“Kempen has a sincere commitment to ESG at the firm level,” declares Narina Mnatsakanian, Director, Impact and Responsible Investment, who joined the firm in 2017 having previously spent over eight years working at UN PRI and MN. “Our top level commitment helps to differentiate us as an organisation by fully integrating ESG as an active owner. Active ownership has always been part of our DNA ever since the beginning, 26 years ago, when we launched our Dutch small cap fund and our European equity fund, which pursue a focused, concentrated and engaged strategy.”
ESG’s growing importance at Kempen over the past 10 years has had an increasing impact on: governance; internal staff resources; external consultancies, engagement, voting and memberships of various industry organisations.
“ESG reporting has to be seen as part of a broader trend towards managers becoming more transparent and more prepared to negotiate over fees, post the GFC.”
Michiel Meeuwissen, co-head of Alternative Strategies, Kempen
“Sustainability is one of the top four priorities for the whole organisation, at board level, and is a key performance indicator (KPI) feeding into senior managers’ and portfolio managers’ remuneration. The policy started as responsible investing (RI) and has now developed into sustainable investing (SI), as the default client offering, fully integrated into Kempen’s own investment processes. The four core issues are human rights, labour rights, governance and climate,” says Mnatsakanian.
Kempen initially hired a director of responsible investment and now has a team of three full timers and other part time staff. This is complemented by external consultants. Kempen initially became a client of GES International, and then replaced GES by MSCI and later added ISS for carbon data and Sustainalytics (which took over GES in 2019), for additional perspectives on scoring companies’ ESG performance. “We use multiple providers in addition to using our own data and scores,” says Mnatsakanian.
The objective is also to apply ESG holistically to fiduciary mandates. ESG is often overlooked in relation to passive investing, where the first ESG index futures have only been rolled out over the past year or two. Though Kempen runs no passive money in house, it has paid attention to ESG where fiduciary clients have passive mandates. Kempen has seeded ESG index products run by Northern Trust and is one of their largest European clients.
Controversial weapons (nuclear weapons, cluster munitions and anti-personnel landmines) are excluded, while the avoidance list focuses on the four core issues of human rights, labour rights, environmental violations and corruption. Over 100 tobacco companies have also been excluded from internal Kempen funds.
Kempen is an active investor engaging with companies involved in controversial activities. Kempen’s 2018 Responsible Investment report states that the firm’s engagement has contributed to “Shell’s December 2018 commitment to set rolling three-five year targets towards halving its net carbon footprint by 2050 and Glencore’s commitment in 2019 to limit coal production and align the business with Paris climate targets”. The voting policy is global. Some managers avoid Russian equities altogether due to concerns around corporate governance, but Kempen has engaged with steelmaker Severstal, which now reports ESG metrics including its carbon footprint. Meanwhile, Finland may have a reputation for good governance, but Kempen raised concerns about an insufficient number of independent directors at Kojamo Oyj, which led the firm to shift to a majority independent board. In cases of unsuccessful engagement Kempen may divest, with Bayer a recent example.
Kempen is also exercising its proxy voting rights in a transparent fashion for internally managed funds. Kempen voted in 440/462 investee company AGMs last year and abstained or voted against management about ten per cent of the time.
In 2018, carbon data was available for 44.3% of its assets under management. “Our carbon footprint is relatively low partly because the long/short equity managers we invest in have little exposure to utilities and real estate,” says Meeuwissen.
Kempen was an early mover in signing up to the UN PRI in 2008, just two years after the organisation signed its principles. It has since joined the IIGCC (Institutional Investors’ Group on Climate Change) and is active in working groups, as well as engaging with the largest emitters via Climate Action 100+. To focus on investee companies’ governance, Kempen belongs to the ICGN (International Corporate Governance Network) corporate governance committee. Closer to home, Kempen’s CIO, Lars Dijkstra, has joined the board of Dutch platform EUMEDION corporate governance forum, which engages with Dutch companies. Kempen’s CEO, Leni Boeren, belongs to the board of FCLT Global (Focusing Capital on the Long Term), a Boston-headquartered group with members including asset managers and other companies. Kempen has also joined a Dutch coalition of financial institutions campaigning for living wages, Platform Living Wage Financials.
