Engaged shareholdership

Webinar on sustainable equity

Sustainability is the hottest topic around right now. But it’s no mere talking point: the transition to a sustainable economy is changing the world around us, with some major implications that investors simply can’t afford to ignore. How can you reduce your CO2 footprint and become (more) climate neutral? How can you contribute to the SDGs? Why is it important to be aligned to the sustainable transition? And what is the importance of an Article 9 classification and does this mean sacrificing investment returns?

You can rewatch our webinar and get answers to these and other questions here:

An active approach is vital to maximise sustainability 

In our final blog, we set out why we believe taking an active approach is so important when investing sustainably, using the example of two stocks that we hold in our portfolio.

Kempen takes an active approach to investing sustainably
With sustainability firmly in the spotlight, asset managers all over the world are launching sustainable strategies in their droves. Among these new launches include a large number of passive strategies and portfolios that track sustainability indices. 

While passive strategies have their admirers, at Kempen we’re firmly in the active camp.

Passive portfolios can help investors reach their sustainability goals to a certain extent, but in our view active managers can take sustainability a step further. That’s because the ESG data that indices are based on are often inefficient or don’t paint a complete picture of a company’s sustainability credentials. Active managers can override this deficiency.

What’s more, while passive managers often engage with some of the companies they invest in, they generally hold too many companies to have a real impact at the overall portfolio level. Active managers running concentrated portfolios can use active ownership as an important tool to unlock additional value for their investors. 

Let’s take a look at a couple of companies we invest in to illustrate these points. 

John Deere: a world leader in agricultural efficiency
John Deere is the world’s biggest agricultural machine company. The need for the products the firm produces is self-evident – this kind of machinery plays a vital role in helping us grow the food we need to survive. However, the heavy-duty machines it makes unavoidably run on diesel because electric engines are as yet simply unable to produce the horsepower necessary for the onerous tasks they perform. 

The upshot is that simple sustainability rating agency checklists punish the firm because of its use of diesel. We believe this is a mistake. 

First, John Deere is performing cutting-edge research into the development of electric tractors. Second, John Deere is in our view doing a lot of good due to its world-leading position in the field of precision agriculture. The firm is increasingly using artificial intelligence and satellite data to enable farmers to monitor the status of every square centimetre of their fields. This provides better insights on soil quality and how crops are growing, and much more accurate information about how much pesticide and fertiliser to use. This enables farmers to increase yields while using less polluting products and suffering less soil degradation. 

To us, this is a great example of a firm enabling us to produce more while using fewer resources – which is essentially what sustainability is all about. But as the sustainability ratings agencies don’t like the firm because of its current links to diesel, a passive strategy wouldn’t invest in it. When we look at the broader picture, it’s not that simple.

Siemens Healthineers: a company clearly doing good
Active ownership is in our view a vital component of any sustainable investment strategy. First, it enables investors to have an impact on how a company is run and therefore its long-term prospects. Another benefit is that it provides them with valuable investment insights: you can learn much more from talking to a company than by doing nothing – the passive approach.

Medical equipment maker Siemens Healthineers illustrates this perfectly. The firm looks like it should be the perfect candidate for any sustainable investment strategy: it has a highly attractive business model and it’s helpingsave hospital resources and solve people’s health problems with its cutting-edge technologies. And yet it has a poor rating from sustainability agencies. Why should that be?

The reason is that after spinning off from parent company Siemens in 2018, it neglected to produce a sustainability report. This oversight gave the agencies little option but to assign it a poor rating due to the methodology they systematically follow, even though it had otherwise excellent sustainability credentials. 

We invested in the company’s IPO and recognised the problem immediately. Alongside a number of other investors we started to engage with the company straight away to make it aware of the benefits of producing a sustainability report. In the end we succeeded, and Siemens Healthineers is now producing a sustainability report. Once it’s published, we’re confident that the agencies will assign the firm a much higher rating, and this is likely to unlock further shareholder value.

