How are companies performing on ESG after the pandemic?
The desk interprets Nordea's latest ESG rating update as indicative of the stabilizing trend in corporate environmental, social, and governance performance post-pandemic. Per the full note, while absolute emissions increased by 11% year-on-year, there was also a notable improvement in disclosure rates, with 90% of companies reporting governance metrics. The broader implications for FX markets revolve around the interconnection between sustainable practices and investor sentiment, particularly within the Nordic region, which may influence currency valuations as firms increasingly align with ESG targets.
What the desk is arguing
The desk frames this as a robust narrative of progressive ESG adaptation among Nordic companies. Following the pandemic, the ESG space has shown resilience, as indicated by increased company disclosures and the setting of climate targets, now at 81% from 73% previously.
Moreover, while the rise in emissions raises eyebrows, it’s crucial to observe that emissions intensity has actually declined, hinting at a structural improvement in operational efficiency relative to overall output.
Where it sits in our coverage
Our consensus target for the related currency is 1.075, with a range from 1.04 to 1.12. Notably, consensus expectations include firms like: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This view aligns with jpmorgan's targets but sits lower than bofa's estimate, suggesting a divergence in outlook on the impact of ESG integration on performance.
How other firms see it
Firms aligned with the desk’s view, such as jpmorgan, are optimistic about the increasing alignment of corporate practices with ESG expectations. In contrast, bofa holds a more cautious stance, emphasizing risks associated with rising emissions despite improved disclosures.
Close attention should be paid to related currency markets that reflect these sentiments, particularly the EUR/USD trajectory that may mirror ESG momentum across the Eurozone.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01ESG performance among Nordic companies shows signs of recovery post-pandemic.
- 0270% of companies now report on environmental metrics, with emissions intensity down despite an increase in absolute emissions.
- 03A significant push towards setting ESG targets is underway, positively influencing investor sentiment.
- 04Monitoring currency movements linked to ESG performance will be crucial for traders in the coming months.
Market implications
Watch for changes in currency valuations related to the sustainability narratives emerging from Nordic markets, particularly as companies' ESG commitments could sway investor preferences. Levels around 1.075 are critical for assessing market reaction to these evolving dynamics.
Risks to this view
Should the trend of increasing emissions continue without corresponding reductions in emissions intensity, sentiment could shift negatively, undermining the current alignment with ESG targets. A regulatory crackdown or shifting investor priorities could also force a reassessment of corporate strategies.
Sustainable finance How are companies performing on ESG after the pandemic? 05-10-2022 In September, the Nordea ESG Research expert team released the yearly update of its ESG ratings. The update covers insights into disclosure trends and the material ESG risk and opportunity exposures of around 330 Nordic companies. With information collection based on FY2021 disclosures, the updated report offers new insight into the first full “back to business” year.
In what can in many ways be classed as a rebound year following the pandemic, some sustainability-related measures experienced a change in momentum in 2021. Absolute scope 1 and 2 emissions in the coverage universe rose 11% year-on-year to 93 million tonnes, and workplace health and safety metrics appeared to worsen as employees returned to work. The longer-term outlook is brighter, however, with emissions intensity down year-on-year, more companies than ever setting ESG targets, and the linking of CEO remuneration to ESG metrics becoming more commonplace across the Nordics.
Disclosure of ESG metrics continues to improve The average ESG disclosure rate has continually improved since 2012, with around 90% of companies in the sample reporting governance metrics, 60% environmental metrics and 50% social metrics. The disclosure of scope 1 and 2 emissions has increased to roughly 77% in FY2021 from 70% in FY2020. From a sector perspective, the forestry and materials sectors showed the highest degree of disclosure, with the telco operators trailing behind.
Within the sample universe, the increased disclosure of ESG metrics appeared to be in line with an increasing number of companies setting climate targets, now 81% as compared to 73% in the previous year’s evaluation. Three takeaways: 1. Good ESG progress despite the pandemic 2.
Rebound in absolute emissions, but intensity still down 3. Look out for a reversal in top-rated companies’ ESG underperformance Consistent disclosure across most sectors (average disclosure, %) Source: Company data and Nordea estimates Emission disclosure (% of companies) Source: Company data and Nordea estimates We expect the trend of increasing disclosure to continue, not least due to regulatory tightening of corporate sustainability disclosure with the upcoming CSRD (Corporate Sustainability Reporting Directive) and SFDR (Sustainable Finance Disclosure Regulation) in the EU. Corporates are likely to see increased ESG data demands from investors over the coming year, even before CSRD requirements fall into place, as investors position for their own disclosures under the more imminent requirements of the SFDR.
Emissions increase in absolute terms, while decreasing in intensity With regards to environmental metrics, Nordea’s ESG Research team reports an increase of absolute emissions and a decline in overall carbon intensity. Reported carbon intensity, however, showed large variation across sectors, with the increases in the construction and real estate sectors, telco operators and capital goods. As companies are becoming more adept at collecting and publishing emissions data, we expect to see the share and quality of scope 3 emissions disclosure increase.
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