Sustainability as a growth driver

How can companies use sustainability to grow their business and achieve a competitive advantage? That is a focal point when Danske Bank’s Swedish small cap fund engages with smaller Swedish companies, where sustainability plays a key role for their business potential – and our return potential as investors.

The so-called small cap segment of the Swedish stock market consists of smaller companies in terms of market capitalization. Their activities span widely from transportation to medical technology and from real estate to high-tech and computer games development.

“The common denominator for smaller Swedish companies is their general focus on sustainability, but during the last couple of years, their focus on leveraging sustainability as a business driver in order to capitalise on it, has increased,” says Petter Löfqvist, Senior Portfolio Manager and responsible for Danske Bank’s Swedish small cap fund. He continues: “Obviously, large, global companies have a longer track record in working with sustainability from a business perspective compared to the smaller companies. However, across the board they are all raising the bar and looking to gain a competitive advantage by embedding sustainability into their business model.”

Obviously, large, global companies have a longer track record in working with sustainability from a business perspective compared to the smaller companies. However, across the board they are all raising the bar and looking to gain a competitive advantage by embedding sustainability into their business model.
Petter Löfqvist

The small cap fund consists of 43 companies, and Petter Löfqvist and his colleague Joel Backesten, regularly discuss with the companies how they can grow their bottom line by leveraging sustainability.

Sustainability should be embedded in business development

Petter Löfqvist and Joel Backesten are looking for the future winners that can deliver competitive returns to Danske Bank’s customers. In this quest, they see sustainability as a crucial part of the recipe to become a successful company.

“Companies that fully integrate sustainability into their businesses can to a greater extent use it as a business enabler and be better positioned than competitors to create growth and development. Smaller companies typically have a more focused business model and are more agile than larger companies, which enables them to adjust products and services faster or launch new ones that live up to the rising sustainability requirements from governments as well as the growing demand from consumers for green solutions,” says Joel Backesten, Portfolio Manager.

Green transformation putting new demands on the transport sector

The transportation sector plays a key role in the transition to a low-carbon society, with electrification and biofuels gaining ground as a means of reducing the sector’s carbon emission impact. Swedish firm Nobina is the largest operator of public bus transportation in the Nordics, and it has a clear strategy to increase energy efficiency and transition from diesel to biogas and electricity. The company has increased its share of green energy in recent years, and in 2018 some 81% of the buses’ energy consumption came from renewable energy. Nobina’s initiatives included putting 19 electrically driven buses into service in Landskrona in 2018 and they expected to have 44 electric buses in Oslo in 2019. At the end of 2019, they expected to operate a total of 147 electric buses.

“Nobina sees the transition to a green economy as a business opportunity and a means to strengthen its market position. Many cities are already demanding that buses only run on green energy, and we expect that more cities will make similar or stricter contractual demands for bus transport in the future. That is why it is important that Nobina future-proofs its buses at an early stage, and we discuss this regularly with Nobina,” says Petter Löfqvist.

Petter and Joel have for instance advocated that Nobina improved the level of transparency and the communication of their climate and environmental impacts and how that benefit Nobina’s long-term growth as well as society as a whole. As a result, Nobina now discloses e.g. their net carbon emissions per passenger and reduction in air pollution.

Nobina’s work with sustainability is not only of importance to Danske Bank’s small cap equity team but also to the corporate bond team. In 2019, Danske Bank’s corporate bond team was one of the investors in Nobina’s green bond issue of SEK 500 million. That was the first time a green bond was used to support the green transformation of public transport in the Nordics, with proceeds used to finance e.g.more fossil-free and electric Nobina buses.

Before investing in Nobina, The Danish-based corporate bond team discussed Nobina’s financial and sustainability perspectives with Joel Backesten and Petter Löfqvist to leverage their deep understanding of the company. It is an example of how Danske Bank’s investment teams collaborate and share company insights with each other in order to make the best possible investment decision to the benefit of Danske Bank’s customers.

“There was considerable and broad interest in investing in the green bond, and that resulted in lower loan costs for Nobina, which can benefit our potential return as shareholders. The level of demand shows that the financial markets is supportive of Nobina’s approach to fusing climate and profit, and that is one of the company’s great strengths," says Joel Backesten.

Energy-saving balconies have growth potential

Another example is Swedish-based Balco, which is one of the Nordic market leaders in glazed balconies and also growing in the northern European markets. The company’s glazed balconies have a lifespan that is up to five times longer than traditional concrete balconies, and they have lower maintenance costs. In addition, Balco has a balcony solution where the building’s entire facade is built together with the balcony, which gives significant savings of up to 15% on the apartment’s energy consumption.

Companies that fully integrate sustainability into their businesses can to a greater extent use it as a business enabler and be better positioned than competitors to create growth and development.
Joel Backesten

“We see that Balco’s sustainability focus gives the company a potential competitive advantage and a good chance to increase market share in the growing northern European market for installing new balconies and replacing old ones,” explains Joel Backesten.

In the dialogue with Balco, Joel Backesten and Petter Löfqvist have emphasised that a lifecycle analysis of the balconies could be a good tool to further their sales and earnings. The longer lifetime of Balco’s balconies compared to concrete balconies means that a lifecycle analysis would make the sustainability and cost benefits of Balco’s balconies more transparent and tangible to potential new customers.

The dialogue is constructive on Balco’s future prospects and development options, and the company is in the process of developing a method for lifecycle analysis. Balco views dialogue with investors as an important way to gain input and new ideas for the development and release of business potential.

”It is very important to discuss the different ways that we raise the bar in terms of sustainability, and the ongoing dialogue with Danske Bank’s investment team carries weight in our roadmap to capitalize on sustainability. We get valuable insight into how the team perceives sustainability and which aspects are important to them as investors,” says Kenneth Lundahl, Balco’s CEO. Petter and Joel will continue their dialogue with Balco to support its work with sustainable balconies and its expansion into new markets.

This article is also included in our report Active Ownership Stories 2019.
Read the full report here

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