Finance sector must set the base for green transition

Finance sector must set the base for green transition

Nikolaj Kosakewitsch, President, Nasdaq Copenhagen, talks about the financial sector’s adoption of digital technologies and efforts made by the stock exchange and public companies to ensure the green transition becomes a reality.


What major trends are we seeing in Denmark and the Nordic region’s stock exchanges?

We are the region with the biggest initial public offering surge across all of Europe. Obviously, we are nowhere near the U.S. as it is a much bigger economy. In Europe  we have made 174 initial public offerings in 2021, which surpasses any other exchange group in Europe. This is largely due to our inherent digital capabilities. People do all banking such as personal finances, taxes and shopping online. We are not afraid of receiving information digitally and we are very much used to doing administrative tasks with the government online. When the pool of customers and investors looking to the equity markets suddenly explodes like it has, it creates an exceptional foundation for companies to raise capital on the exchange.

The sheer number of initial public offerings has caught us by surprise. This was brought on by the huge surge in initial public offerings in Sweden, tracing all the way back from 2014 and 2015. It takes a bit of time for the local ecosystem or local capital market and all stakeholders to embrace this new source of capital, namely equity markets for small and medium-sized enterprises. However, once it caught on there has been a nonstop growing trend. To date this year, we have had 26 initial public offerings, 22 on our growth market and four on our main market. The pipeline looks very strong. There is a kind of a Pygmalion effect; once advisors or companies looking to raise capital see that other similar companies can achieve it on the exchange, they want to try it out as well. It is no longer just normal startups that want to sell their company for a quick dollar and retire on a hammock on a beach. These are founder-led companies that are passionate about the purpose of the company, and they want to drive these entities for the long run. We feel that being listed on an actual exchange checks a lot of boxes in that department. You can raise capital and be diluted while remaining in control and driving the company into the next millennium.


What benefits do companies gain by being publicly listed?

Being a listed company makes companies better. Once you are a listed company, you can use that as marketing toward employees to hold on to talent. You can also use it towards customers, because you become a lot more public. Additionally, you can use it toward vendors because it is perceived as a validation of a solid business case. Naturally, the media has started covering the whole startup environment. We feel that we are in a good place when the media is writing about startups, entrepreneurship, innovation and the importance of raising capital on the exchange on a continuous basis. However, many companies are in their infancy, and the media should not expect all newly listed companies to be the next Facebook. We spend a lot of time explaining that it is a riskier segment to invest in.


How has the COVID-19 pandemic affected Denmark’s equity market?

If we look back to pre-COVID levels, market capitalization is up by 50 percent. The composition of the main index and of the entire exchange is made up of mainly defensive industries, such as pharmaceuticals, medical technology, food, utilities and biotechnology. These are goods and services that will always be demanded, no matter what happens with the pandemic or global supply market. We do not have a lot of mining, mechanical engineering or cyclical exposure listed with us. Having the majority of the market cap listed as defensive by nature meant that when the COVID-19 pandemic hit, we did not see a big drop in total market capitalization versus more cyclical indices around Europe. For instance, Germany has a lot of engineering companies, and a significant automotive industry and Sweden has significant mechanical engineering and machinery segments. We not only did not suffer a drop; we saw a rapid turnaround. From the beginning of 2020, we saw a 50 percent increase, which we owe to our listed companies.
If we look at activity on the exchange, we have seen a huge boom in retail activity. Many retail investors were forced to work from home. Private individuals who had never taken care of their personal finances suddenly began investing in stocks. We saw this trend in the U.S. and the same in the Nordic region, particularly Denmark. The best key performance indicator for this was an explosion in new accounts and retail customers that have never traded stocks with our member local banks and online retailers. As an exchange operator, this is something we are very excited about as it activates a lot of money standing on deposits with zero or even negative interest rates; it is important for us to broaden the scope of participants looking into investing in equities. It is advantageous for already listed companies to benefit from a more diverse group on their shareholder lists, and it is highly advantageous for newly listed companies or companies on the verge of doing an initial public offering. These entities need to be able to attract both active investors and new investors.


What has Nasdaq Copenhagen done to promote financial knowhow in the European market?

