Cool Growth Opportunities for Sustainable Investors

Dutch asset manager NN Investment Partners (NN IP) is known for putting sustainable investing and stewardship at the heart of its business. The company’s roots trace back almost 175 years. Building long-term relationships with clients based on a common strive for sustainable outcomes, underpinned by entrepreneurial thinking, innovation, and risk awareness, have been the main drivers of the firm’s success ever since.

Recently acquired by Goldman Sachs Asset Management, NN IP remains committed to upholding the same high sustainability standards. “We recognise NN IP’s strength in ESG integration and sustainability and believed that combining it with our offering would be of great benefit to clients, helping us to scale and accelerate growth in Europe,” shared Fadi Abuali, CEO of Goldman Sachs Asset Management International.

Building on two decades of sustainable equity investing, NN IP’s approach aims at identifying high-quality companies that offer sustainable solutions and behaviour. It sounds straightforward enough. However, finding such sustainable businesses that can stand the test of time is neither a quick nor a simple process. It means being selective and narrowing down the investable universe step by step. It also means actively looking for sustainable opportunities across value chains and in niche areas often overlooked by others.

“The future of our sustainable equity strategies is full of opportunities,” according to Pieter van Diepen, Head of NN IP’s Sustainable & Impact Analyst Team. “We invest in the companies that are developing sustainable solutions in areas such as ESG data, cybersecurity and the green energy transition for which demand is set to increase.”
NordSIP met with two of the senior investment analysts on van Diepen’s team, Milou Beunk and Dirk-Jan Dirksen, covering the areas of Smart Manufacturing and Digital Revolution, respectively, who provided some insights into a couple of such opportunities. Both cases in point clearly illustrate the benefits of integrating sustainability into the investment process, creating long-term value in financial as well as impact terms.

Heating and cooling, the smart way

First off, we talk to Milou Beunk, who is eager to tell us about the significance of heating and cooling our in-house environment in a sustainable way. She points us in the direction of some useful data supporting her thesis. According to the latest Global Status Report for Buildings and Construction, buildings account for 36 per cent of global final energy consumption and 37 per cent of energy-related CO2 emissions globally. “Reducing these emissions will be critical to limiting global warming in line with the Paris Agreement,” says Beunk. “And tackling the energy use for heating and cooling is perhaps the biggest opportunity to achieve this goal.”

That’s where air-conditioning and heat pumps come in, according to Beunk. “Heating space and water still rely heavily on direct sources of energy, such as oil and gas, unlike cooling systems that are already running mainly on electricity,” reminds the analyst. Meanwhile, the current geopolitical situation has made us all painfully aware of the vulnerability of our energy supply chains, according to her. It forces us to speed up decarbonising by, for instance, electrifying based on renewable sources and increasing the use of zero-carbon technologies.

“Heat pumps lower energy consumption through the electrification of heating, avoiding boilers and furnaces that typically burn fossil fuels and delivering improved energy efficiency,” explains Beunk. “This is a simple, mature technology, and the heat pump market is fragmented. Companies with dominance in their geography, and a strong sales network are well-positioned to succeed.”

One such company that has made it into many of NN IP’s portfolios is Daikin¹. Being the global market leader in air-conditioning and a major player in the heat-pump area is not the only reason why Beunk and her colleagues favour the Japanese company. “Daikin has a strong position in emerging markets, where penetration is rather low, hence the potential for both growth and impact is huge,” says the analyst. According to the International Energy Agency (IEA), 44 per cent of the world’s population lives in a hot climate, out of whom only about 12 per cent own an AC unit. AC ownership per cent in the United States and Japan might exceed 90 per cent, but in India, for instance, a country currently experiencing its worst heatwave ever, still less than 10 per cent own an AC unit.“Daikin has also come very far when it comes to reporting its Scope 3 emissions, something that others still struggle with,” Beunk points out.

“This makes it possible to measure the actual CO2 reduction that the company is able to accomplish over time.” Another feature that the analyst talks warmly about is Daikin’s reputation for being a true innovator. The company’s innovative solutions, such as the world’s first split and multi-split air conditioners, make it a pioneer in the strife for energy efficiency.

