Action: Portfolios with purpose
In a fast-changing world with a closing window of opportunity to prevent irreversible environmental damage, we’ve made strides in constructing positive impact portfolios.
We have not just strengthened our sustainability ambitions and policies in 2021, we have also made sure our commitments filtered through to our client solutions, products and portfolios. Our four-pillar approach to responsible and sustainable investment is explained in the figure.
Take the Kempen SDG Farmland Fund, for example, which invests in agricultural projects offering attractive returns and contributing to sustainable food production. Concrete KPIs were being set in 2021 to enable institutional investors to contribute directly to SDGs linked to biodiversity and climate concerns over time.
We’ve also worked with clients to develop bespoke sustainability indexes across asset classes and with thematic tilts based on client preferences. These indexes look to reward clients if they hit certain KPIs relating to climate, biodiversity, and by demonstrating bold ambition to face the environmental crisis head on.
A three-year review of our Global Impact Pool this year showed how its investments since 2018 have helped over 350,000 underserved people access healthcare services annually, trained an average of 132,000 smallholders farmers per year, and accumulated avoided emissions equivalent to taking over 13,700 cars off the road for a year.
“We share the EU’s ambition to drive a more defined and transparent sustainable finance sector. Kempen is determined to not only comply with the latest sustainability disclosure regulations but to show the way and engage with policymakers to improve standards where required. “
Johan van der Lugt, Lead Expert, Sustainability Advisory
The EU Sustainable Finance Disclosure Regulation (SFDR), which is to be mirrored in the UK, came into force on 10 March 2021 with the aim to encourage better transparency on sustainability risk. The regulatory requirements and transparency rules are complex but are designed to nudge managers and advisors towards the sustainable new normal so we have been active supporters of its implementation. The introduction of our Sustainability Spectrum across all parts of our Group in the last two years has already laid the foundations for our alignment with the SFDR. For example, the EU’s use of ‘principal adverse impacts’, that is, activities that do harm and cause sustainability risk, largely matches the definitions and requirements for ‘Level 3 - responsible’ on our Spectrum. At Kempen we believe that to be sustainable, we must define sustainability. We have therefore also been vocal supporters of an EU Taxonomy which aims to provide agreed definitions across capital markets on what is ‘green’ or ‘sustainable’, and what is not and will be introduced in early 2022.
Despite best intentions, the EU Taxonomy in its current form is far from perfect and we are part of an ongoing debate about whether sectors like ‘natural gas’ or agriculture should be badged as ‘green’, working with partners such as the Dutch Fund and Asset Management Association and Eumedion, the Dutch Corporate Governance Forum. Throughout 2021 we have been engaged to keep clients ahead of the debate both within Europe and beyond, including new influential bodies announced in 2021, such as the International Sustainability Standards Board (ISSB) at COP26.
The rapid growth of responsible investment has led to a boom in the provision of ESG data, with millions of data points from thousands of sources. Shouldn’t this help both Kempen act on its ambitions, and also help our clients? The first visual shows how data could help us and our clients meet sustainability targets.
Figure 11: ESG data in a perfect world
But this is not how it works in the real world. In fact, one of the biggest problems that we face is that investee companies report ESG data in different ways, and making sense of this becomes a major barrier to sustainable investment, as shown in the next image. This is what the ESG data arena really looks like and where being an active owner and thoughtful investor makes a difference.
Figure 12: ESG data in the real world
Across all asset classes, we are keenly aware of ESG data challenges, particularly as it enters our investment processes. In 2021, not only were we able to explain through our investment literature why this is a problem, but have presented some critical tools to overcome certain data issues.
Not every aspect of sustainability can easily be measured into simply comparable sets of numbers. We always recommend a combination of quantitative and fundamental analysis, or bottom-up investment skills, allied with an active management approach.
Cheniere Energy, a US exporter of liquefied natural gas (LNG) is a good example of this issue. At face value, the company is a big polluter, with estimated annual Scope 3 emissions at over 40 million tonnes. At Kempen though, our data analysis showed that, through its exports, the company is helping the Chinese economy transition from coal to LNG, meaning it is helping reduce overall emissions globally. This kind of detailed, holistic analysis of ESG data is what has set us apart this year, and substantiates our positive sustainable investment trajectory. Read here our full white paper on ESG data in real assets.
2021 saw the development of the Kempen ESG score which we have started rolling out for the Kempen listed funds. The proprietary score builds on external data providers, with a layer of own assessment and a particular focus on climate and governance issues.
Embedding ESG into manager selection
Our proprietary manager scoring framework has evolved over the last two years, with fund manager products classified according to our Sustainability Spectrum. It means that we can cut through the greenwash and ensure that all managers we work with are applying a best-in-class approach to sustainable investment, and delivering real-world outcomes. For more detail, see our article for PRI here.
In 2021 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 Research Solutions 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.
We assessed over 387 listed funds in 2021, representing around 57% of our total assets under management, and their ESG scores ranged between levels 2 and 5 on sustainability. The scope of this scoring has been significantly expanded upon, from about 26% in 2020. As a percentage of the covered assets under management, 9% of the funds scored ‘Basic’ (score 2); 64% scored 'Responsible' (score 3), 25% scored 'Sustainable' (score 4) and 2% scored 'Impact' (score 5). During 2021, both the coverage as well as the percentage of our assets that can be classified as sustainable and impact has grown materially (amounting to 27%). For the next few years we have formulated a new KPI and want to grow this with 5%-points annually. In 2021, the percentage of fund managers on the approved list that met our criteria for responsible, sustainable and impact was 76%.
