An interview with Christoph M. Klein, Founder and Managing Partner of ESG Portfolio Management.

This interview by Hannah Stringham will be published in The Beam #12. Subscribe now to read more on the subject.


 

Christoph M. Klein, is an expert on sustainable investing and ESG (Environment, Social, Governance). He has over 20 years of experience in the financial industry, having worked, among others, for nordIX AG, Deutsche Asset Management, and Deutsche Bank. In 2018, he founded ESG Portfolio Management, an asset management firm based in Frankfurt, which focuses on embedding the UN Sustainable Development Goals (SDGs) in its investment strategy. In October 2020, ESG Portfolio Management was included in the UN Principles of Responsible Investing (UN PRI) ‘Leaders Group’. Hannah Stringham of right. based on science took the opportunity to interview him.  

Mr. Klein, yours is the smallest firm to make the list of the UN PRI Leaders Group, alongside global giants like Allianz. Do you think small investment firms can make a true impact in terms of sustainability and climate action? 

Absolutely. I’m very optimistic about that. First of all, as a smaller company, it’s easier to optimise. To really go for the highest ESG quality, SDG impact and low climate risk. Because if we don’t like a company and don’t see any progress and transition, we simply don’t buy it. We don’t need to discuss for ages with anyone else, who may want to include that company for its performance – to beat the benchmark, as we say. That makes it easier for us to reach higher sustainability scores.

The other important dimension from a sustainability perspective is engagement and proxy voting. Here, you could expect that smaller investment firms are at a disadvantage, because companies may not see us as very relevant. But I disagree, and I would like to give you an example: Last year, when I was in the US, I saw a Kellogg’s cereal packaging that was pure plastic at the bottom. Kellogg’s is otherwise quite a good company from an ESG perspective. But I think they need to do more, where waste is concerned. So, I took a picture and wrote to their investor relations, asking about their packaging strategy and requesting that they reduce plastic waste. On my first two tries, I didn’t get a response.

That is why I used the UN PRI collaboration platform to write again to Kellogg’s, explaining why this issue is important for me and also inviting other PRI signatories to join this initiative. More investors from Australia, the US, and Europe joined, so we now represent over 60 billion US-Dollars in Assets-under-Management. And we have already had two very good conversations, not just with the Kellogg’s investor relations division, but also with their Global Head of Sustainability. And what we want to achieve, is to have a measurable reduction of plastic waste, more insights into how Kellogg’s is using alternatives, and how they work with the waste management industry to properly recycle – not just in developed countries, but around the world.

If we succeed in this, it would be a win-win-win situation – for the company, for us, and for the planet. So it doesn’t matter if  you’re small. If you use your networks, you can make a change.

 

It sounds as though UN PRI is a really important network for you. What were the main criteria to being selected for the ‘Leaders Group’? 

It’s really a great honor for us to be selected, because only 36 out of around 3,300 signatories were chosen for this group. The main topic to being selected was climate reporting. They covered a lot of detail and dimensions: How we measure climate risks. What kind of data we use. Our methodology, which should obviously follow TCFD recommendations. And we are happy to be working with right. based on science here, because your methodology is forward-looking and through the analysis we could show that all our funds are Paris-aligned, so comply with a 1.75 degree global warming scenario. But, obviously, we work hard and are committed to reducing it even further.

We presented that commitment in our PRI report. Senior management is involved with that. We have training and education, internally. We do research and we publish it. So, we share our knowledge and we report on a monthly basis in a very transparent way. I believe that ambition and that transparency were the reasons we were selected.

 

© Christoph Klein / ESG Portfolio Management. © Christoph Klein / ESG Portfolio Management.

 

You have been very active in the investment industry for a long time, especially focused on sustainable investing. Would you say that the conversation around ESG has changed a lot over the past year or few years? 

Increasingly, there is a basic understanding that this is indeed relevant and important for all of us. Five years ago, there was still a lot of reluctance. Extra work. Extra costs. Lower returns. Those were the main concerns.

But now, there is a very clear scientific understanding of what climate change means. And investors like pension funds and insurance companies, but also endowments or churches, have a long-term investment horizon. As do individual investors that are just starting out, like graduates or young professionals. They have around forty years to invest. And with that timeframe, rising sea levels matter. More volatile weather conditions and droughts – all this becomes highly relevant. You need to think long-term and you had better start today. Climate models are very, very clear about that. They talk about Tipping Points, where, once we reach them, there is no way back. And that creates some urgency, which is now reaching the financial markets as well.

 

In what way?

We as investors, have a tremendous responsibility. Because we not only analyse and signal to the markets, we also allocate capital. And hopefully, we select companies which are not only doing well, but doing good. Creating positive impact. If you provide new capital to these companies, that is what we call ‘additionality’. And many argue that this is really the driving force of SDG impact.

