ESG in volatile markets

ESG, has become a hot trend, but can it weather the current market storms?

ESG has gone mainstream in recent years, with millions flowing into responsible investment funds. But markets have taken a big hit this year and many are asking if ESG investment really is here to stay. At Nordea Asset Management (NAM), we would say it is. But we have been investing responsibly for more than three decades. Are we just biased? We don’t think so.

Recent changes to MiFID II now require financial advisers to ask clients about their sustainability preferences—whatever the macro scenario. This is just one reason to prepare yourself for client conversations about ESG. However, there are other, much more powerful reasons too.

The reality of ESG factors’ impact on portfolios is widely recognized

It is now accepted by most that ESG-related risks are often financially, as well as environmentally and/or socially material. In an historic first, a new UN climate agreement aims to pay developing countries for loss and damage caused by global warming. Negotiators from nearly 200 countries, including the US, have agreed to establish a fund to help poor vulnerable countries cope with climate disasters made worse by the pollution spewed by wealthy nations that is harming the planet. This new mindset will surely have an impact on the whole value chain, including investment portfolios.

Investors finding ways to stay true to ESG commitments and realize returns in the process

For example, the Ontario Teachers’ Pension Plan launched a “high carbon transition” initiative that will see one of the country’s largest fund managers, with $242-billion in assets, take significant stakes in businesses with outsized GHG emissions, then back strategies to reduce their carbon output. Sectors with vast GHG emissions include transportation, electricity production, heavy industry and agriculture. Ontario Teachers’ Pension Plan plans to invest $5-billion in some of the world’s biggest greenhouse gas emitters as part of a strategy to boost returns while tackling climate change.

Clients still want ESG solutions

A glance at any media channel will show you that people are increasingly becoming more informed and more engaged—which is leading them to ask for change. People are willing to march and protest. They are also willing to move their money to reflect their values. Last year, NAM conducted a survey with 1,200 retail investors across Europe[1]. More than three-quarters of respondents believed investment decisions could make a difference in creating a more sustainable society and 71% planned to increase their ESG allocation in the coming 12 months. Clients who make sustainable investments tend to have stronger relationships with their advisers and their money tends to be “stickier”. Isn’t that what we all want?

New regulations will help you find the products clients need

The full set of ESG regulation (including the EU Taxonomy, SFDR and changes to MiFID II), once fully delivered, will make it easier to compare ESG strategies and select the right solutions for clients, but there’s undoubtedly a steep learning curve for advisers who want to prepare themselves for these conversations. Are you comfortable with ESG terminology? And can you navigate the regulation sufficiently to know how to find the product you need?

Nordea offers a wide range of MiFID-eligible solutions

NAM’s long history of responsible investing has enabled us to embrace the new regulation. Today, more than 65% of our assets are MiFID-eligible Article 8 and 9 products. Our award-winning ESG STARS strategies[2] which offer full ESG integration aim to beat the benchmark[3] not in spite of their ESG approach, but because of it. With a wide range of regional and asset class strategies, the ESG STARS offer a full set of building blocks that can be used to create sustainable portfolios. NAM’s sustainability-themed strategies bring more targeted solutions to specific client interests.

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[1] Source: Nordea Investment Funds S.A.

[2] Winner, Best Sustainable Fund Range, Investment Week Sustainable Investment Awards 2022

[3] There can be no warranty that an investment objective, targeted returns and results of an investment structure is achieved. The value of your investment can go up and down, and you could lose some or all of your invested money.