A renewed methodology as a cornerstone for responsible investing
Today's social, environmental and economic challenges require a thoughtful and appropriate response from the financial sector. With responsible investing, asset managers want to support the evolution towards a more sustainable world. Given the fast pace of evolution within the field, KBC Asset Management is therefore continuously seeking to develop its responsible investing methodology.
Responsible investing first
Responsible investment comes first as a proposition. After all, as a financial institution, we have an exemplary role to play there. We owe that to the world, both present and future society.
Ismail Fouda, responsible investment expert at KBC Asset Management
Personal values guide clients' investment preferences. Once expressed, there is a greater propensity for responsible investing. In Belgium, nearly 50% of the assets managed by KBC are responsibly invested. "We are reaching a tipping point where responsible investing (RI) is growing stronger and is likely to become the dominant proposition this year”, says Ismail Fouda, responsible investment expert at KBC Asset Management. “As an asset manager, one must be prepared for that. KBC has been pioneering responsible investing for decades. Meanwhile, we are going one step further by putting RI forward as the first proposition through our 'RI-first' approach. This will give it the place it deserves, both in invested assets and in our digital and personal communications".
Clients experience a personal conversation and parameterization of their preferences as something crucial within the context of responsible investing. MiFID(1) questionnaires address this and record clients' ESG(2) preferences. "We notice that most of our customers do not always have specific sustainability preferences. Rather, we find that they tend to value responsible investing as a whole, with the majority agreeing with KBC's approach in constructing the RI model portfolio. Then an RI proposition is certainly appropriate".
"Nevertheless, we want to emphasize that our investment products are not RI- only, but RI-first," Fouda clarifies. RI is our first proposition, but that doesn't mean that we don't meet our clients other preferences. We have a diverse client base, of which some might say 'I want it even more responsible investments' or 'No, RI is not for me. I want to stay non-RI'. With the diverse investment offering at KBC, we are able to satisfy these various demands".
True to what is right and good
For us, 'RI-first' is a unique approach that cannot be compromised under any circumstances. It is therefore established on the solid foundations of our RI methodology, which we have improved over the years and continue to do so, all the while building up considerable expertise in responsible investing.
Ismail Fouda, responsible investment expert at KBC Asset Management
“One shouldn't completely change what is solid. But we should also not fall prey to the illusion of stability, relying purely on our current process as an indicator of success,” says Fouda. “Thus, in this context where we are elevating our RI methodology, KBC Asset Management is still adhering to its three types of funds that invest responsibly”:
- Responsible funds (article 8): funds that invest in companies and countries that promote sustainability features and make efforts to mitigate climate change.
- ECO-thematic funds (Article 9): funds that invest in companies that offer a solution to a specific sustainability challenge, such as water scarcity, climate change or alternative energy.
- Impact Investing funds (Article 9): funds that invest in companies whose products and/or services have a positive impact on society or the environment.
Each of these funds must comply with four core principles that also remain unchanged:
- Avoid negative exposure by applying proper negative screening
- Achieve specific ESG objectives
- Contribute to sustainable development
- Defend the interests of our investors and promote sustainable behaviour through Proxy Voting and Engagement
A renewed RI methodology makes a difference
To keep up with market developments in responsible investment and to ensure that the methodology used remains sound, it undergoes an annual review. That can lead to certain things being changed. And that has now happened.
Ismail Fouda, responsible investment expert at KBC Asset Management
The main change within the updated RI methodology concerns the tightening of the framework for labelling companies as sustainable. Companies are no longer assessed generally on their policies, products and services. Instead, they are now only labelled sustainable when at least 20% of their turnover can be linked to sustainable activities. The framework becomes more tangible and stringent, resulting in fewer companies being labelled as sustainable. "As we set the bar higher for companies we view as sustainable, our responsible funds (Article 8)will end up with lower minimum targets for sustainable investments under the Sustainable Finance Disclosure Regulation (SFDR). However, this should not be viewed as a relaxation of targets; on the contrary, our stringent assessment of companies ensures that only the ones we truly believe are sustainable get awarded that label. For ECO-Thematic and Impact Investing funds - both Article 9 funds - the targets will remain unchanged at 95%", adds Fouda.
Another significant change is in the exclusion policy for responsible investment funds. There, a new biodiversity policy ensures that companies with serious land use and biodiversity controversies are now excluded. The same applies to companies whose activities have a negative impact on biodiversity and which do not take sufficient measures to reduce their impact. “Protecting our biodiversity is an essential path to achieve the sustainable revolution we all aspire to undertake at KBC. The first step we take in doing so is to ensure we consider biodiversity in our investment decision making,” indicates Fouda.
Additionally, specific ESG targets for responsible funds are also under scrutiny. Promoting the integration of sustainability into companies' policy decisions, which is done by giving preference to companies with a better ESG score, has been lowered from the current at least 10% better than the fund benchmark to better than the fund benchmark. This adjustment does not apply to ECO- thematic and Impact Investing funds.
As for the greenhouse gas intensity target, it also undergoes new enhancement. In addition to applying a 50% reduction trajectory by 2030 (relative to end-2019 fund baseline), a second greenhouse gas intensity target is added for companies. Thus, the GHG intensity of a responsible fund must always be 15% below its benchmark. “The decarbonization challenge is complex one, but an essential piece of the puzzle for us to achieve a sustainable transition,” adds Fouda.
"Finally, for our sovereign bond funds, we have excluded government bonds of countries applying the death penalty from responsible investment funds", concludes Fouda.
An exciting turnaround
Responsible investing is a way to combine your financial goals with your concerns about the environment, society and corporate governance. The renewed RI methodology is fully in line with this idea and well placed to help support the sustainable transition by promoting environmental and social characteristics.
The combination of the RI-first concept and the tightened RI methodology can help identify long-term risks and opportunities, while aligning investing with personal values. Thismakes for an exciting turnaround that we can use to try to make a difference, for our customers, for the environment and for society.
Ismail Fouda, responsible investment expert at KBC Asset Management
(1) 'Markets in Financial Instruments Directive' is a European investment directive
(2) Environment, Social & Governance
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This article is informational only and should not be considered investment advice.
