Getting granular with the SDGs
Last year marked five years since the UN adopted the 17 goals for a holistic approach to achieving sustainable development. These SDGs are a universal call to action to end poverty, protect the planet, and improve the lives and prospects of everyone, everywhere. A collective effort by the private sector, the financial industry, governments and other actors is essential to achieve them.
All SDGs are equally important, although the ‘gap’ that needs to be closed on the underlying targets may differ per region or stakeholder group. The SDGs can be broadly grouped into social themes (for example, SDG 1: No Poverty, SDG 3: Good Health and Well-Being, SDG 5: Gender Equality, SDG 8: Decent Work and Economic Growth) and environmental themes (for example SDG 7: Affordable and Clean Energy, SDG 14: Life Below Water, SDG 15: Life on Land). While only SDG 16 and 17 primarily focus on corporate governance issues, good governance is a prerequisite of making meaningful progress on all themes covered by the SDGs. The figure below indicates this split of environmental, social and governance focus.
Figure 13: The split of Environmental, Social and Governance focus
Aligning to SDGs
Beyond the E, S, and G split, the SDGs can be split into those which are primarily achievable through business conduct (gender equality, decent work and economic growth, optimising material use) and other themes that are more achievable through the provision of products and services (ensuring good health, providing basic services, climate and clean energy) 12. The more ‘operational’ SDGs are marked with an ‘O’ above.
Some research has gone into understanding what are the investible themes among the SDGs. The more investible themes inform the choice for thematic prioritization – these are pictured above as the larger icons. SDGs are interrelated, so selecting one theme will have an impact on others.
At Kempen, we want to invest in companies that help achieve the SDGs. This, of course, is easier said than done.
Most companies do not have a mature SDG-linked reporting strategy in place and, therefore, the data available to investors is generally of low quality or insufficient quantities.
2020 was a major turning point for Kempen as we started working with a new SDG data provider for listed asset classes – and together looked for meaningful ways to bring the measurement of SDG alignment into the heart of our investment decision-making. This means that funds such as our Global Sustainable Equity Fund allocate scores to companies based on the percentage revenue a company contributes to individual SDGs from their underlying products and services. Looking at revenue percentages derived from products and services that are aligned with the SDGs lends itself as a proxy of SDG contributions in listed asset classes.
As shown in the figure below, the Kempen Global Sustainable Equity Fund’s (KGSEF) holdings derive a higher percentage of their revenue from products and services contributing to the SDGs (i.e. healthcare products and services, sustainable energy) than the benchmark and a lower percentage of their revenues obstruct the SDGs (i.e. fossil fuel based products) compared to the benchmark. It also outperformed its benchmark financially. This score means that we have a means to identify engagement opportunities and maximise positive impacts.
Figure 14: Overall Contribution or Obstruction of the KGSEF as % of Total AUM
Using this improved data, we set up an internal impact working group to help different parts of the business collaborate on measuring SDG alignment and positive impact. There has already been considerable success from this group, such as our Private Markets team publishing their first sustainability report for clients, while other members of the group can share best practice across their various funds and asset classes.
We aim to roll out more SDG assessments across more products and services throughout 2021 and are working on a Kempen-wide policy for SDG alignment, which may then set specific targets.
We have made a baseline assessment of Kempen listed funds based on percentages of revenues investee companies derive from products and service that support or obstruct the achievement of specific SDGs. By linking the SDG alignment to a company’s revenues, we can calculate our indicative attribution, resulting in an overall alignment in monetary terms to the social capital-related SDGs13.
This alignment can be positive, neutral or negative. These values are based on an objective sustainable development taxonomy that classifies products and services according to whether they contribute to sustainable development (such as bio-pesticides and renewable energy) or whether they obstruct sustainable development (such as fossil fuels, soft drinks and marine tailing disposal)14.
By using data from a new data vendor, we undertook a preliminary first assessment of the alignment of Kempen’s sustainable equity funds with sustainable development themes that relate to the SDGs. These funds comprise the Kempen European Sustainable Value Creation Fund, Kempen Global Sustainable Value Creation Fund, Kempen Global Sustainable Equity Fund and Kempen Sustainable European Small-cap Fund, with a total value of €876 million. The alignment of the four sustainable funds in aggregate (€876 million) with environmental themes is estimated at -€2.1 million and with social themes it is estimated at €39.1 million. If the €876 million were to be invested in benchmark funds instead, the alignment with environmental themes would be estimated at -€124 million and on social themes €14.7 million15. Our calculations were based on company sales data per investee, indicating which portion of sales could be linked (positively or negatively) to a set of environmental and social themes. Although we recognise that this aggregation may result in a product or service of an investee being attributed to more than one (natural or social) theme, we do not expect this to materially influence the final outcome of our analysis. The main reason is that our aggregation is conducted both for positive and negative impacts, and consequently smooths out a potential double-counting calculation impact.
Figure 15: Alignment of our assets under management in Kempen Sustainable Equity Funds with environmental themes (in €1,000 per million euros invested)
Figure 16: Alignment of our assets under management in Kempen Sustainable Equity Funds with social themes (in €1,000 per million euros invested)
Our impact fund, the Kempen Global Impact Pool (GIP), has also continued to grow over the past year. GIP assets were around US$108m at the end of 2020.
In 2020 the GIP team successfully mapped all managers using the twelve dimensions of the Global Impact Investing Network’s Impact Measurement project. This process led to some interesting insights and confirmation of our approach; for example, all GIP managers fall into impact category contribute to solutions but the impact they achieve varies from engaging actively to growing new undersupplied capital markets.
PROTECTING SMALL HOLDER COCOA FARMERS DURING THE PANDEMIC
Through an Agriculture Debt fund, the Global Impact Pool invests in companies like Ecookim, a cocoa cooperative in Ivory Coast. We help finance the cooperative to meet its working capital needs, and have seen its revenues multiply more than seven-fold since 2012.
The Covid-19 pandemic brought turbulence to commodities including cocoa in 2020, as the market oscillated between stockpiling and fear of a downturn. Global lockdowns also threatened to prevent procedures like due diligence being done, blocking the flow of capital into the sector.
Our SDG-focused investments this year have helped provide capital and technical assistance to maintain cocoa deals being done along the supply chain, ultimately benefiting the small holder farmers like Ecookim at the base of the supply chain.
Using technical assistance to help rehabilitate and rejuvenate cocoa plantations the Agriculture Debt fund has been working through the pandemic with Ecookim, with the aim to train and offer long-term loans for 334 cocoa producers, to revive 1,409 hectares of plantations and to increase their yield by 38%.
12. This split is not clear-cut, there are of course companies who produce products that enable others to reduce their material input into their respective production processes.
13. Until now, we have not been proactively steering on contributing to the SDGs through our investments in listed asset classes, which is why we use the term “alignment” instead of “contribution” at this stage.
14. This is our initial baseline assessment in which we recognise certain data gaps:
1 The coverage varies per fund;
2 The objective taxonomy is not exhaustive (there is a significant proportion of goods and services that do not currently fall under the aligned or misaligned category);
3 On certain themes, such as climate, corporate disclosure is much more advanced than on other themes. This is reflected in the revenue alignment score;
4 Companies often do not report in sufficient detail about their revenues per products aligned with the SDG themes. Their revenue percentages are therefore estimated.
15. The calculations are based on € value of both enterprise value and holding data available as of end 2020.