As the world races towards a greener and more sustainable future, the urgent shift from fossil fuels to renewable energy has shot to the top of the agenda for governments, investors and businesses alike.

Encouragingly, as our battle against climate change picks up speed, we are witnessing the formation of new ecosystems and the rise of innovative technologies. However, despite this progress, many companies – particularly today’s heavy polluters – remain laggards in the green transition and continue to be significant contributors to the global climate crisis.

With growing environmental awareness in recent years, we have seen a marked investor exodus from heavy-emitting companies. The rise of ESG has been a major driver in this flight of capital, as asset managers increasingly seek to showcase a commitment to sustainability.

At Nordea Asset Management (NAM), we have been on the right side of change in terms of embracing sustainability and supporting real-world decarbonisation. As a pioneer of environmentally focused investing, 15 somewhat years ago, our success was in identifying companies offering innovative climate-forward solutions.

Fast forward to today, we need to take our climate commitment a step further and actively target real-world emissions change. It’s not the Climate Winners that need to change, it’s the heavy-emitting companies that have a crucial role in the transition to a more sustainable world – who hold the key to significant carbon reduction. We can leverage our experience of what makes a Climate Winner today, from both a Sustainable Business and Portfolio Return generation, to identify, guide and invest in the Real-World Decarbonisers of tomorrow.

Enacting real-world change

In our view, asset managers can deliver portfolios aligned to net-zero in two ways. The first is to build a portfolio of positions in low-emitting companies, where high-emitters are simply excluded. Sure, this can send a powerful message to many major emitters, but there will always be available capital for these companies if the return potential is strong enough. But, in our view, there is little to be gained by holding a clean portfolio on a dirty planet.

The second option is to invest in companies with credible decarbonisation plans – entities seeking to achieve true real-world change. As time progresses, this portfolio’s emissions will eventually meet net-zero goals as the companies continually improve their carbon footprints.

Like it or not, today’s heavy emitters will play a crucial role in our transition to a more sustainable future, so it is vital for investors to engage with these companies. Of course, there will always be companies to avoid – essentially those requiring a complete business model reinvention – but there is a sizable universe of companies that need the right investor.

Investing in relative high emitters during the early transition phase is the best method of meeting the real decarbonisation objective of the Glasgow Financial Alliance for Net Zero. Importantly, investors must understand that even though a portfolio of this kind is extremely unlikely to witness an immediate carbon footprint decline, this approach maximises the potential for a real long-term emissions reduction. Through engagement, investors will also get a better sense of the companies that are unable, or unwilling, to transition.

Five primary sustainability pillars

In order to enact meaningful change through corporate engagement, we believe investors are best served by focusing on five primary sustainability factors. Unsurprisingly, the first key consideration is greenhouse gas emissions – the leading driver of global warming. If a large carbon emitter does not align its emissions trajectory to a sub-2°C scenario, it will continue to be highly exposed to escalating regulatory, environmental compliance, and reputational risks – which will likely increase its costs and risk profile.

Next, as economic production requires substantial energy inputs, energy management is paramount for successful climate action. With the rise in non-renewable energy prices and the implementation of carbon pricing, climate has become financially material – specifically in energy-intensive sectors like manufacturing. Through engagement, it is possible to help companies improve energy efficiency and energy resource diversification. This can mitigate exposure to volatile energy costs, reduce greenhouse gas emissions, and help improve costs and the reliability of the overall energy supply.

Water and waste management is another critical issue. The world’s limited resources cannot meet growing demand, which creates long-term uncertainty for companies highly dependent on natural assets. Water-related capital investments and water-efficiency improvements can reduce the risk of experiencing higher operational costs or shortages. By driving the adoption of circular models, we can help face the growing scarcity of natural resources and the increasingly visible environmental costs of resource production and waste generation.

Similarly, companies need guidance on natural resource management. This includes using recycled and renewable materials, reducing the use of key supplies, and maximising resource efficiency in manufacturing. Research and development investment in substitute materials is essential if we are going to stop harming the health of ecosystems through overexploitation.

Finally, corporate management teams must be willing to reposition businesses to be resilient to the transition and physical risks of climate change. In our view, sustainable long-term value creation will be almost impossible if corporates are not responsive to the permanent migration to a low-carbon and climate-constrained economy.

Industries primed for transformation

There will always be high-emitting industries that climate-focused investors could not invest in, such as coal mining. There is no way to make coal an environmentally friendly solution and there are cleaner, greener alternatives. However, there are other high-emitting industries we simply cannot do without. An example of this is cement, an essential material within our modern economy. We struggle to see a scenario where cement – with its low cost and durable characteristics – can be replaced at scale. Even in a future low-carbon economy, this material will retain its key role.

From a fundamental perspective, the cement industry has witnessed a significant transformation over the past decade. After years of focusing on volume growth and expanding market footprints, the global financial crisis of 2008-09 permanently altered the landscape for the industry, as a full recovery in demand never materialised. Faced with poor returns, the cement industry began to consolidate midway through the 2010s. This marked the start of market discipline, reflected in consistent pricing power and a value-over-volume strategy for key cement corporates.

We expect that over the next decade there will be another phase of evolution for the industry, as cement companies tackle the impact of carbon costs and the challenges of decarbonisation. This will transform the fundamentals of the industry again – leading to structurally lower volumes, steepening cost curves, even more localised markets, and more capacity rationalisation.

We expect first-mover advantages for cement companies able to decarbonise the fastest Within the cement industry, we continue to unearth compelling investment opportunities in today’s decarbonisation leaders, alongside entities with the potential to show more ambition and credibility in net-zero strategies.

Cement is only one example of an industry that is poised for this change – recall our earlier statement “there is little to be gained by holding a clean portfolio on a dirty planet” now imagine a portfolio with companies that are willing to change, the potential for significant decarbonisation and will have a sustainable competitive advantage that we believe will lead to improved justified company value.