If we’d been passive investors, we wouldn’t have invested in Siemens Healthineers due to its poor rating, even though it clearly has a strong sustainability profile. From an active point of view, investing was an easy decision because the mismatch between its ESG rating and what it actually does was plain to see. 

This article is written by Richard Klijnstra 

download our article

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Global Sustainable Equity (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

Companies need to adapt to survive in a sustainable world

Previously, we explained how we manage our sustainable equity strategy. In this blog we take a closer look at how regulators and wider society are demanding change and how companies need to respond, using the examples of two stocks.

Companies have no choice but to invest in a low-carbon world
The Paris climate goals are universally accepted targets to make the world climate-neutral by 2050. Now that the US has rejoined the initiative, the whole world is working towards this goal once again. At Kempen we believe we’re going to get there, but there’s a huge amount of work to be done by governments, companies and investors in the meantime. 

From a corporate perspective, every firm needs to assess its carbon footprint and set out a roadmap towards carbon-neutrality. Any firm that isn’t aligned will at some point in time face regulatory scrutiny and the expectations of informed consumers. 

This is going to require companies to make investments. Those with a better starting point – a lower carbon footprint – will need to invest less to get there. And that means they can invest more in growth. Therefore, e believe that a major revenue opportunity for firms going forward is to invest in products and services that contribute to the United Nations Sustainable Development Goals (SDGs). 

Croda International: leading by example
We look to invest in companies with low CO2 emissions, usually because their operations are either in better shape than those of their competitors or because they were cleaner to begin with, and that are contributing to the SDGs.

One example is Croda International, a speciality chemical company that primarily obtains the materials it uses from natural sources rather than petrochemicals like most other chemicals firms. 

Croda has set itself a number of stringent targets, one of which is to be carbon-neutral by 2030. It has looked at its ten manufacturing sites that pollute the most and set clear targets to reduce how much it emits by 2030, and has calculated how much it needs to invest to achieve its aims. And from 2030, it knows that it can invest in growth again.

Croda has considerable growth potential due to its alignment with the SDGs, having clearly defined how its whole product portfolio contributes to the goals. For example, it makes chemicals used in crop protection, which increase agricultural land efficiency – which helps us grow more crops without using more land. Not using petrochemicals also reduces its carbon emissions, in line with SDG 13.

Nike: evolving in line with society
It’s not just regulators that are demanding change – society is too, as people become increasingly aware of sustainability issues. We believe that Nike is an  example of a company responding to the changes demanded by society.

In the past Nike has had reputational difficulties due to its links to child labour, but since then it has shown improvement to become a leader in supply chain management and ensuring high standards for its workforce. 

Some people’s knee-jerk reaction is still to associate Nike with child labour, but what’s interesting is that consumers are increasingly recognising the good that Nike has been doing. In our view Nike has looked at who is buying its products – mainly young people in cities – and adapted in line with the demand and requirements of its target market rather than trying to please everyone. 

Short-term pain doesn’t preclude short-term gain
Some investors might be put off investing in companies spending money to reduce their CO2 emissions or improve their supply chain’s working conditions as, on the face of it, doing so won’t directly result in better financial performance. But regulation is on the rise, and society is demanding improvement. This ultimately has implications for firms’ bottom lines. 

For example, a firm that is a big polluter or treating its employees badly might be shunned by its clients. Firms not embracing sustainability might quickly go out of business, either because society no longer wants anything to do with them or because regulators force them to close. This could result in their stock prices falling in the short term even when they appear profitable. The flip-side, of course, is that companies making positive change and responding to shareholder engagement become more positively viewed by investors.

With our sustainable equity strategy we as an investor seek to use our influence to consistently encourage positive change, including using our voice as an investor actively with company management.