Kempen’s 2019 Assessment from the PRI arrived at the highest scores of “A+” for strategy and governance, listed equity and fixed income, and the second highest scores of “A” for listed equity (incorporation); listed equity (active ownership); fixed income (SSA), and fixed income (corporate financial).
All of Kempen’s own funds and externally managed funds are rated for ESG on a scale of one – five. Funds with a one score comply with legal ESG requirements; two-rated funds apply additional exclusion lists. Kempen’s Alternative Strategies (ALTS) team currently has integrated ESG elements in order to be able to score a three, dubbed “responsible” which besides applying exclusion policies includes active engagement and integrating ESG in the investment process. According to co-head of Alternative Strategies, Michiel Meeuwissen, “This approach is far above the peer group”. For a fund to score four, it would have to apply a “best in class” approach, investing in companies with the best ESG scores in their respective sectors only. Five-rated funds apply impact investing.
Kempen practices what it preaches; since 2011 Van Lanschot Kempen has targeted to reduce the firm’s own C02 footprint by 2.5% per FTE year-on-year. “Plates are biodegradable, we aim to reduce electricity consumption and offset all emissions from travel. Since 2011 around 40% of our emissions have been offset via yearly compensation. As of 2019 we will offset 100% of our own emissions, making us climate neutral. We encourage car sharing, electric car use, and several rooms have videoconferencing facilities. For meetings in London, we are increasingly using the Eurostar train in at least one direction rather than flying.”
Kempen ALTS’ ESG policies always paid attention to governance, the “G” in ESG, and have progressively added the “E” and “S”, environmental and social. “Since the inception of Kempen’s hedge fund business in 2005, we have invested in funds with a long-term focus, and portfolio turnover that is not only much lower than the average hedge fund – but also even lower than a traditional mutual fund. We have always expected hedge fund managers to engage with companies through an active dialogue, but not necessarily to be activist. This fits our corporate level ambition to be engaged,” says Meeuwissen. The firm runs circa $1.5bn in commingled multi-manager alternative solutions: Kempen Orange Investment Partnership; Kempen Non-Directional Partnership, and Diversified Structured Credit Pool, (all of which have been profiled in The Hedge Fund Journal), as well as customised portfolio solutions.
“Additionally, it is important to invest in funds that have good governance, including independent directors, and since 2013 we have used Aksia to carry out operational due diligence for each fund invested in,” he continues. This external ODD complements Kempen’s internal ODD.
Since 2015, Kempen has asked managers specific questions on their responsible investing policies, covering, amongst others, exclusion lists. Since 2017, Kempen has been asking managers to complete the publicly available UN PRI due diligence questionnaire for hedge fund managers (whether or not they are PRI signatories), which the UN PRI developed in conjunction with the Alternative Investment Management Association (AIMA) and the Hedge Fund Standards Board (HFSB). The DDQ covers policy, governance, investment process, monitoring and reporting. “Answers to these questions are becoming more and more extensive,” says Felix Rutten, Portfolio Manager for Alternative Strategies at Kempen, who has responsibility for monitoring hedge funds’ ESG policies.
Kempen is now further raising its game. “Since 2019, we have added an ESG score to our portfolio construction framework, based on five pillars: commitment to responsible investing; ESG integration; active ownership; evidence & transparency and tailoring. Currently the framework is based on a binary score of zero or one for each category and is equal weighted in terms of the final score. That said, investing in excluded sectors will lead Kempen to actively engage with a manager towards a solution, even if a manager scored eight out of ten on other criteria. For new managers, we explore ESG at an early stage so that we do not spend time completing due diligence on a manager that will not prove to be investible,” says Rutten.
Currently, hedge fund managers score between two and nine, with an average score of six, but this has to be seen in the context of the strategy: managers of strategies that do not invest in individual companies (such as CTAs, macro funds or insurance linked securities) cannot attain the highest scores as they cannot be given any credit for not investing in excluded sectors, or indeed for engagement. Therefore, Kempen may refine the approach to add more qualitative criteria that could reward managers for articulating more extensive policies, with a score of one to five on each criterion. Weighting schemes could also be introduced.
“We have also added a traffic light system of red, orange and green ESG flags to our monitoring framework, so that these issues are alerted to quarterly investment committees,” says Rutten.
