Figure 7: Highlights 2020
Our approach to sustainable investment
At Kempen we have spent years refining our responsible and sustainable investment philosophy and processes to help our clients preserve and grow assets that yield a real economic return alongside a positive societal and environmental impact.
We organise our responsible and sustainable investment efforts across four pillars:
1. Exclusion and avoidance
We believe that, in most cases, sustained and informed engagement is the best way to improve a company. However, there are several instances when Kempen directly excludes or avoids companies, including firms involved in the production of controversial weapons or those where engagement efforts have failed. In 2020 we committed to exclude companies relating to coal and tar sands across all investment strategies within two years. Full details of the sectors and companies on our exclusion and avoidance lists can be found here.
2. ESG integration
We believe ESG factors are fundamental to understanding the true value of a company or other investable entity, and what material risks and opportunities it faces over the long term. ESG is deeply integrated into the processes of all our portfolio managers and fiduciary advisors and applied across asset classes. In 2020 we have continued to deepen our ESG integration by improving the ESG data including developing a shared understanding across the Group on how different teams can judge the sustainability of each company. Full details of our approach to ESG integration can be found here.
For examples on ESG integration in this report, please see the section on Responding to Covid-19, Meeting the climate challenge, or Aligning to the SDGs.
3. Active ownership
We believe that using our influence to encourage positive strategic, financial, environmental, social, or governance changes at companies is part of being responsible stewards of our clients’ capital. This includes direct engagement with companies, engagement as part of a collaboration and exercising our right to vote at shareholder meetings. In 2020 we engaged with 116 companies directly and 206 companies collaboratively, achieving over a hundred engagement milestones in direct engagements. The outcomes of our engagement also feed into our ESG integration processes, helping mitigate portfolio risk and generating alpha. Full details of our approach to active ownership can be found here.
For examples on Active ownership in this report, please see the section on Responding to Covid-19, or Meeting the climate challenge
4. Positive impact
We believe that where possible, we should invest in companies whose growth is driven by generating positive real world outcomes, such as contributing to achieving the SDGs. In 2020 we selected a new data provider to track and report coherent, quality metrics on the contributions of some of our equity portfolios to SDGs for the first time. In addition we continue to grow our Global Impact Pool which explicitly invests in companies that also seek tangible social and environmental outcomes next to financial return.
The Sustainability Spectrum
In order to foster a shared understanding of sustainability across the whole of our business we have also developed our Sustainability Spectrum in 2019. The Spectrum, introduced last year, helps all stakeholders to define whether a financial product or service is one that aims only to ‘avoid harm’ or whether it is more ambitious in its sustainability goals.
Figure 9: Sustainability scores of Kempen pool solutions
Beyond engaging with investee companies, we also engage with external managers including fixed income and equity managers, hedge funds, and private equity managers on their ESG commitments and performance. In 2020 we proactively engaged with 32 managers which can be broken down to 22 listed external managers through our manager selection team, two non-listed Real Estate managers, all managers in in the Global Impact Pool, and three managers for alternative strategies.
"The speed at which the sustainability journey of our clients is progressing is incredible. A few years ago ‘avoid harm’ was the sustainability-benchmark for our approved list and ‘do good’ solutions were rather limited; yet in 2020 we were creating bespoke ‘do good’ solutions for our clients."
Wouter van der Stee, Investment Manager Research & Selection
External manager scoring
In 2020 we have worked assiduously to ensure all parts of the Group, from private equity to private banking, use the Sustainability Spectrum to score external managers or define client sustainability preferences. As part of this exercise the manager selection and monitoring team mapped the vast majority of the managers we work with, to define where their products are positioned on the Spectrum. In our manager scoring process we make a distinction between the listed and non-listed / alternative investment funds. The manager scoring methodology is aligned on the pillars across asset classes, but the exact scoring elements vary per asset class.
At Kempen we scored 83 listed funds by the end of 2020 based on our updated framework, which represents around 24% of our AuM . Their ESG scores range between 2 and 5. As a percentage of AuM: 2% of the funds scored Basic (score 2); 15% scored Avoid harm (score 3); 7% scored Do better (score 4). Less than one percent of the AUM fell under managers scoring 5 on the Sustainability Spectrum. The distribution of the 83 funds’ ESG scores between the five Sustainability levels are: 27% Basic; 52% Avoid harm; 18% Do better; and 4% Do good (score 5).
While quite a few funds still score 2. these are mostly legacy passive funds where we have an advisory mandate and clients are free to choose what they invest in. Where possible we advised our clients to move capital to more sustainable funds that score at least level 3. Most of our institutional clients’ capital is already invested in level 3 and 4 funds. While the number of funds and AUM in level five remains low we see increasing interest among clients who want to invest in sustainable solutions to pressing global challenges such as climate change or focus on certain Sustainable Development Goals. The charts below show a breakdown of our external managers in listed asset classes by scores on the Sustainability Spectrum.
Scoring the funds of funds
In 2020, we have continued to assess funds in private and alternative asset classes (our Kempen Pool solutions). The ESG scores are not completely aligned with the listed asset classes mentioned above, due to differences in every asset class, although they give a good indication about the ESG approach of the funds. In 2020, 56 funds have been assessed on ESG, of which 9% scored Basic; 43% scored Avoid harm; 38% scored Do better; and 11% scored Do good. The Global Impact Pool all funds score 5 (Do good), the Private Markets funds scored mainly 3 (Avoid harm) and 4 (Do better) and the majority of Alternative Strategies funds were assessed with a score of 3 (Avoid harm). In 2021, we aim to extend the coverage of the ESG scoring and further align the different asset classes where this is needed.
GOING BEYOND ‘AVOIDING HARM’
In 2020 we worked with one of our fiduciary clients - and a major ESG data provider - to develop a bespoke sustainability index for the fund’s European equity investments.
The tailor-made index consists of about 200 companies and tilts towards companies with high ESG ratings, positive contribution to Sustainable Development Goals and has a low carbon footprint. When constructing the index, our client was clear that they wanted the solution to go beyond level 3 on our sustainability spectrum (‘avoid harm’) – that is, a solution seeking to be best in class, avoid controversial sectors and activities– and actively contribute to achieving three of the Sustainable Development Goals. Specifically those contributing to climate action, healthcare, and affordable and sustainable energy. This type of solution didn’t exist in the market so we worked with our client and the ESG data provider to build one that would meet their requirements.
The index methodology we helped devise with the client seeks to reward companies taking ambitious climate action and excludes ‘carbon criminals’. It has resulted in an index with a much lower carbon footprint compared to the mainstream Europe index.
The index methodology furthermore aims to over-weight companies that contribute to the treatment of important illnesses, food security (nutrition) and the prevention of pollution. It also assesses pharmaceutical companies on their pricing policies and whether they were enabling fair access to medicine.
The Index is still in its early days but encouragingly, 2020 performance was above a mainstream index by quite some margin.
The Index is currently applied to the client’s European equity holdings and they plan to expand it to cover other regions in their equity allocation as well. Other clients – pension funds and insurance company clients - have followed suite since and also have started to invest in this solution over the course of 2020. We expect to have allocated well over EUR2bn in these solutions by early 2021.
Figure 10: Carbon footprint of a bespoke index
- In a custom benchmark, the climate profile can be greatly improved compared to both the European index and the ESG Leaders and SRI index without this leading to a much higher tracking error.
- The tracking error is even lower than the tracking error of the European SRI index. This is because a relatively small group of companies is responsible for most of the CO2 emissions.