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New white paper on making sense of ESG data in real assets

Real assets investors hold the key to decarbonisation, and need to consider the carbon footprints of their holdings…

Author:

Jags Walia, Senior Global Listed Infrastructure Portfolio Manager

Alex Williamson, Senior Quantitative Portfolio Manager

Real assets investors hold the key to decarbonisation, and need to consider the carbon footprints of their holdings…

Everyone talks about the need to reduce the number of flights we take if we’re to meet the goals of the Paris Agreement and limit climate change. And yet air travel is only responsible for around 2% of global carbon emissions, so it would possible to meet the Paris goals without making any changes to how we fly.

Other areas of the economy have a much greater impact. Take real assets, for example. As we set out in our 2022 outlook, they’re likely to be a great inflation hedge in a period of rising prices. But investors should bear in mind that maintaining and operating real estate accounts for around 17% of global carbon emissions, and roughly double that proportion if we factor in its construction. Utilities, which make up half of Kempen’s infrastructure universe, account for another 30%.

…but doing so isn’t easy

If the Paris goals are to be achieved, it’s clearly vital that real assets companies take decarbonisation seriously. But measuring their progress towards decarbonisation, and the overall effects of their activities on the environment, is easier said than done.

One of the biggest problems is that companies report ESG data in different ways. Another is that in recent years there’s been a proliferation of ESG data providers, all using different methodologies and often producing conflicting scores. This causes headaches for investors looking to limit their exposure and contribution to climate change. They can’t just look at an ESG score and conclude a high number is good and a low number is bad because the providers’ methodology might not be capturing certain nuances.

“Looking at ESG scores can be a bit like looking at a photograph of what a company is doing at one point in time, but to be getting a better idea you need to be watching a film of its activities and future plans.” – Jags Walia, global listed infrastructure portfolio manager

Taking a holistic approach

In Kempen’s white paper, Turning up the volume, cutting through the noise: making sense of ESG data in real assets, we argue that bottom-up investment skills, an active approach and taking a holistic view of a company’s activities are vital if investors are to make a contribution to solving the climate crisis.

In the paper we cite the example of Cheniere Energy, a US exporter of liquefied natural gas. With estimated Scope 3 greenhouse gas emissions of 42.7 million tons per year, on the face of it it’s a big polluter and as such receives a poor score from many ESG data providers. But at Kempen we believe that only tells half the story because the firm is helping China’s transition from coal to natural gas. That means it’s playing an important role in reducing global carbon emissions.

The need to dig deeper

In the paper we’re at pains to point out that we’re not disparaging the work of ESG data providers. It’s a new industry and lots of companies don’t disclose data adequately or according to the same criteria. And the information they provide does have its uses – we use it in our reporting.

But when it comes to our data-heavy investment process, we believe the data they provide is much too inexact to base our decisions on. So we have a choice. We could be passive, waiting for data to improve, but that could take ten years, and by then it would be too late to solve the climate crisis. Instead, we take an active approach, digging deep into a company’s activities to enable us to better estimate its impact on the world we live in.

“There’s been a proliferation of ESG-based passive funds and ETFs recently. They use ESG data and claim to be a low-cost option for sustainable investors. But if you open up the bonnet and look at them, they’re not embracing sustainability to the same extent that we are at Kempen – we’re much more nuanced in what we’re doing.” – Alex Williamson, senior quantitative portfolio manager

Read our white paper

To find out more about the challenges involved in making sense of ESG data and how we overcome them in our real assets investment process at Kempen, please download our white paper.