Kempen Real Assets Update: Questions for rapid decarbonization
Driving real change despite a heavy footprint todayThe Real Assets universe is a significant contributor to global greenhouse gas (GHG) emissions, typically upwards of 40% across portfolios.1 This also applies to the Kempen investment universe, where Real Assets are responsible for up to 42% of emissions across our investments. One could call it a ‘dirty sector’, but one with a great opportunity for improvement for active, engaged investors.
As investors, we have two options:
1. Avoid investing and sell off companies to reduce our portfolios’ reported CO2 footprints (and assume someone else will solve our problems).
2. The ‘Real Active’ approach – to engage powerfully with investee companies for improvement, creating the change we require rather than waiting for it to happen.
At Kempen we take the latter approach. As active investors, we have a responsibility to use our power to drive forward change through our control of capital. We believe the long-term success of our portfolios – and our planet - depends on sector wide improvements.
As a specialist investment manager with a total of €91.3 billion in assets (as of December 2021), Kempen has been practicing responsible investment strategies for decades, including smart corporate engagement and delivering change through shareholder actions. We want to use and share our experience with peers, so we can work together to perform sector-wide engagement that leads to dramatic and rapid change in Real Assets.
Engagement, engagement, engagement
Active engagement with the companies in our Real Assets portfolios can have a real world impact in the short-term. Engagement needs to be expansive and not solely focused on a few big names: a broader approach recognises that the whole system needs to change and the sector at large must be fit for purpose in a low carbon economy. This is key to reaching zero: our goal for GHG emissions.
Case Study: XCEL ENERGY
Scope 1 and 2 emissions of Xcel, a major US electricity provider were ca.47 million tons of CO2 per year.* That is as much CO2 as is produced by 10 million cars. Much of its electricity is generated by coal. We did not rule out Xcel Energy as an investment and looked forward to what this company plans to become. The company has a clear roadmap for transition on which we have engaged with this company in person: an ambitious path planning for an 80% reduction in CO2 emissions by 2030 (beyond the 50% goal of Paris), and 100% by 2060. Credibility is added to this trajectory from:
a) reductions in CO2 already shown in recent times;
b) the inclusion of CO2 reduction into the management’s Long Term Incentive Plan; and
c) transparency on the moving parts to achieve this transition.
The investment approach of focusing on how a company or its situation is changing, is also brought into our sustainability analysis in order to build more sustainable alpha.
How we engage effectively
1. Understanding the complexities companies face. It is tremendously important to consider each firm’sCO2 trajectory. Many companies will realistically only be able to move from ‘dirty’ to ‘less dirty’, in the mid-term. Judging stocks in a binary framework of clean vs dirty misses the overall journey and potential long-term improvements, and fails to reward this appropriately. We therefor need to know: what is the mindset of the company and are they on board with target setting and ESG goals?
2. Evaluating what’s said, done and implemented. In reporting and disclosure we seldom compare apples with apples. For example, companies use different starting points for their emissions data tracking and different periods for target settings. We also need to evaluate which Scopes (1- all direct emissions, 2 – indirect but in-house emissions, 3 – all other indirect downstream emissions) are measured. And we cannot be too easily impressed: a reduction target of 70% can seem impressive, but closer analysis may point to an even more ambitious target being achievable.
3. We ask the right questions, in the right places. Does a company have enough control over their operations to make good on commitments? What regulatory requirements are applicable to them? Sometimes the process may require us to redirect our engagements beyond the companies themselves and engage other stakeholders, such as regulators.
Fundamentally, cooperation is key. Greater power comes with pooling our resources as investors. We believe that we cannot achieve the desired results alone and that a co-engagement approach is the right way forward. We invite you to join us.
The Question we ask
- What is the position today? - we cut through the noise to understand exactly what companies are currently doing/ measuring and why
- What hard and soft targets do companies have? – both are valid, we need to understand their purpose and value
- How much will the sustainability measures cost the business? - we need to establish their commercial impact too
- How likely is it that they can meet their transition objectives? – setting goals is not enough, we need to see a workable plan
- Are your people committed? - we believe incentivising key individuals is more likely to deliver meaningful change
- How are you going to keep us informed? – we avoid vague commitments and look to secure a firm reporting framework
This article has previously been published on Citywire DE
1 Sources of GHG Emissions, EPA
*Data 2020 from CDP (Carbon Disclosure Project)
The views expressed in this document may be subject to change at any given time, without prior notice. Kempen Capital Management N.V. (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.
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