Figure 13: Sustainability scores of external managers
Scoring the funds of funds
In 2021, we have continued to assess funds in private and alternative asset classes (our Kempen Pool solutions) and have done so according to the more stringent external manager scoring system. In 2021, 77 funds have been assessed on sustainability, of which 19 % scored Basic; 34 % scored Responsible; 35 % scored Sustainable; and 6 % scored Impact. In the Global Impact Pool all funds score 8 (Impact), the Private Markets funds scored mainly 3 (Responsible) and 4 (Sustainable) and the majority of Alternative Strategies funds were assessed with a score of 2 or 3. Hedge fund managers are now scored according to the same sustainability criteria as long-only managers, which explains why the score on average lower than last year.
Table 4: 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 2021 we proactively engaged with 72 managers which can be broken down to 47 listed external managers through our manager selection team, 2 non-listed Real Estate managers, all 8 managers in in the Global Impact Pool, and 15 managers for alternative strategies.
In 2021 we also continued to evolve the way we evaluate external managers on ESG performance, to ensure they meet our clients’ sustainability requirements.
Our Manager Research Solutions team also participates in the PRI Hedge Fund Advisory Committee and has contributed to the Shorting & Responsible Investment publication, which explains that shorting can be used as an alternative to screening and it offers an engagement opportunity with companies to incentivize them to improve their business conduct.
Climate data and additional sustainability disclosures per fund
For each Kempen core strategy fund, we have a fund sustainability policy in place, a quarterly fund factsheet and related engagement factsheets and significant votes. In the past we’ve presented in our Stewardship report a table showing the total emissions and emissions intensity of listed Kempen funds. Our fund-specific factsheets contain detailed information on both the total emissions and emissions intensity of Listed Kempen funds, together with a number of other sustainability-related disclosure items. You can access the engagement factsheets and other relevant documents in this overview table through the hyperlinks.
Regarding the overall result on carbon footprint emissions (AuM analysed, financed carbon emissions, carbon emissions per EUR million invested and Weighted Average Carbon Intensity), the most up to date disclosures are included in the Van Lanschot Kempen Annual Report in the Natural Capital chapter.
Similarly, the SDG alignment disclosure, which we have made a head start with in last year’s report, are included in the most recent Van Lanschot Kempen Annual report, under the Social Capital and Natural Capital chapters.
As an active owner, we assess the individual activities of high-risk companies through engagement. With specific focus areas for engagements, ranging from board make-up to biodiversity, we lean in to facilitate effective behaviour change in laggard companies.
Kempen has been practising sustainable investment strategies for decades, and in 2021 we sought to share our experiences and expertise. Why now? It is clear that we are facing a climate emergency, and that short-term profit is outweighed by a shared goal, which is to mitigate the catastrophic effects of breakdown. Our Real Assets team published a handbook on collaboration, to offer a ‘short cut’ to peers so we can work effectively together.
Alongside the focus on climate action and biodiversity, we have been engaging with companies on social issues. Two noteworthy examples are our engagements with Coats and Vinci. Our engagement with Coasts has encouraged the apparel company to ensure it is paying a fair living wage to all employees in the markets they operate in. By engaging French infrastructure company Vinci, we’ve sought to continuously improve operational processes and conditions to prevent labour rights violations in their supply chain in Qatar, by working with NGOs, labour federations and ratings agencies.
Meanwhile, in October our Sustainable Equity team also published a whitepaper, emphasising the material risks of climate change is having on global markets. It details an investment approach which rewards companies with an acceptable and well-managed direct carbon exposure, and demonstrates how the portfolio can be less than 50% of the intensity of the MSCI World benchmark. The team highlights their engagement with Belimo to demonstrate this.
As a group, this year we engaged directly with 132 companies. This represents 47% of the companies we invest in in our listed equity strategies. To read more about our engagements in 2021, please read the Our Engagements section of the report.
In addition to voting for holdings in our core strategies, we have a growing number of mandate clients who also ask us to vote on their behalf, applying our voting policy and giving a quarterly update on our voting decisions. We welcome this development as it fully aligns with our active ownership beliefs.
Closing the ambition gap, from Scoring to Stewardship
There were a number of other initiatives we drove in 2021 which enabled us to deliver against our accelerated ambition. This section outlines an assortment of these.
Kempen is a long-standing partner of FCLT (Focusing Capital on the Long Term). In 2021, we actively participated in the FCLT working group communicating climate strategy as well as in another focused on multi-stakeholder capitalism. We assessed that while climate disclosure frameworks trigger climate-related reporting by companies, the information is often not connected to issuers’ long-term strategies. We are helping deploy long-term roadmaps and investor dialogue to address this issue.
In 2021, we reported for the first time on the SDG alignment of four of our Kempen funds on both their social and environmental merits. This means that funds such as our Global Sustainable Equity Fund considers the percentage of revenue a company contributes to individual SDGs, both in terms of operations and products and services. This year’s SDG alignment is included in the Van Lanschot Kempen Annual report under the Social and Natural Capital chapters.
Our institutional and fiduciary clients also ask us to report on the alignment of their portfolios with their priority themes. We report on this also using the ISS SDG Solutions Assessment approach, customised to our clients’ needs.
From a governance perspective, we find it very important that companies focus on their gender and broader diversity. We tend to vote against directors whose tenure exceeds 12 years, or who we deem based on our scoring system ‘overboarded.’ We strongly believe that directors serving on an excessive number of boards, or have (Committee) Chair or Executive Director role, need to limit the number of additional board positions to make sure they have sufficient time and capacity to deliver good results in each of their board roles. We have a similar system in place for auditor assessment. We proactively assess every shareholder proposal and engage with companies on governance issues and our voting intentions.
We continue to provide input to policymakers on sustainable finance both directly and through industry associations, such as the PRI SDG Advisory Group, EFRAG Expert Reviewer Panel, DUFAS Board, Eumedion Board and co-chairing the ICGN Global Corporate Governance Committee.