I feel a great responsibility, both as a capitalist and as an exchange president, to increase financial literacy. Retail investors need the necessary tools and competencies to be responsibly active in equity markets. While they serve as the cornerstones of capital markets, it is our responsibility—alongside banks and the government—to provide them with an attractive platform, simple access, attractive taxation and access to the right information to make informed decisions. Nasdaq’s recent launch of our pan-European financial literacy initiative speaks to just that. The initiative aims to promote and support the expansion of financial literacy and inclusion and investor protection. These efforts give private investors the foundations for future prosperity. Together with a group of partners we want to expand financial knowledge and help drive change. We aim to improve financial understanding and skills that help investors and savers make informed financial decisions and build awareness on both financial risks and opportunities that come along with their investment journeys.


How advanced is Denmark in terms of digitizing its services?

We are a country of early adopters when it comes to digitalization. At the end of January 2021, we had 5.7 million internet users in Denmark out of less than six million inhabitants. This is an astonishing figure. It means that even members of the older generation that are not digital natives are accustomed to doing most of their transactions online across the board, from banking to shopping. Internet penetration is close to 98 percent. Denmark came out atop the 27 European Union member states in the European Commission 2021 edition of the digital economy as being the most digitally enabled. We use modern payments and have a fully digitized governmental infrastructure. It is no surprise that COVID further accelerated this. People could not go grocery shopping; they were ultimately forced to do everything online.


What kind of new digital technologies is Nasdaq Copenhagen leveraging to expand and solidify its services?

Most of what we are doing is related to technology. People know Nasdaq as an exchange operator, but we do so much more than that. We have a listing business, a trading business, an investment intelligence business and a market technology business. The market technology business is something that is growing a lot. In this area we supply global capital markets with infrastructure technology to run their market, meaning other exchange groups, central securities depositories and central counterparties. We are also focusing on everything related to anti-financial crime and make serious investments in this area. Over the next three to four years, we will try to make a splash through our insider financial crime capabilities in Europe. We strongly feel that our purpose around championing inclusive growth and prosperity fits well with the battle against financial crime. We are trying to help our customers manage these risks and make the world a better place. Around six months ago we acquired a company based in Newfoundland, Canada, called Verafin, which is world class within the anti-financial crime sector. We are going to help our customers battle financial crime within the banking and credit institute industries. Customers are looking to us for support in these areas.


Is Nasdaq Copenhagen considering entering the cryptocurrency market?

Although Denmark is an early adopter country in terms of digital technologies, cryptocurrencies are not so much the case. Nasdaq has four listed products in the exchange-traded product space in Europe, which are based on Bitcoin and Ethereum. We also recently invited another issuer of exchange-traded notes called 21Shares with the same underlying cryptocurrency concept. That is all we have in Europe in the crypto space. However, as an exchange operator and a technology innovator, we look at cryptocurrencies all the time. We provide matching technology to digital asset platforms and surveillance software. It is currently too soon for us to say whether we will invest in technologies or expand our marketplace capabilities. We come from the regulated space, and cryptocurrencies are not currently regulated. We either need to figure out how to position ourselves in an unregulated space or wait to see whether cryptocurrencies will be regulated. If cryptos are regulated, we will be there. We prefer to keep things in the regulated space. We are in constant dialogue with our local regulators in Denmark, Sweden and Finland to try to align our risk appetite with theirs and keep attuned to demand.


How are financial markets helping to promote sustainability?

After COP26, governments, expert organizations and private companies have a joint obligation to take action against climate change. Former Bank of England Governor Mark Carney spoke at COP26 saying that we need to fix the plumbing, and financial markets can play a huge role in this journey. Financial markets have a unique ability to connect investors looking to make sustainable choices with companies and organizations looking to raise capital to support sustainability efforts. Policy alone is not going to solve the climate crisis; we need public markets to help the transition. Financial institutions increasing spend to $140 trillion towards green sources from 450 different financial institutions is a step in the right direction. Ensuring that financial companies with big balance sheets and big lending books will further accelerate their loans toward green rather than gray, brown or black investments is a tremendously positive checkmark. Banks will set up on sustainable bonds going forward.


What platforms has Nasdaq Copenhagen put in place to support the green transition?

