Meeting the Climate Challenge
“The ongoing consequences of climate change are like a slow puncture on the economy. At Kempen we go beyond box ticking and take tangible steps - from incentives for green bonds to sector engagement frameworks - to implement our ambitious new climate policy across our investment process”
Danny Dekker, Senior Advisor Impact and Sustainable Investment
Climate change has deep ramifications for human and ecological wellbeing, and the material effects of our changing environment are becoming ever more present in capital markets.
To help us stay ahead of the curve in 2020, we published our new Climate Change Policy, which made us one of the first asset managers to commit to net zero emissions by 2050. Our policy brings together climate-friendly policies in areas from green bonds to coal exemptions and active ownership and sets out short and medium term goals to align our portfolios with the Paris Agreement goals, Dutch Climate Agreement (Klimaatakkoord), and the EU’s net zero ambitions.
Table 3: Our Climate Policy goals for 2025, 2030 and 2050
The Policy is already being implemented. For example, two of the new additions to our Sustainable Equity Fund in 2020 were Rational, a German manufacturer producing energy efficient cooking appliances, and Belimo, which delivers equipment for more energy-efficient real estate. By finding companies and investable entities making a clear contribution to combating climate change we expect our rate of decarbonisation to reflect the pathways of the EU Benchmarks (approximately 7% year-over-year reductions).
Figure 11: EU climate pathways to achieve net zero ambitions
A focus on transition towards a low carbon economy, especially of the most carbon-intensive companies and sectors, has been a clear focus of our active ownership work in 2020 including our engagements with Shell and Equinor.
We need global collaboration to tackle climate change. To this end we continue to help drive collaborations such as Climate Action 100+, the world’s biggest investor-led engagement initiative that seeks to ensure the world's largest corporate greenhouse gas emitters take necessary action on climate change. The CA100+ is currently made of 545 investors with over US$52 trillion AUM. We currently act as lead investors on several engagements in the Climate Action 100+.
We also participated in the creation of the IIGCC Net Zero Investment Framework to help provide a practical blueprint for asset owners and managers to follow our lead on net zero investing, and have published several whitepapers on our latest thinking related to climate risks and opportunities. Our Real Assets team has recently published its thoughts on the importance of using forward-looking ESG data (as well as historic, such as emissions data) to enable better forecasting, helping investees increase their ESG scores and make them much more credible, attractive and investible in the long term.
NEW FUND HAS ESG AT ITS HEART
A new fund launched this year was Kempen’s Sustainable Global High Dividend Fund. It offers a diversified portfolio of around 60 listed companies worldwide, with an attractive dividend yield complying with some straightforward sustainability criteria.
The fund has a clear approach to sustainability, like other Kempen funds it excludes companies involved in alcohol, animal welfare and carbon intensive power generation. Alongside its other dividend strategies, managed by experienced senior portfolio managers the fund only invests in those companies driving the transition to a low carbon economy. The approach integrates ESG-related adjustments to margins, growth and the costs of capital. Moreover, as active managers we take responsibility for engaging with the investee companies to make sure they are aligned with our targeted emission reduction pathway and that the companies improve their overall sustainability profile.
Not a straight line downwards
The fund takes a hard-headed approach. We follow the trajectory of the EU Climate Transition Benchmark which demands 7% year-over-year reductions of emissions. But our active approach means the fund doesn’t just buy into companies that are already ‘green’. We may buy companies with relatively high emissions now but who we believe have a good plan to transition to a low-carbon model in the years to come. When it comes to climate, our objective is to help reduce global CO2e emissions.
A good example of a holding at launch was Portuguese utilities firm EDP. Portugal’s national energy supplier is not a net zero investment right now, but it is a leading generator of wind energy and has a flourishing renewables profile that puts it on a very positive carbon trajectory. The company is also planning to close down its most intensive generation units in the very near term.
Kempen’s carbon footprint
We have measured the carbon intensity of our own internally managed funds for six years. Starting from 2017, we have assessed the carbon footprint of our overall assets under management. As illustrated in figure 12, there have been increasing calls for investors to measure the climate impact of their investments. It helps clients and wider stakeholders to compare the carbon footprints of different investment options, and gives investors themselves a baseline from which reductions in carbon impact can be measured. It also provides a base for forward-looking targets and commitments. In 2020, we set long-term commitments to become a net zero investor by 2050, along with intermediate ambitions for 2030, and shorter-term objectives to 2025.