Positive Impact is a pillar of Kempen’s ESG policy, setting out the benchmarks which are used to assess external managers’ ESG policies. Kempen measures some impact funds on criteria including intentionality, additionality and measurability. Kempen already has a Global Impact Pool, which invests in companies furthering the UN Sustainable Development Goals (SDGs), and a range of Sustainable Value Creation funds. On the ALTS side, Kempen does not yet have an impact offering, but is contemplating investing in a credit fund that uses ESG scores.
Excluded sectors apart, Kempen’s policies are not inflexible in all areas. Companies on the avoidance list are excluded from Kempen’s internal funds, but the manager does not feel it is realistic to expect all external managers to exclude them. Therefore, the approach is to engage with managers in relation to their investments in such companies; Kempen only engages directly with companies that it owns directly through its own funds. Nonetheless, engaging with managers can still keep the team busy: “even when a manager gets a score of eight out of ten we can engage with them over holdings,” says Rutten. Sometimes, Kempen has alerted managers that some of their investee companies may have weapons exposures via joint ventures, which might not have been immediately apparent.
Kempen does not vote proxies for holdings in external funds but does expect managers to do so responsibly. “We have developed a very detailed scoring methodology for reviewing managers’ voting track records,” says Mnatsakanian.
Kempen is focused primarily on securing ESG objectives for its own clients and not necessarily seeking to radically change managers’ entire business models. If managers are not prepared to remove excluded stocks from a strategy, Kempen may sometimes opt for a separate share class or separately managed account meeting the exclusion criteria.
On only one occasion has Kempen ALTS divested from a fund for ESG reasons. “We temporarily redeemed from a merger arbitrage strategy that was exposed to a weapons company. We reinvested after the position had been exited,” says Meeuwissen. And some managers’ ESG offerings are more restrictive than Kempen requires. They declined to switch into an ESG version of a strategy that excluded adult entertainment, bottlers and drinks, and gaming, for instance.
Kempen’s ESG policy is not overly prescriptive and leaves latitude for managers to develop their own approach. For instance, Kempen encourages managers to sign up to the UN PRI but this is not a hard requirement. As of January 2020, seven of the 20 external hedge fund managers were UN PRI signatories (LibreMax; Marathon; Transtrend; Boussard & Gavaudan; One William Street; Warwick and Lyxor). “We would ideally prefer all managers to sign up to the PRI, but it is more important that they have their own responsible investing policy and act as engaged shareholders,” says Meeuwissen.
Indeed, Kempen has a preference for active managers that do their own ESG research, rather than relying only on ESG ratings agencies – not least because scores can vary markedly between the agencies. But Kempen would not be precluded from investing in a manager that did rely exclusively on external agency scores, as this is only one criterion and not a prerequisite.
Whether shorting stocks with low ESG scores is a legitimate source of alpha is another topic of some controversy. Some managers short low ESG score stocks, while others remove them entirely from their investment universes and Kempen could invest with either sort. “There is not yet any common view in the industry. Shorting might help such companies by providing liquidity and attention, but it could also encourage them to change their behaviour forced by an increased cost of capital,” says Meeuwissen.
Another initiative for 2020 will be asking hedge fund managers for their carbon footprints. Kempen already reports these on a “best efforts” basis (in 2018, carbon data was available for 44.3% of its assets under management) for its internal funds and some external funds with a full look through to portfolio holdings and based on its own assessment, working together with ISS-Ethix Climate Solutions. “Our carbon footprint is relatively low partly because the long/short equity managers we invest in have little exposure to utilities and real estate,” says Meeuwissen.
Carbon reporting is just one example of the type of information that could be aggregated from underlying managers and relayed to end investors in Kempen Alternative Strategies, to complement traditional risk and portfolio reporting (such as RiskMetrics HedgePlatform for risk aggregation, with some managers also offering Open Protocol Enabling Risk Aggregation (OPERA)). Meeuwissen is optimistic that this will eventually be realistic because, “ESG reporting has to be seen as part of a broader trend towards managers becoming more transparent and more prepared to negotiate over fees, post the GFC. Dialogues on ESG were initially difficult, but we are now seeing some acceleration, with very few managers unwilling to provide enough detail. Responsible investing is now becoming a much more common part of dialogues.”