In Europe, we launched a service called the Nasdaq Sustainable Bond Network, which gives investors insights into global sustainable bonds. Currently, there are approximately 7,000 global sustainable bonds but no hub for collecting information about their bond issuance. The Nasdaq Sustainable Bond Network gives global investors and issuers insight into the world of sustainable bonds. Our sustainable bond market has exploded over the last 24 months. Both listed and unlisted companies go to debt capital markets to raise sustainable bonds. There will be a lot of emphasis in Copenhagen on the sustainable bond market going forward. We have seen green, pink, blue and even COVID-19 bonds being issued. This trend will continue because both listed and unlisted companies that have gone through a green transition and those that want to go through a green transition need debt financing and equity financing. Sometimes investors are willing to give new equity to companies that want to go on a green transition and sometimes they do not. We are currently trying to solve how an inherently black company can begin a green transition with their current set of shareholders. Additionally, we have launched a product called the Nasdaq ESG Footprint, which allows investors to look at their portfolio from a sustainability perspective and see whether they are scoring well or not. It also provides them with insights on how they can improve their sustainability score. We will continue to drive the rollout of environmental, social and corporate governance offerings in the data space.

We invested in a company called and we will continue to further commercialize our Puro platform. Additionally, we created a partnership with a non-profit organization called AllBright to help us educate our listed companies when it comes to diversity. We also have our Nasdaq Green Equity Designation. We are going to do a lot more when it comes to green equity going forward.

The markets in which we operate are at the center of the transition to create a more sustainable society. Almost all new companies that are entering initial public offerings are thinking about sustainability and how they fit into the global ecosystem; companies are now looking at making money for shareholders but also contribute to making the world a better place. Being environmental, social and corporate governance compliant is not only a license to operate, rather it is what every company needs to think about when they communicate with their internal and external stakeholders. Listed companies are fiercely powerful in the global economy and need to be at the forefront of this agenda. As an exchange operator and as a sustainable bond market platform, we aim to help both listed and unlisted companies on this journey.


Why has Denmark been so successful in growing its economy despite the COVID-19 pandemic?

We are in a very good position in terms of financial literacy, but we are still not where we want to be. Equity culture is high in the Nordic region. In Denmark it is growing faster than it is in Sweden because they are already ahead of us, which is why we are seeing such a success on the initial public offering front. Although we are a relatively small economy, we are a country driven by innovation and entrepreneurship. There are many ways to raise capital for growth companies or entrepreneurs, whether it be through high-net-worth individual networks or venture capital and private equity. The equity market seems to have been adopted as a viable source of financing for growth.

Denmark has a thriving diabetes company like Novo Nordisk. Ørsted was voted the most sustainable company in the world by Corporate Knights in both 2020 and 2021. We have world-class food ingredients companies that are set to make smart food available to the global community. Denmark will continue to excel by being at the forefront of sustainable solutions, both within the food ingredients and renewable energy spaces. We have Vestas Wind Systems, which is one of the largest providers of wind turbines, and a lot of renewable energy capabilities coming out of our Technical University of Denmark. The institution has a vast faculty within renewable energy and renewable technologies and many emerging companies will come from this network.

If you look at foreign bank participation on the actual exchange in Denmark, we are at a very high level. A total of 79 percent of all transactions on the exchange are from foreign banks or foreign members. Most Nordic banks have full Nordic coverage, meaning it might be a Swedish bank, but it will have coverage in Denmark and be a member of the Danish exchange. The number of transactions from the international community has been growing for many years. We will see a bit of a continued plateau at around 80 percent participation due to the defensive composition of our index.
We are on the brink of something big when it comes to the global economy. We are seeing inflationary pressure because of disruptions in the global supply chain and interest rates rise. We have started seeing a rotation into more cyclical companies—not only technology entities but also more traditional cyclical companies—despite high-growth companies tending to be weighed down by interest rate hikes. Banks are being favored now among investors, and that trend is likely to continue. From a European perspective, we might not have impressive growth, but we have inflationary pressure. Growth in Denmark’s economy is at a relatively high level, exceeding 3 percent and likely to continue to grow by more than 3 percent. We have prominent international exposure. Our listed companies do less than about 5 percent of their business in Denmark. The rest of the revenue comes from abroad. Because we have large companies with strong competitive advantages in the global marketplace, we are on a good path to continue to outgrow the rest of the European Union.