ESG Clarity sat down with Eric Pedersen, head of responsible investment and Nordea Asset Management (Nordea AM), to discuss what makes a successful engagement, how regulations have impacted the asset management company, and the action the firm is taking to decarbonise portfolios.

Pedersen also explained why investors should be willing to engage with highly pollutant companies and how these engagements can pay off.

Engagement

Can you provide an example of a recent successful engagement either as part of Nordea or a collaborative engagement?

Currently, we are engaging with many oil and gas investee companies that we hold in Article 6 funds. Although oil and gas companies don’t have a credible strategy to align with the Paris Agreement as they’re not going to stop producing oil and gas, what they can do in the short-term is limit their emissions of methane.

Methane is a powerful greenhouse gas, estimated to be contributing to 25% of global warming. It dissipates in the atmosphere within 10-12 years, so if you can bring emissions down, it would be immediate.

Out of the 56 companies we’ve engaged with, there are nine that have joined The Oil and Gas Methane Partnership (OGMP) 2.0, two of which were pre-existing members. OGMP is the gold standard in methane measurement, reporting and target setting and is convened by the United Nations Environment Programme (UNEP) and the Environmental Defence Fund (EDF).

The first company we have on board is the Brazilian oil company, Petrobas, following on from EOG and Diamondback Energy. Nordea AM attended a conference in Houston, Texas this June where we held a workshop arranged with UNEP and EDF on methane mitigation. We had a similar workshop for Canadian companies in the autumn.

The key to successful engagement is the amount of resources you are willing to offer. This covers not only the time spent talking to the company, but also the time you spend elaborating on your asks. That is, bringing something to the table something that makes sense for you and the company.

When we want companies to follow actions specific to the strategy that we run, we prefer to be in the lead. We do this by becoming the lead investor under one of the big initiatives like Climate Action 100+, like we did with Petrobras.

At other times, we actually bring together a coalition by approaching asset owners and managers about the issues we wish to resolve. If you can get the labour and resources in place through a network, these engagements are equally as important.

You have expressed in a previous article for ESG Clarity that ‘engagement is only a credible strategy if investors are prepared to divest’. What is an example of where you have had to escalate an engagement to the point of divestment?

Nordea AM talked to JBS, a Brazilian meat producer, for a long time. The company has various issues, ranging from alleged corruption to deforestation in the Amazon to poor factory conditions in the US where it was the largest producer of chicken in the US during Covid-19. We simply weren’t getting any serious answers from them.

This company would fall in Article 6 investments, but when it comes to Article 8 and 9, we must consider if it is a ‘sustainable investment’. We need to decide if a company lives up to the standard we set, and this depends on the answers they give.

So, most divestments occur when the company refuses to engage with us.

What is your outlook on engagement strategies going into 2024?

Nordea AM has a strategy called the Climate Engagement fund, where we engage with the companies before we invest in them. We want to be able to show actual real world emissions reductions, meaning that we can’t invest in a company that is not on board with this.

So, we contact the company, and the upfront investment team and the portfolio managers hold conversations with the companies. If there’s an alignment, then we’ll invest.

Once a company is onboard, if they don’t live up to our expectations, then we’ll have to sell that company. I predict this will happen over the next year as there is a round of cleaning up the names that perhaps don’t deliver.

This speaks to the idea that you don’t have to be a large stakeholder to have an influence over a company. It is the quality of suggestions you bring which matters. We must make suggestions which will make companies listen. The skill is being able to convince the management company this is something that is in their own interest.

We’ve taken the next step. We have launched a strategy where we don’t need to keep an eye on the footprint of our portfolio at all. On purpose, we invest in the companies that are the heaviest emitters – such as cement, steel, transportation – and are committed to bring their emissions down quickly.

From a primitive ESG lens, investors will stay away from these companies because they’re heavy polluters. However, you must go deeper into the issue and try to reach an understanding with the company. If this is reached, then you put those in your portfolio, and then hopefully with ambition you get both real-world decarbonisation in the portfolio and an evaluation pickup as the companies move faster on the regulation.

So, in five years, if you have a utility that has done all the investments in wind and solar and battery applications, and another one that’s still running almost fully on coal, which one’s going to have the highest elevation? It’s an interesting thesis.

Regulation

Nordea’s engagement report states engagement is the ‘primary mechanism’ to drive Paris alignment among investee companies. How will this be affected by various upcoming EU fund labelling proposals?

On the one hand, it is a little frustrating as they’ve spent all the time on adjusting the framework to SFDR and it’s now changing.

But, on the other hand, the changes being proposed make a lot of sense. This is because they’re easier to understand for clients. They’re more aligned with the way that that distributors would frame the questions to their class.

These changes will make it clearer on what you can own and what you cannot own in a given type of strategy.

We are less affected by the upcoming fund labelling proposals. The majority of our Article 9 funds follow a personalised fossil fuel policy, so they don’t own those companies to start with. So, we don’t have to change our processes as much as others do.

What do you think of the FCA’s recent findings that engagement and stewardship efforts at many UK fund managers was lacking?

I agree with the FCA’s findings. The clients that we have on the institutional side in the UK seek us out for this especially because it is what we bring to the market.

The issue is lacking engagement and also the voting power at AGMs. There has been a misalignment between what the asset owners wanted to position the AGMs in, especially when it comes to climate and social issues, where it seems that the FCA wanted the asset owners to be more activist than they have been.