01-04-2022 10:52

ESG: A potential game changer for capex

Global listed corporates in recent years have persistently been spending less than in the past. In this issue of Nordea on Your Mind, we look at one driver that could turn the trend around and potentially revive capex: sustainability.
Charging electric car

Our fourth look at the corporate capex enigma

Since 2017, the Nordea Thematic team have published three previous Nordea On Your Mind reports on corporate investments, investigating the mystery of global listed corporates persistently spending less than in the past. The analyses leave us unconvinced that this can be justified by technology, supra-normal productivity growth, or risk aversion, and we have shown that equity markets reward investment in growth. In the new report 'Capex IV - Saving the world', the team take a different look at this issue and instead consider what could potentially revive capex. One driver stands out: sustainability. It is increasingly critical for companies to show that they have a sustainable business, and global commitments to address climate change through energy transition will require substantial investments from society and from corporates.

Major global policy initiatives will power the green energy transition

Capex-to-sales ratios remain at 30-year lows for listed large corporates in North America and Europe. Irrespective of the global macro outlook, more than 190 countries have committed under the 2015 Paris Agreement to keep global warming to no more than 1.5º Celsius above pre-industrialised levels. This will require massive capital expenditure. Two reports –one by the IEA and the other by the OECD together with the UN and the World Bank – point to a need for annual spending of USD 6.9tn and USD 4tn, respectively, until 2030. While these investments will need to be made by a variety of entities, including states and supranationals, the sheer magnitude is an eye-opener – it corresponds to some 100-150% of the current annual capex of all listed companies globally.

Assigning some numbers to the potential capex needs

To gain a general idea of how much corporates will need to invest in the global energy transition and sustainability, we look at four key sectors: Energy, Utilities, Industrials and Transportation. When we compare current capex trends extrapolated from 2021-23E consensus forecasts with the needs highlighted in the IEA's World Energy Outlook 2021, we find a potential aggregate capex shortfall of USD 1.6tn until 2030. Utilities and Industrials may be investing 10% less than needed, but Energy and Transportation are far worse – investing only 40% and 60% what is needed, respectively.

Voices from corporates investing in sustainability

We interview Henrik Andersen, CEO of the world's biggest wind energy company Vestas, who outlines the merits of wind power, the challenges of permitting for wind farms, and ensuring that the company itself has a sustainable footprint and supply chain. Björn Annwall, CFO of Volvo Cars, talks to us about its strategy to be the car industry's fastest transformer to electric propulsion with a 100% electric product range by 2030, and the company's ambition to have a net zero emission footprint by 2040.

Nordea On Your Mind is the flagship publication of Nordea Investment Banking’s Thematics team, which produces research for large corporate and institutional clients. The research does not contain investment advice and typically covers topics of a strategic and long-term nature, which can affect corporate financial performance.

Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year. The publication’s themes vary widely, and many are selected from suggestions by clients. Examples of covered topics include artificial intelligence, wage inflation, M&A, e-commerce, income inequality, ESG, cybersecurity and corporate leverage.

Listen to the related podcast episode 

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Large companies have since 2016 invested far less than they used to do historically. In this podcast, Johan Trocmé and Viktor Sonebäck from Nordea Thematics talk about how the world’s nations have committed under the Paris agreement to investing in limiting global warming to save the planet, and how companies will need to invest massively both in becoming more sustainable and to pursue business opportunities from the global sustainable energy transition. ESG could become the catalyst that ends under-investment.

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Top decision makers at Nordea’s large clients across the Nordic region receive Nordea On Your Mind around eight times per year.

If you are a corporate client and want to access the full Nordea On Your Mind report, please contact viktor.soneback [at] nordea.com (Viktor Sonebäck)

Nordea On Your Mind