This article is written by Mark Oud Mark Oud

download our article

our webinar on sustainable equity

To find out more about how companies need to adapt to survive in a sustainable world, the opportunities for investors that the transition to sustainability is presenting, and how we manage our sustainable equity strategy, please rewatch our webinar here.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Global Sustainable Equity (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

Combining sustainability with performance

In our last blog we talked about how sustainability is the sixth wave of innovation, and that it represents a compelling opportunity for investors. But how exactly do we turn that belief into an actionable investment strategy that truly helps our clients meet their sustainability goals? Lots of asset managers claim to run sustainable strategies, but there’s a general feeling that some are prone to greenwashing. 

We launched our global sustainable equity strategy in 2013. Back then, like many funds around that time, it focused primarily on simple exclusion, such as tobacco and controversial weapons. In January 2017 we reinforced our investment team and refined and developed our focus on sustainability. Since that time the strategy has delivered over 4.2% in alpha per annum to our clients1

Let’s take a look at how we manage the strategy:

Meeting our clients’ financial goals
Our strategy has three key goals: financial return, Paris alignment (50% of benchmark CO2 or better) and SDG contribution 

The first is to achieve attractive returns for our clients. How do we do this?

There’s no longer much debate about the benefits of investing sustainably – a large majority of 2000+ academic reviews since the 1970s report a positive relationship between ESG criteria and corporate financial performance. 

With this in mind, we believe it’s imperative for our investment process to specifically take sustainability into account rather than just using it as a hygiene factor to discard the firms with the worst practices. So when we’re looking for companies to invest in we want to see sustainability fully integrated in their business model and strategy.

To this end, we only invest in firms in industries that make a positive impact and involve low ESG risk. For example, we don’t invest in oil companies because they’re not making a positive impact and they involve considerable ESG risk.

But sustainability credentials aren’t enough – we also need to achieve attractive returns for our investors so they can meet their financial goals. That’s why we only invest in industries with strong growth potential, going on to identify the best firms in these industries based on in-depth fundamental analysis.

In the oil industry example above, not investing is an easy decision because we believe oil firms have weak return potential over the coming decades as the world transitions away from fossil fuels. 

But things are a bit trickier with something like the wind industry – there’s clear value in moving to a cleaner form of energy, but we feel the sector doesn’t have many long-term competitive advantages relative to other forms of clean energy. We don’t believe it will provide good returns over our 10-20-year investment horizon, so we don’t invest in it.

In line with the Paris agreement and contributing to the SDGs
The strategy’s other two aims are to be in line with the Paris climate goals and to contribute towards the United Nations Sustainable Development Goals (SDGs). 

When it comes to the SDGs, we model the impact of each company’s products and services to work out how much they contribute to the goals. Our portfolio contributes to 10 of the 14 measurable SDGs through the products and services of the firms it invests in. 

And we seek to contribute to the Paris climate goals by ensuring our portfolio’s carbon footprint is less than half of that of the MSCI World. At present, while the index emits about 200 tonnes of CO2 per million euros in revenues, our portfolio emits just 46 tonnes2

Our Sustainability credentials
From a sustainability credentials perspective, there are three more things to consider of our approach.

First, when we’re making our decisions we calculate ESG risk ratings for each potential holding. These ratings consider a whole raft of data such as each firm’s water usage, CO2 emissions and how it treat its employees.

Second, our process doesn’t finish with investing in sustainable companies. Once we’ve made our decisions, we engage with the firms we invest in to urge them to enhance their sustainability practices even more. 

And finally, with the impending advent of the EU’s Sustainable Finance Disclosure Regulation (SFDR), our strategy is designated an Article 9 fund – the most sustainable category possible.

 

This article is written by Martijn Kleinbussink 

download our article


  1. Source: Kempen, annualized performance figures based on a representative account before fees, 28 Feb 2021
  2. Source: Kempen ISS, MSCI. WACI measured in tCO2e/MLN EUR revenue

our webinar on sustainable equity

To find out more about the opportunities for investors that the transition to sustainability is presenting, and how we manage our sustainable equity strategy, please rewatch our webinar here.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. 

