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The Dividend Letter: Exclude, Integrate, Engage

01 October 2020

With the September launch of a sustainable version of our Global Dividend strategy, there is rarely a better moment to discuss how we treat ESG as part of our investment philosophy. The fact that we chose to launch a ‘green’ version of our fund doesn’t mean we ignored sustainability before. It is an important factor to consider in our high dividend universe, given that the space tends to be geared towards more ‘dirty’ industries compared to the broader market. It is our belief that a company cannot add value over the long term if its business model is unsustainable, be it because it is harmful to its environment or by being overtaken by cleaner technology. To put our beliefs into practice, our ESG approach has three pillars: Exclude, Integrate and Engage, with each more progressive than the one before. Exclude the violators from our universe, integrate sustainability into the investment process and engage with the companies where we can drive positive change.


The ‘quick and dirty’ way to improve the ESG profile of an investment portfolio is to exclude any company that doesn’t meet predefined sustainability criteria. Comparable to screening for investment ideas on trading multiples, it quickly filters out any unwanted exposure to undesirable businesses. Exclusion lists are an effective strategy and relatively easy to implement as sustainability ratings and scores are widely available. Exclusion lists are common practice among most investment strategies and we are no exception. The downside is that excluding companies is a form of negative reinforcement. Just as sending a misbehaving child  out of a classroom makes the class look better, it doesn’t improve his or her behavior; companies get punished for doing wrong but they are given little incentive or feedback to improve their behavior. 


Still, exclusion serves a purpose. Companies whose business activity we do not support (like tobacco, gambling or controversial weapons1) will not enter our portfolio, because they have little room for improvement. This contrast with energy or utility companies, which tend to be some of the largest current polluters but are also some of the biggest investors in clean energy technology2. Where the line for exclusion should be drawn is a matter of opinion, we neither want to be a ‘sin fund’ nor do we strive to be the ‘vice police’.


Nevertheless, we recently took a step forward in our ESG approach by launching a sustainable version of our fund, offering an alternative ESG profile to our established fund with stricter exclusion criteria and even more focus on ESG trends in our overall investment decisions. After the line has been drawn we continue to observe a lot of dispersion in the sustainability approach of companies, which is why we integrate ESG into our overall investment strategy.

“Just as our investment process doesn’t end at a simple screening, our approach to sustainability goes beyond simple exclusion. Sustainability is more than a hygiene factor to us.”


Integrating ESG trends into our overall investment process is the lynchpin of our own ESG approach. Just as our investment process doesn’t end at a simple screening, our approach to sustainability goes beyond simple exclusion. Sustainability is more than a hygiene factor to us. Between the companies that pass our exclusion thresholds, there are huge differences in how companies incorporate sustainability in their corporate strategy and culture, and how they are exposed to the benefits (or risk) of ESG trends. 


We strive to integrate sustainability into our overall strategic analysis of a company. And just as we do with any other business opportunity or threat, we treat it as a building block of our company valuation. While this is certainly easier said than done, as the benefits and risks of sustainable policies can be difficult to quantify, ESG impact is reflected in our valuation in a number of ways.  By adjusting the future growth or profitability, adjusting the cost of capital, or taking assets at a premium or discount when a company is at risk or set to benefit of ESG trends helps us integrate sustainability into our investment framework.  We chose to build our modelling tools in such a way that any ESG adjustment shows up as an explicit premium or discount in our valuation overview, for two reasons. First, it allows us to keep track of the biggest ESG risks and benefits in our portfolio. Second, by highlighting ESG-related adjustments we force ourselves to explicitly identify the impact of ESG trends on a company’s earnings, assets or business risk and be challenged on the decisions we make. With this approach we believe we can actively look beyond minimum ESG thresholds and actively discount or reward companies for (un-)sustainable behavior. 


When we have a clear case to do so, we add significant premia and discounts to our holdings based on ESG considerations, as the graph below shows.

On the downside, companies may pass our exclusion criteria, but that doesn’t imply they are free of risk from bad governance or environmental damage. We therefore invest in these companies if their valuation offers a margin of safety even after accounting for those risks. On a more positive note, we value companies best positioned to benefit from sustainability trends higher. Either way, we make a strategic analysis of how value can be created (or destroyed) by a sustainable business model. 



Car component manufacturer Valeo is a good example of integrating ESG in our investment strategy. We see the automotive sector being influenced by multiple positive developments; the switch to electric driving to reduce carbon emissions, the rise of assisted or autonomous driving to increase safety and the shift to connected cars and shared mobility. In our view Valeo is very well positioned to benefit from these trends. The company has leading technology in the fields of assisted driving, electric drive systems and thermal systems, all of which are key components for electric and autonomous driving, which it supplies to a well-diversified client base. The high R&D content and the high investment in research ensures Valeo holds a competitive edge. Profitability and future growth for Valeo are thus adjusted upward as they are in a unique position to supply the technology and components to further the sustainability trends in the automotive industry, which should allow the company to outgrow the automotive sector.


Our efforts to identify the opportunities and risks of ESG trends for a company provide a starting point for engaging with companies. Our goal  is to drive positive change, both for the company and its environmental context.  While this may sound obvious, as long term shareholders we genuinely believe a business model can’t be profitable in the long run if it is harmful to its surroundings. With our engagements we seek to make a positive impact for all stakeholders in a company as well as for ourselves as shareholders. Ultimately the discount of a company’s value on ESG considerations, is the value we could potentially unlock by engaging with a company on improving the sustainability of their business. 

Often these engagements are a joint effort with other investment teams, our ESG desk or even other asset managers as they can be difficult and time consuming processes. Yet the impact of a successful engagement can be significant and rewarding. 

As a company we have engaged several companies over the past years. One of our most successful engagements came as part of the Climate Action 100+, a collective of asset management companies striving for a better world which resulted in several of the major oil companies in adopting a ‘net zero carbon by..’ policy. Most of our Oil Majors have since adopted these policies and for others we expect these to be introduced in the near future and as a result we discount the value of the laggards.

Exclude, Integrate, Engage. With these three steps we put our beliefs into practice. Each is more constructive than the one before and focused more on creating value rather than avoiding risk. With this approach we strive to find income and to contribute to a better world.


  1. Other exclusion criteria are alcohol, animal care, gambling, coal production/generation, adult entertainment, GMO and tar sands. We exclude unwanted business activities, though at varying levels of overall business activity and the exact restrictions may vary for our different strategies. 
  2. We recently wrote an article on the opportunities in Utilities:


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 Kempen Global High Dividend strategy (‘the Strategy’), managed by Kempen Capital Management N.V. (‘KCM’). The Strategy might currently hold shares 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. 

This document is based on information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. 

The views expressed herein are our current views as of the date appearing on this document. This document has been produced independently of the company and the views contained herein are entirely those of KCM. 

The authors

Marius Bakker
Joris Franssen

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