Figure 12: An industry in transition
GROWING MOMENTUM FOR INVESTORS TO MEASURE THEIR CARBON FOOTPRINT
CARBON FOOTPRINT SUMMARY
By 2020, Kempen’s asset management portfolios have become less carbon intensive. As the coverage of the carbon footprint analysis of our assets grew to EUR 34.2 billion (2019: EUR 27.3 billion), the total financed carbon emissions stayed at the same level (2020 and 2019: 3.4 million tonnes of CO2e). The lower carbon intensity is reflected in the decrease of the two carbon footprint metrics, carbon emissions per EUR million invested (2020: 100.1) and weighted average carbon intensity (2020: 148.2).
The lower carbon footprint was seen in both our internally-managed Kempen funds and the external funds, also because we see more clients shifting to ESG funds with lower carbon emission footprints. We see that more (institutional) clients are looking for assets with lower carbon intensity in order to align their portfolios with the goals of the Paris Agreement and the Dutch Climate Agreement (Klimaatakkoord). We expect that this development will continue going forward with the increasing ESG and climate focus from regulators, and with the introduction of the EU Sustainable Finance regulation in 2021 (SFDR) and 2022 (SFDR Level 2 and EU Taxonomy).
Working with ISS ESG, we calculated our carbon footprint across a range of asset classes from equity to corporate bonds and government bonds. The assessments were made in line with the Greenhouse Gas Protocol’s 'ownership principle'. A full description of the methodology is available here. We took into account both direct emissions (scope 1) and indirect emissions that stem from the generation of purchased energy (scope 2).
The results are based on our portfolio as of Q3-2020, and carbon data from 2018. The figures only represent the portion of our assets under management where carbon data was available across listed equites, corporate bonds and government bonds. The coverage of our total AuM was 48%, an increase of 4% compared to last year. In the coming years, we aim to increase the amount of our assets under management included in the footprint.
The table below shows the overall carbon footprint and the AuM it covers. Kempen’s financed carbon emissions of 3.4 million tonnes and its carbon emissions per one million euro invested is 100.1 tCO2e, whereas its carbon intensity is 148.2 tCO2e. Read here more details about the three carbon metrics.
Table 4: Overall results carbon footprint emissions*
* CO2e emissions include scope 1 and 2. CO2e data per 2018. AuM data per 30/9/20
Financed carbon emissions: this measures a portfolio’s absolute carbon footprint (in tonnes of CO2) based on its shareholdings in the underlying companies. The shareholding in each company is taken as part of the enterprise value and multiplied by the carbon footprint of that company.
Carbon emissions per one euro million invested: this relative footprint shows how many tonnes of CO2e an investor is financing in relation to its ownership in a certain company or portfolio. This metric captures the carbon exposure of an investment amount and is measured by dividing the absolute footprint of the portfolio by the total amount invested in the portfolio.
Weighted Average Carbon Intensity: the intensity footprint calculates a portfolio’s exposure to the carbon intensity of companies (expressed in tonnes of CO2e/€ million revenues) multiplied by the percentage of the company in the portfolio.
The table below shows the aggregated emissions broken down for all internally-managed Kempen funds.
Overall, the figures show that most of our Kempen funds are less carbon intensive than their benchmark, indicating that the companies in the portfolios have a relatively lower carbon intensity compared to their industry peers. In line with the goals of the Paris Agreement, a lower carbon intensity – besides an absolute carbon level – is required. We encourage companies in their journey towards a lower carbon economy via our active ownership approach.
Table 5: Carbon footprint breakdown of listed Kempen funds
More and more governments, companies and investors have made commitments to net zero emissions. Following the EU and the UK, China, Japan and South Korea also announced commitments in 2020. And with the Biden administration taking office, the US is back in the Paris Agreement and President Biden has already announced the inclusion of climate-related investments across several Covid-19 stimulus packages.
Moreover, the EU has stepped up its 2030 ambitions, including a 55% emissions reduction in line with its 2050 net zero commitment. Accompanying EU regulation (EU Action Plan on Sustainable Finance) will be implemented in 2021 (SFDR), and will continue into 2022 (SFDR Level 2 and EU Taxonomy) and beyond. This is bolstered by the Dutch Climate Agreement (Klimaatakkoord) which requires financial institutions to disclose their carbon footprint from 2020, and to deliver concrete actions at the latest by 2022 to support the Agreement’s greenhouse gas reduction goals by 2030. As an active asset manager with focus on long-term value creation, we are well positioned to take up this climate change challenge.