SUSTAINABILITY

KENFO's mission to integrate its sustainability criteria into its systems is based on investment guidelines issued by the Federal Ministry of Finance (BMF). The investment guidelines dated 27 June 2017, issued by the BMF as a general administrative regulation on the basis of Section 9 Para. 2 (2) of the German Nuclear Waste Management Act, stipulate in Section 4 Paragraph 3 Sentence 1 that KENFO’s board of managing directors should integrate ESG (environmental, social, governance) criteria into the investment strategy. 

In addition, the German Bundestag has asked the Federal Government not to invest in projects, companies, bonds or institutions that are contrary to the German parliament’s higher-ranking decision of phasing out nuclear energy (in accordance with the decision of the German Bundestag on 14 December 2016 (BT-Drs 18/10671).

The consideration of sustainability criteria in the investment process should help to ensure the tasks and goals of KENFO defined in the German Act on the Nuclear Waste Management Fund. The sustainability strategy is an integral part of the investment strategy. It is intended to achieve good, long-term returns and stable long-term performance. The investment strategy is based on a balanced, broadly diversified portfolio. A specific concept to take ESG criteria into account is developed and implemented for each asset class within the strategic asset allocation. Wherever possible and reasonable, the fund refers to internationally recognized ESG norms and standards. 

The effects of entrepreneurial activity on the environment and society, as well as good corporate governance, are important parameters of sustainable investment. Sustainable business models can help to achieve long-term, above-average, risk-adjusted returns. Sustainable investment criteria based on risk considerations are particularly important for investors like KENFO with a long-term perspective. Companies whose business policies are based on short-term success and are not geared towards sustainable goals involve considerable risk of loss to investors. We therefore want to make investments that are geared towards a sustainable generation of performance. 

KENFO's sustainability approach is largely implemented in a decentralized fashion, whereby external asset management companies are tasked with managing investments according to ESG principles. They typically work with qualified ESG data providers of their choice to incorporate sustainability metrics. This way, KENFO is able to benefit from established cooperation processes between external asset management companies and ESG data providers/ratings agencies, and is able to stay abreast of new developments in the field of ESG management. On the other hand, this approach gives KENFO the opportunity to benefit from the global dynamism of sustainable capital markets and in particular the continuous further development of ESG rating approaches and also to support the competition between the best rating concepts.

The asset management companies and investment advisors being mandated have proven expertise when it comes to integrating ESG criteria into the investment process. The selection process for the investment universe integrates the sustainability criteria (known as “ESG screening”). For example, each time bonds and equities are purchased, it is ensured that the selected investments are not subject to the predefined exclusion criteria (such as UN Global Compact violations or being nuclear power plant operators) and, at the same time, are among the best in their industry. Companies are analysed and evaluated based on a variety of industry-specific and other relevant ESG criteria. The companies rated with best ESG-scores within their industry branch will be included in the liquid investment universe.

KENFO does not generally exclude investments in oil and gas companies because it does not currently consider this to be expedient. Although an exclusion makes the portfolio appear less CO2-intensive, it does not change the CO2 emissions of the company in question. The sale merely results in the shares changing hands without depriving the company of capital. KENFO's sustainability approach is rather aimed at supporting the real economy in the climate-neutral transformation of its business models (see NZAOA Position on the Oil and Gas Sector). This requires considerable financial resources and takes time. Complete exclusion would mean that KENFO would no longer pursue the necessary energy transformation of oil and gas companies.
The real economy and private households will continue to rely on oil and gas for the foreseeable future and it is necessary to maintain a reliable and affordable energy supply. At the same time, it is clear that the Paris climate targets can only be achieved if oil and gas are replaced by renewable energy sources in the medium term. This is also reflected in KENFO's portfolio: around 40% of its non-listed infrastructure portfolio currently consists of investments in renewable energy and the energy transition (such as the expansion of grid infrastructure). The German government's energy transition strategy is also based on such a transformative approach.
 

There is no one-size-fits-all strategy in the area of sustainability. KENFO aims to take ESG criteria into account in all liquid and illiquid asset classes when selecting assets. The sustainability approach is in line with our performance goals. We want to balance our (direct and indirect) investment decisions and our ESG goals in such a way that return potential is preserved when the foundation's assets are invested. In this way, we can pursue the foundation’s purpose without placing a burden on future federal budgets.

