ESG ratings update shows continued progress for Nordic companies

Each year, our ESG Research team updates its ESG ratings for the approximately 300 companies covered by Equity Research at Nordea. In addition to upgrades and downgrades for specific companies, the update provides a picture of how Nordic companies’ ESG efforts have progressed during the past financial year. So how are Nordic companies performing when it comes to sustainability?

Progress continues across most areas, although momentum has slowed down somewhat compared to previous years, says Marco Kisic, Head of ESG Research.

Based on data from 2023, 80% of companies in our coverage universe have both climate and other ESG targets, and 40% now have CEO pay linked to those targets – up from 29% in 2022. 

Better environmental footprints

On environmental metrics, absolute scope 1 and 2 emissions came down 4%, in line with previous years. But the momentum in reducing emissions intensity (emissions/revenues) slowed down to -5%, compared to the -13% compounded annual growth rate seen in 2018-22, and the -7% needed to meet the Paris Agreement targets. 

Kisic sees the trend as temporary: “We’ve seen many companies where this was driven by difficult market conditions reducing the efficiency of industrial processes. We expect momentum to accelerate again in the coming years, as technology shifts materialise in some key sectors,” he says. 

He adds that delivery on other environmental metrics remains strong, for example, with 60% of energy now renewable (compared to 56% in 2022), less water used, less waste produced and energy intensity improving.

Gender diversity on Nordic boards hits all-time high

We saw continued improvement on social and governance metrics in 2023. Gender diversity on Nordic boards reached an all-time high, with almost 40% of directors being women – the level legally required in Norway. 

Board independence is also at record highs, at 80% compared to 78% in 2022. Workplace fatalities continue to trend down, and sickness rates and staff turnover have normalised from their 2022 peaks. 

On the other hand, gender diversity among staff and management remains flat compared to the past year, at 33% and 25% respectively. 

Growing focus on ‘ESG improvers’

The ESG Team also updated the back-testing of its ESG ratings, looking at companies’ share price performance in 2018-23 among companies with an ESG rating. 

P/E (x) of top-ESG-rated and bottom-ESG-rated companies in our universe

After years of strong outperformance, better-rated-ESG companies underperformed worse-rated names in 2021-23. This phase of underperformance appears to have come to an end, with neutral returns so far in 2024. What’s more, top-rated ESG companies retain a substantial valuation premium compared to bottom-rated companies (around +6-7x P/E). That’s encouraging for so-called “ESG improvers” – companies on the right track when it comes to sustainability and positioned to benefit from earning a higher ESG rating.

“We see a growing interest in ESG improvers among investors, also pushed by the new investment product labelling systems in the EU and the UK,” says Kisic, who also sees a new period of outperformance ahead of us:

“We think the combination of EU policies starting to bite in 2025-26, plus the normalisation of interest rates, should provide a positive backdrop for ESG names.”