07-06-2022 08:47

How to invest in a fossil-free future

The interest for climate-aware investments has increased hugely during the past years, and the increasing demand has led to a broader investment offering. But it can still be fairly difficult for an investor to understand how an investment alternative marketed as fossil-free could help combat climate change.
Aerial view of the solar power plant on the top of the mountain at sunset
One of Nordea's 2025 targets is to ensure that 80% of the top 200 emitters in Nordea Asset Management’s portfolios are either aligned with the Paris Agreement or else are subject to active engagement to become aligned.

There is no unambiguous definition of what kind of company can be called fossil-free or fossil-intensive and the interpretation seems to vary from investor to another. Therefore an investor looking for climate-friendly investment alternatives should look beneath the surface.

Most “fossil-free” filters may include both the largest producers of renewable energy and large emitters with no actual and meaningful plans to transition. Instead of focusing on categorising investments simply as “fossil” or “fossil-free”, financial industry experts have prepared a more holistic approach. In this way they are able to invest in energy companies that do enough to limit global warming, and to divest from those that do too little.

To find out more about it, we have interviewed Eric Pedersen, Eric Pedersen, Head of Responsible Investments in Nordea Asset Management involved in developing climate-related analysis tools that the whole financial industry can benefit from.

We stay invested in positive change

Eric Pedersen, you and your colleagues within Nordea’s Responsible Investments team are professionals in assessing the climate impact of fund investments. You have done a huge amount of research in order to find the best approach to limiting fossil emissions. What have you concluded?

“In our opinion it is crucial to curb global warming, and therefore we also need to invest in companies that are delivering real change. This means companies that cut greenhouse gas emissions enough to help us meet the global warming target of the Paris Agreement. In recent years, we have seen several electricity utilities, for instance, making ambitious plans for phasing out the use of coal and replacing it with renewables, and this is exactly the kind of change we need to enable. At the same time we of course need to halt investments in fossil fuel companies that are not delivering emission cuts at the scale and speed that we need to limit global warming.”

“The transition to a fossil-free future is both inevitable and urgent. But it is equally important to understand that this transition is primarily about high-emitting companies fundamentally changing the way they operate, rather than ceasing to exist. Two thirds of global emissions come from fossil fuels, so the companies that are most dependent on them need to change the most. They need to change fast, and the financial industry needs to help accelerate that change, but most of this will not happen overnight. In order to ensure a structured transition period, we must take a long-term view and focus on collaboration,” Eric Pedersen explains. 

Carbon emissions need to be halved every decade in order to achieve the Paris Agreement goals. 1) Excluding negative emissions which are necessary to reach net-zero emissions. Sources: Global Carbon Budget 2019, IEA World Energy Outlook 2019.
Two thirds of global emissions come from fossil fuels, so it really is companies in the fossil fuel-dependent sectors that need to change the most.

Eric Pedersen, Head of Responsible Investments in Nordea Asset Management

“The problem of fossil emissions is not entirely black and white, either. We know that modern societies need an increasing amount of energy. In the Nordics, our need for heating during winter will not go away. Even with large improvements in energy efficiency, we know that the global demand for energy will increase by at least 20% in the next 20 years. At the same time, the amount of green energy produced today still only covers roughly 20% of the global energy need. So, we simply need to give companies some transition time to adopt and invest in modern, and sometimes quite costly, green business models and technologies. At the same time, we need to send a clear message to companies that aren’t making these investments,” says Eric Pedersen and adds:

“If we were to just exclude companies based on their present emission levels or use of fossil fuels, we would ignore their transition efforts completely and wouldn’t be able to make this distinction.”

Why invest in companies that need to change? 

“As we all know, climate change is a problem we simply need to address as soon as possible. Therefore, as an investor, it makes sense to take whatever measures you can to achieve the most with the shortest possible delay. At Nordea, we believe that the most important measure we can take to limit global warming is to bring down emissions from fossil fuels. This can only be done if we recognise that the complete elimination of fossil fuels in most countries is a decade or more away. Many of the key energy providers of tomorrow are currently in a phase-out period where they are reducing the use of fossil fuels,” Eric Pedersen emphasises. 

“Another upside in aligning investments to goals of the Paris Agreement is the fact that it is widely supported globally and signed by 197 countries. With our approach to fossil fuels, we also make sure that the assets in our funds with a sustainability focus are working for this same target,” he says.

How can this be done in practice in a trustworthy way? 

“We think it is important that the assessment is done as transparently as possible, based on carefully developed tools and indicators, and in line with independent industry standards. We use the research from the Transition Pathway Initiative (TPI) to understand if a company’s strategy helps or hinders the Paris Agreement goals. TPI is rapidly becoming the go-to corporate climate action benchmark, and their focus on future rather than past climate efforts makes their analysis a powerful tool for investors to help drive climate action,” says Eric Pedersen.

“In addition to TPI, there is a variety of climate-related analyses in the market, and understanding them requires competence, experience and time. I am very pleased to work as part of a team of award-winning professionals that have been exploring climate issues for more than a decade – that has made my work much easier.”

“Even if climate data is growing enormously, we are still lacking adequate assessment tools and processes for many industries. We continue to contribute to their development with our long experience, and hopefully the financial industry will soon have even better tools to make good climate investment decisions. Two thirds of global emissions come from fossil fuels, so it really is companies in the fossil fuel-dependent sectors that need to change the most.”


Sustainable Choice

Nordea’s Sustainable Choice funds apply special principles to investing in fossil companies. Approximately 30% of total assets managed by Nordea Asset Management are in strictly ESG-themed funds, and this proportion is rising rapidly.

Learn more about Sustainable Choice