Sustainable investing is a dynamically developing area. The individual steps in the sustainability approach are implemented directly by the associated asset management companies for the liquid investments. The companies generally have competencies, computing capacities and licenses from multiple data providers. This means that KENFO does not have to commit to one ESG ratings agency or data provider and its databases. By doing so, KENFO benefits - in addition to cost savings - from the high level of dynamics that results from improving data quality and data availability in this business area, which is still new.

KENFO’s sustainability approach is based on the following general principles when making investment decisions:

UN Global Compact is the world's largest and most important initiative for responsible corporate governance. Companies are excluded from investment if they violate one or more of ten of its core principles. This includes compliance with recognized human rights and international labour standards, protecting the environment and combating corruption. The exclusion also includes companies from industries that are excluded from the UN Global Compact as signatories because they violate its statutes relating to corporate misconduct.

UN Principles for Responsible Investment (UN PRI). The global investor initiative PRI works in partnership with the financial initiative of the UN environmental program UNEP and the UN Global Compact. More than 1,400 companies from 50 countries around the world have joined this initiative. Together they have an investment capital of more than USD 59 trillion. With their signature, capital owners, asset managers and financial service providers undertake to observe environmental and social criteria, as well as aspects of corporate governance in all of their activities.

Exclusion of nuclear power and supporting of climate goals. The fund excludes investments and participations in nuclear power station operators and in companies that control nuclear power station operators. When investing its resources, the fund will not act in a manner that is contrary to the phasing out of coal-based power generation. As part of its statutory mandate, KENFO supports investments in decarbonization in order to achieve climate targets to be achieved. When investing its resources, the fund will not act in a manner that is contrary to the phasing out of coal-fired power generation, which the coal commission is aiming for and which has a broad social consensus behind it.

In November 2020, KENFO joined the Principles for Responsible Investment (PRI), developed by international investors and endorsed by the United Nations. The Principles for Responsible Investment is an international investor initiative established in 2006 in partnership with the UN Environment Programme (UNEP) Finance Initiative and the UN Global Compact. At the core of the initiative are six Principles for Responsible Investment, which propose numerous measures to incorporate ESG (environment, social, governance) issues into investment practices. 

Principle 1: We will incorporate ESG issues into investment analysis and decision-making processes.

Principle 2: We will be active owners and incorporate ESG issues into our ownership policies and practices.

Principle 3: We will seek appropriate disclosure on ESG issues by the entities in which we invest.

Principle 4: We will promote acceptance and implementation of the Principles within the investment industry.

Principle 5: We will work together to enhance our effectiveness in implementing the Principles.

Principle 6: We will each report on our activities and progress towards implementing the Principles.

Even before joining, KENFO had already substantially implemented these principles; in particular, it has integrated environmental, social and governance principles into its investment and decision-making processes since its establishment in summer 2017.
 

KENFO has joined the United Nations-convened Net-Zero Asset Awner Alliance (AOA) in early March 2020. This organization was founded by the United Nations at the UN Climate Summit in New York in September 2019 and is the most important international initiative involving various major investors in the fight against global warming. KENFO is the first sovereign fund in the world to commit to the Paris Agreement and to making its investment portfolio climate-neutral by 2050. AOA members commit to reducing the CO2 emissions of their investment portfolios to net zero by 2050. In doing so, the Alliance aims to play its part in limiting global warming to 1.5°C compared to pre-industrial times. Members collectively manage assets under management for US$9.5 trillion and include 89 international institutional investors (as of July 2024).

In its sustainability principles, KENFO is committed to the Paris climate goals. The aim of membership is to accompany the transformation process of the real economy together with other major investors towards climate neutrality. With a joint commitment by large asset owners in the AOA, KENFO is sending a strong signal to achieve the climate goals through a transformation in all areas of the economy. The aim is not to make portfolios climate-neutral primarily through exclusions. KENFO wants to go down this path together with the real economy.

The Net-Zero Asset Owner Alliance released the "Inaugural Target Setting Protocol" in October 2020, which defines the AOA's goals to be achieved over the next five years and how individual members will work toward those goals. Targets to be set under the protocol carefully balance scientific ambition, active investor engagement, and divestment constraints, formulated in line with the Paris Climate Agreement.  

As a member of the UN-convened Net-Zero Asset Owner Alliance (AOA) and its "Target Setting Protocol", KENFO has set an initial interim target for reducing its carbon footprint: By the end of 2024, the carbon footprint of its equity and corporate bond portfolio measured as of December 31, 2019 and submitted to the AOA shall be reduced by an additional 20 percent.