And, beyond that, we also engage with the companies. Giving constructive criticism, not to bash them and shut them down, but to help them move on in their transition.

 

Transition is a very good point: Many are calling for immediate divestment from, for example, fossil fuel companies. Others argue that sustainability in a broader sense means enabling transition by staying invested and engaging. What are your thoughts on this?

I understand what you are saying. There are some great examples of utilities companies that are leaders in the transition to renewables. Orsted, a Danish company that has almost completed that transition, comes to mind.

Of course, we also need to think about the consequences, about creating alternative jobs and providing the necessary infrastructure. That takes time. That is why politicians can’t ‘switch off’ as quickly as would be necessary to protect the climate. So, unfortunately, there is certainly a compromise between environmental and social factors.

But for us at ESG Portfolio Management, we exclude coal. And investing in, say a ‘green bond’ from a ‘brown’ company is not an option for us. We want to be truly green.

 

It does seem as though climate change and climate action is really moving to the forefront of political decision-making, public discourse, and also of investment and finance. Do you think there is a greater focus on climate compared to other sustainability aspects? 

Yes, I think the EU Taxonomy is an example of that. It focuses only on environmental factors and includes only very few sectors. From an investment perspective, this does not allow for diversification. Some asset managers may, for example, launch a windpark fund, which would be well aligned with the Taxonomy, but it’s certainly not diversified. Would you offer that to retail clients? I’m not sure, because of the risk. So I’m cautious about the Taxonomy. The level of detail is very high, but the outcome is perhaps not very satisfying.

And at the moment, social factors like gender equality, healthy food, and labour conditions are not covered at all. Perhaps the EU is planning to take it step-by-step. But it has already taken three years to get to this point. I think it will take too long, before other sustainability criteria are covered.  That is why I would suggest using the national sustainability labels, like the ‘Umweltzeichen’ in Austria or the ‘FNG Siegel’ in Germany. They are independent and their level of detail and scrutiny is pretty high, both on a fund level and for single securities. And they cover all SDGs, not only five or six. So I would call on the regulators to use these existing labels, because they include Social and Governance factors along with Environmental.

 

© Christoph Klein / ESG Portfolio Management. © Christoph Klein / ESG Portfolio Management.

 

All the different ESG criteria and metrics cause a lot of confusion. That is why we at right. are such strong believers in Temperature Alignment and using °C as a single, unified language that can connect science, economy, society, and policy when talking about climate impact. What would your advice be to individual investors who are trying to find a sustainable way to invest their savings?

That would be exactly those labels I just mentioned. But I think in Germany, we tend to have two extremes: Greenwashing, where providers just state that their funds are sustainable without a lot of proof. And, on the other hand, Greenbashing, where many professors in the field claim that most funds have no SDG impact.

I believe that there is something in between and that there are some fund providers who really work hard, are very transparent about what they do, and spend money to get double checked. There are around a hundred funds in Germany which I regard as very sustainable. But retail clients simply don’t know about them. So I urge the politicians and the regulator to speak up and say: ‘A fund that has an FNG label is sustainable.’

Because when you go to the supermarket and want to buy organic eggs, you look for the ‘Bio’ label and you buy them. You don’t conduct another analysis yourself, because you have a certain level of confidence in the label.

But if we only have washing and bashing, but no backing, then it is no wonder that there is confusion and that everyone says ‘it’s alphabet soup, I don’t know’.

 

Our dream would be that in future, you would not just buy the ‘organic’ product, but the 1.5°C product. So we would have clear labelling for products, companies and investments, what degree of global temperature rise they are aligned to.

Yes, we have worked hard to get our funds into alignment with 1.75°C and, as I mentioned earlier, we continue to work very hard to get down to 1.5°C. That is why we use right.’s methodology and insights, to identify companies that are not only already Paris-aligned but also continuing to reduce emissions further. And maybe, once we have more access to carbon absorbing technologies and projects, we can even get down to Net Zero. That is at least as important as an ESG score or an SDG impact. Because climate is, I agree with you, absolutely the dominating theme.

 

Strangely, you still seem to be in the minority there. According to a recent survey among nearly 3,000 investment professionals, only about 40% of them say they incorporate climate change into the investment process. Why do you think that is? 

For me, it is difficult to understand why only 40% incorporate climate change into the investment process. Climate change, its importance and effects have been discussed for more than twenty years. Over the past five years, the impacts have been in the news every single day. It’s all over the place because it’s so important. Therefore, we select carefully and engage to actively reduce climate risks in our portfolios as much as possible.