This document is prepared by the fund managers of Global Sustainable Equity (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might hold position in the subject company. The views expressed in this document may be subject to change at any given time, without prior notice. KCM has no obligation to update the contents of this document. As asset manager KCM may have investments, generally for the benefit of third parties, in financial instruments mentioned in this document and it may at any time decide to execute buy or sell transactions in these financial instruments. 

This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.

The value of your investment may fluctuate, past performance is no guarantee for the future. Do not take unnecessary risks. Before you invest, it is important that you are aware of and are informed about the characteristics and risks of investing. This information can be found in the available documents of the strategy and/or in the agreements that are part of the service you choose or have chosen.

Investing sustainably to shape a brighter future

Sustainability is the hottest topic around right now. But it’s no mere talking point. The transition to a sustainable economy is changing the world around us, affecting almost everything: the way we live our lives, the way political institutions are functioning, and the way companies are going about their business.

It’s also having a huge effect on the world of investments.

The sixth wave of innovation
It would be easy to fall into the trap of thinking we’re living in extraordinary times, but disruption is by no means new. In our efforts to control the world around us, we’re constantly developing new technologies and exploring novel ideas. Innovation has been disrupting society and driving economic cycles for centuries.

At Kempen, we recognise five previous waves of innovation that have changed the world, starting with the industrial revolution in 1771. 

Figure 1: waves of innovation

 
We believe that the transition to a sustainable economy is the sixth, and that it’s the wave of innovation that our lives are going to be defined by.

Lessons we can learn from history
There are some important lessons for investors to learn by looking at previous waves of innovation. 
First, revolutions don’t appear out of nowhere: they’re a long time in the making. But once they hit, they hit hard, and can persist for a long time. That means it’s possible for investors to benefit from them for several decades.

Second, past experience shows it’s better for investors to be bold and embrace the changes that are occurring, rather than shying away from them. It’s vital that investors look carefully at the developments all around them and stay on the right side of the changes that are occurring.

But there’s also a big difference this time: the transition to a sustainable economy is demand-driven rather than supply-driven. So rather than being driven by new inventions, the current wave of innovation is being driven by a lofty ambition – a sustainable economy – which the world needs to invest in heavily if it’s to be achieved.

This makes it a particularly interesting opportunity for investors, who have a huge role to play in the transition to a sustainable world. In fact, we believe that investing is the greatest platform for positive change that there is.

A huge opportunity – for investment returns and to do good
The transition to sustainability offers investors the opportunity to earn financial returns and shape a brighter future for us all.

For example, companies involved in innovative fields including precision biology, industrial innovation, targeted therapy, enabling platforms and renewable energy have the scope to make huge amounts of money by solving some of the world’s most pressing problems.

What’s more, at the individual level, we’ve calculated that someone moving their savings away from a standard investment fund into our sustainable equity strategy could save 18 times more carbon emissions than the combined effects of eating less meat, taking shorter showers and taking one less flight per year.

Committed to sustainability since 2002
At Kempen we’ve been investing sustainably since 2002 with our European small-caps strategy. In 2013 we launched our sustainable equity strategy.

With our Sustainable Equity team at the helm our strategy has delivered investors on the objective of outperforming the  global equity markets, while at the same time helping them to reduce the carbon footprint of their investments and to contribute to the United Nations Sustainable Development Goals. 

This article is written by Martijn Kleinbussink 

download our article

our webinar on sustainable equity

To find out more about the opportunities for investors that the transition to sustainability is presenting, and how we capture these in our sustainable equity strategy, please rewatch our webinar here.

Disclaimer

Kempen Capital Management N.V. (KCM) is licensed as a manager of various UCITS and AIFs and authorised to provide investment services and as such is subject to supervision by the Netherlands Authority for the Financial Markets. This document is for information purposes only and provides insufficient information for an investment decision. This document does not contain investment advice, no investment recommendation, no research, or an invitation to buy or sell any financial instruments, and should not be interpreted as such. The opinions expressed in this document are our opinions and views as of such date only. These may be subject to change at any given time, without prior notice.