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    Kempen’s Bold Move: Blacklists Chinese Assets

    Stockholm (NordSIP) – Kempen Capital Management (Kempen), part of Van Lanschot Kempen Wealth Management NV, has a reputation for being a fiduciary manager par excellence, known for its proactive investment approach. At the beginning of May, the firm showed further proof of such proactivity and innovation by announcing that it would start excluding certain sovereign bonds and state-backed entities from the portfolios of its fiduciary clients, such as pension funds, based on the results of a proprietary ESG framework.

    What made the headlines immediately after Kempen’s announcement was that the investment manager plans to blacklist Chinese government assets, among others. Somewhat sensational, as the country’s enormous economic potential has left most investors impervious to its undemocratic ways and willing to turn a blind eye even to blatant human rights abuses, despite plenty of evidence. Although the war in Ukraine has recently illustrated just how quickly an autocratic regime’s assets can become undesirable, few seem prepared to apply the logical conclusion of the Russian case to their overall portfolios. In comparison, Kempen’s systematic and straightforward exclusion policy appears both farsighted and bold.

    Curious to hear more about the rationale behind the exclusions, the design of the framework itself and its uptake among the firm’s clients, NordSIP reached out to Nikesh Patel, head of the UK fiduciary team and Lars Dijkstra, Van Lanschot Kempen’s Chief Sustainability Officer.

    Many ways to ‘fail’

    According to Patel, what prompted Kempen to start developing the framework in 2021 was an increasing frustration with the existing ESG indices and scores. “At some point, you have to stop and ask yourself, ‘How can I be a truly responsible investor?’ And the standard solutions available out there do not provide any clear answers, at least not when investing in sovereign bonds and state-backed entities,” explains Patel. He quotes the example of an Emerging Market Debt index that claims to be sustainable yet features government bonds issued by both Saudi Arabia and China. “There is even an ESG-labelled Chinese government bond index,” exclaims Patel. “It’s simply jarring to the value system!”

    The screening tool designed by Kempen attempts to capture a broad array of sustainability metrics, paying equal attention to all three categories, environmental, social and governance. “Many investors tend to emphasize the ‘E’-aspect in their analysis, focusing on climate change in particular,” explains Patel. “It is important, of course, but so are biodiversity, freedom of speech, corruption, or workers’ rights to name but a few. For us, an absolute ‘fail’ on any one of these metrics constitutes a material risk to the investment portfolio.”

    Each of the criteria within the scoring framework is carefully researched, and the team has had to get creative when sourcing the data. “Wherever we can find reliable and relevant data, we consider it,” says Patel. Sources include a variety of academic institutions and NGOs, such as Reporters Without Borders, Transparency International, and Climate Action Tracker.

    Subjectively fair

    One could argue that the design of the Kempen framework is subjective. The different criteria, although equally weighted in the model, are not entirely comparable, and the ‘fail’-thresholds for each metric are subject to calibrating. “It is not a perfect tool, of course,” admits Patel. “Had we been able to find a better one out there, we would use it, I assure you. But we haven’t.” For instance, he seems unimpressed by the ESG framework for sovereign bonds developed by the UNPRI. Patel says he doesn’t find their guidelines particularly useful as they offer enough flexibility to permit investors to justify including any country in their portfolios.

    Focusing on the headlines about excluding China or Russia from the portfolios, it is easy to forget that there is a lot more to Kempen’s new framework. The systematic assessment of all sovereign issuers in the world is just as labour-intensive as it sounds, and it also needs to be reviewed continuously. “Many countries are on the verge and could quickly tip over,” says Patel. “India, for instance, passed initially, but it is not certain the country will pass our next assessment.”

    Applying the exclusion criteria to the portfolios is not trivial either, as it is not just a matter of slightly tilting the country composition. Whereas many of the ESG indices overlap with the broad index more than 90 per cent, applying Kempen’s exclusion criteria results in reducing the universe of investable countries by 30 to 50 per cent.

    The uptake

    Fortunately, many of Kempen’s fiduciary clients appreciate the effort that the firm is putting into the exercise. According to Dijkstra, the feedback has been predominantly positive so far. “They like that we are doing something and being explicit about it,” he says. “Apart from a few religious endowments, no other investors in the UK are willing to take a stance,” he adds. Naturally, there are some worries about how the exclusions will affect the investment universe. Still, so far, the managers have convinced the clients that it is possible to compensate for the fallout by investing in other parts of the world.

    For the time being, Kempen is applying the new ESG framework for sovereign issuers only to the portfolios in the fiduciary part of the business, such as pension funds in the UK and the Netherlands. The firm’s private banking clients and investment funds have not adopted the exclusion tool yet. “We don’t force it onto our clients,” says Dijkstra. “We simply make it available to them.”

    “We deliberately chose to create a common framework rather than work on tailor-made solutions with each individual client,” explains Patel. “There is a behavioural aspect to it: we can nudge clients who are wavering into making a conscious decision.”

    How to be a responsible investor

    We touch upon an alternative strategy that many institutional investors subscribe to; engaging rather than divesting from countries or companies that don’t quite pass the ESG bar. Patel dismisses the idea emphatically. “Ah, the lazy argument of engagement,” he says. Although he admits that it is possible to try and influence some smaller countries’ governments if you are a huge and influential investor, he is somewhat sceptical about the idea. “I challenge you to show me an institutional investor, even among the biggest ones, who can engage effectively with the governments of China or Saudi Arabia,” says Patel.

    As to the Nordics, NordSIP’s readers might be relieved to learn that Kempen’s framework does not judge them too harshly. “The Nordics are nowhere near the cusps,” says Patel. “There are no absolute ‘fails’ and no low scores. However, what is not reflected in our model yet is how sustainably the huge institutional capital accumulated in the Nordics is being deployed across the world and its effects,” adds Patel. Now, there is something for Nordic asset owners and asset managers to reflect upon.

    Julia Axelsson, CAIA
    Julia Axelsson, CAIA
    Julia has accumulated experience in asset management for more than 20 years in Stockholm and Beijing, in portfolio management, asset allocation, fund selection and risk management. In December 2020, she completed a program in Sustainability Studies at the University of Linköping. Julia speaks Mandarin, Bulgarian, Hindi, Russian, Swedish, Urdu and English. She holds a Master in Indology from Sofia University and has completed studies in Economics at both Stockholm University and Stockholm School of Economics.

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