By Karl Knutsson, Summer Intern at Equity Research Sweden.
The main project we have been assigned to this summer has been what we call “the ESG project”. The project involves data collection for report, which the analysts in Nordea Research will write.
ESG, which stands for Environmental, Social and Governance, is an area of increasing importance for Nordea’s customers, and hence for Nordea. It boils down to sustainability, and companies with strong ESG focus and performance are generally preferred by investors as sustainability is a sound, long-term strategy. This project therefore aims to map how the companies covered by Nordea perform in this area.
Poor ESG performance will cost you
Nordea’s focus on ESG largely stems from increased interest from clients. Every week, the research department meets this demand when talking to our customers. Sustainability also goes hand-in-hand with Nordea’s values. It is all about finding an investment strategy that is sustainable in the long-run. Poor ESG performance catches up on you, and will cost you – whereas companies with a strong ESG profile can profit from it.
While some may reduce emissions out of good, others realise that focus on sustainability is not only here to stay but will intensify. Keeping that in mind, ESG investments today create value and prevent value destruction in the future. The simplest way to view ESG is that today’s opportunities could be future risks. Look at the car industry – would you want to invest in companies that stick by diesel cars for as long as possible, or do you look for companies that invest in electric cars early?
Sustainability is also about risk mitigation
While focusing on ESG metrics can be an opportunity now, it could also be about managing future risks. A small side-project we had was to find potential future regulations or actions relating to ESG. What kind of legislation could the EU pass in the coming years to combat water stress, for instance.
It goes without saying that companies that are environmentally conscious today would be better prepared to handle things like a water tax or an emissions trading scheme in the future. In this sense, sustainability is also about risk mitigation. Several companies have already paid the price for sticking to their old ways and not thinking about 50 years from now. By creating ratings based on data like environmental impact and diversity, you can better identify a company’s long-term prospects and help clients create more value.
Digging into hundreds of reports
Currently, Nordea uses MSCI’s (Morgan Stanley Capital International) ESG ratings, but without access to the raw data, not much analysis can be done. So now we have been collecting our own raw data, which will soon be put into a report of its own. We have been digging in hundreds of annual and sustainability reports to find out how Nordic companies have progressed on ESG metrics in the past decade. What the report sets out to do is find how the traditional financial data could be affected by sustainability figures. Company X releases more CO2 relative to sales than company Y – what does this mean?
What is interesting is that the result largely depends on the data we find. The report’s content is not set in stone. The data will initially be compiled into sectors to provide a simple overview of what comparisons can be made. The end goal is to find a way to insert this assortment of sustainability metrics into traditional DCF valuations (Discounted Cash flow), and see what effect it has. Basically, it is very similar to the traditional equity research where you compare the data with peers, analyse trends, and so forth, only another dimension is added.
Working on this has been very rewarding, as it is yet another example of something we did not expect to be doing in Equity Research. At first, we all thought that we would be number-crunching all summer, but instead we have seen that research is much more nuanced. Analysts constantly have to study their sectors, and this can involve things like future regulations, climate-crises and consumer trends.
Coming up is a blog post from Emil covering another subject, so stay tuned.
You could be one of the next interns
Do you have an interest for financial markets and investment banking? We are now looking for interns during spring and summer 2019 in Stockholm. Don’t hesitate, deadline is closing in – apply now.
Are you interested in the latest ESG movements? We got that covered in our monthly flagship publication, Nordea On Your Mind, with the title “ESG: Money Talks“.
If you haven’t read about Karl’s and his fellow-interns’ summer at Nordea Markets, you could start here:
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