors used in assessing investments. As part
of our ESG analysis efforts we continuously assess
and evaluate climate change risk and how companies
position their products or services to a low-carbon
economy. We underpin our approach with externally
sourced ESG research and ratings.
Divestment
Nordea Asset Management decided in
2015 to exclude companies with large and
sustained exposure to thermal mining, the
most environmentally compromising fossil
fuel resource and with 75% of revenues
derived from sales of coal products and
do not have a meaningful opportunity to
diversify from coal.
Company and Policy Engagement
We engage with companies and other stakeholders including policy
makers on climate change. We engage with companies to understand how they have integrated climate change risks and opportunities in the companies’ business strategy and governance structure and how they engage with public policy makers.
We engage with companies individually or
through collaborative initiatives with global
reach and supported by a large number of
investors.
Principles for Responsible Investment - PRI
Nordea signed the Principles of Responsible Investment in 2007.
We are involved in PRI collaborative investor engagement initiatives on climate
lobbying. The Climate Lobbying initiative has two main elements.
One element is The Investor Expectations on Corporate Climate Lobbying document
that the working group in which we belong developed. The Expectations document
states that investors expect that companies when they engage with public policy maker,
support cost-effective policy measure to mitigate climate change risks and support a
transition to a low carbon economy.
The other is engagement with companies, with different approaches
and working groups for each region – the USA, Canada and Australia.
Target companies fit into one of these three categories on the basis of their lobbying
practices. For example, a British or Chinese company may be targeted by the US
sub-group due to their indirect lobbying in the United States (i.e. via a US trade
association).

The Institutional Investors Group on Climate Change - IIGCC
We are a member of The Institutional Investors Group on Climate Change (IIGCC)
- a forum for collaboration on climate change for investors to encourage public
policies, investment practices, and corporate behaviour that address long-term risks
and opportunities associated with climate change.
IIGCC develops and publishes Investor guides aimed at creating greater
understanding of the risks and opportunities posed by climate change and climate
policy. These are used as part of our analysis and in a number of engagements with
companies on climate change related issues.
The Institutional Investors’ Expectations of Corporate Climate Risk Management sets
out how investors expect companies to minimize the risks and maximize the opportunities presented by climate change and climate policy.
The Investor Expectations on Mining Companies, sets out expectations on more
sustainable strategies with the aim of mitigating the long term risks, including carbon
asset risk.
The Investor Expectations: Oil and Gas Company Strategy outlines the changing policy, technology and demand dynamics that are creating material risks in the oil and gas
sector. They set clear expectations on the management of boards and management of
oil and gas companies on carbon asset risk.
Nordea supports the Climate Change Investment Solutions, which outlines a range of
strategies and solutions investors can use to address climate change, including low
carbon investment, managing and reducing carbon exposure in portfolios, and engagement, as investors around the world work to scale up their efforts to invest in clean
energy and shift to lower carbon assets. In May 2015 we were among the 120 investors sent a letter the Finance Ministers of the
Group of Seven (G-7) urging them to support a long-term global emissions reduction
goal in the Paris agreement as well as the submission of short to medium-term national
emissions pledges and country level action plans.
CDP – Carbon Disclosure Project
We are a member of CDP- a global collaborative organization aimed at encouraging
companies to measure and disclose environmental information. CDP collects self-reported climate change, water and forest-risk data from companies and provides data
from more than 4,500 companies from 80 countries. CDP also provides an independent ratings system to benchmark corporate disclosure and performance on environmental stewardship. This information is used in our ESG-analysis and investment decision-making. We are also involved in collaborative engagements organized by CDP.
CO2
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The Montreal Carbon Pledge
The Montreal Carbon Pledge is supported by the PRI and UNEP-FI.
By signing onto the Montreal Carbon Pledge we are committed to
measure and publicly disclose our carbon footprint on an annual basis.
We will publish the carbon footprint as part of the ESG score cards for
our STARS funds.
For more information on our work on climate
change see nordea.com and ri.nordea.com