“Of course, we wouldn’t pick a company just based on its sustainability impact,” says Beunk. “In the case of Daikin, however, it is a win-win situation, a potentially rewarding investment both in financial and sustainability terms,” she concludes.

You can’t build firewalls in the cloud

Beunk’s colleague, Dirk-Jan Dirksen, seems just as passionate about identifying attractive opportunities and searching for sustainability leaders who offer solutions to real problems as well as financial rewards to investors. Within his area of expertise, the TMT sector, there is certainly no lack of innovative companies leading the way to a brave new world of sustainable digital solutions.

While cheering for the digital revolution that we are all witnessing today, it would be naïve to ignore the challenges that it gives rise to. “Cyberattacks are increasing in frequency and intensity,” Dirksen points out.

“At the same time, companies are more vulnerable as they shift operations into the cloud and more employees work outside the office, giving rise to the ‘zero trust’ security model,” he adds.

The demand for cybersecurity solutions has never been greater, according to Dirksen. “Global cybercrime costs are expected to grow by 15 per cent per year, reaching USD 10.5 trillion annually by 2025, up from USD 3 trillion in 2015,” he explains, quoting estimates by Cybersecurity Ventures. “Increasingly, companies realise that there is a whole army of hackers out there trying to attack their data, which is a material risk they cannot ignore. Meanwhile, stiffer regulations such as the General Data Protection Regulation in Europe are raising the reputational risks for companies that get hacked,” he adds.

So, how does one identify the right company to invest in within the fast-moving and fragmented sector of cybersecurity? “When looking at companies in this space, you need to focus on their track record and spending on research and development and their ability to attract the right talent,” says Dirksen. “The social and governance aspects of sustainability are key when analysing them.”

Dirksen gives us an example of a company that has met NN IP’s rigorous due diligence standards for both financial returns and sustainability, Palo Alto Networks². “The company has long since outgrown its legacy of building firewalls,” says the analyst. “They realised this is an old-fashioned way of protecting your data as firewalls don’t work with cloud-based solutions.” Nowadays, Palo Alto Networks is best known for its strategic approach to cybersecurity, pioneering the mantra ‘trust nothing, validate everything.’ Moving away from inherently trusting whatever is inside your security perimeter, the company urges its clients to continually authenticate, authorise and verify who and what can access their environment, granting ‘least-privilege’ access all along the way. Authorisation is based on who or what is requesting access, the context of the request and the risk level.

This innovative approach and a series of successful strategic acquisitions make Palo Alto Networks stand out among competitors in the cybersecurity space. For Dirksen, the company meets all three criteria that make it a good fit for NN IP’s portfolios: it offers sustainable solutions, champions sustainable practices, and has a sustainable competitive position in the market.

However, Dirksen keeps digging into the details true to Palo Alto Networks’ own mantra, ‘trust nothing, validate everything’. The company’s aggressive acquisition strategy has been successful, yet how is the integration of the newly acquired businesses going? And how has it affected the management compensation policy? It seems like an analyst’s job is never done, especially when he needs to consider all the various sustainability aspects of a complex investment case.

As we struggle to navigate a period of uncertainty, with climate change, the pandemic, geopolitical turmoil, and economic disruption making it challenging to forecast what the next year or two will bring, the immediate prospects of sustainable equity investments are also hard to predict. Making an effort to identify and thoroughly analyse the sustainable solutions of tomorrow and the companies that have the capacity to provide them feels more important than ever.

<sup>1. For illustration purposes only. Company name, explanation and arguments are given as an example and do not represent any recommendation to buy, hold or sell the stock, or in any way invest in these companies. The security may be/have been removed from portfolio at any time without any pre-notice↩
2. For illustration purposes only. Company name, explanation and arguments are given as an example and do not represent any recommendation to buy, hold or sell the stock, or in any way invest in these companies. The security may be/have been removed from portfolio at any time without any pre-notice↩</sup>