KENFO, Germany’s nuclear waste management fund, has tweaked a sustainability concept it implements for liquid asset classes – equities and bonds – to include a ”best in progress” principle, in addition to its “best in class” approach.
This helps the fund track the progress of sustainability impact made by invested companies when applying an environmental, social and corporate governance (ESG) strategy, the chief executive officer, Anja Mikus, wrote in a paper published by the Institute for Sustainable Investment (NKI).
This may push companies to make an effort to up their sustainability scores if they stand below the 75% “best in class” threshold.
KENFO applies the threshold for the “best in class” approach to spot the “75% best ESG-rated” companies in an industry in order to allocate investments, the CEO explained. A rating improvement is an indicator of “future outperformance”, she added.
The combined exclusion criteria – “best in class” and “best in progress” – guarantees that “central requirements for a modern, sustainable capital investment” strategy are satisfied, while at the same time “the investment universe remains large enough” to achieve diversification, Mikus said.
The fund excludes investment companies that violate the core principles of the United Nations Global Compact on corporate sustainability or firms that aren’t signatories of the UN framework.
For government bonds, KENFO excludes countries that do not follow fundamental, internationally recognized standards.
Last summer CEO Mikus explained that the fund’s ESG strategy is largely based on a decentralized architecture, with external asset management companies running investments according to certain ESG principles. The fund managers work with ESG data providers to incorporate sustainability metrics.
Mikus added that the fund is focusing on private equity and infrastructure for its illiquid asset allocation amid a “challenging” environment for expected returns.
KENFO has meanwhile further developed its internal ESG reporting in order to track changes in its portfolio such as its carbon footprint across all mandates.