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How investors implement ESG

How investors implement ESG

18-02-2015 | Insight | Bas Eestermans The drive to including sustainability factors into mainstream investing has become unstoppable – but investors approach it in different ways. Robeco recently held a series of round tables with existing and prospective clients to find out how investment professionals now tackle the subject.

Speed read:
  • Differing views on what counts as sustainability investing
  • Wide agreement though on exclusions such as cluster bombs
  • Social return is sometimes viewed as an ‘extra profit’

Robeco has been a pioneer of sustainability investing since launching the first sustainable fund in Europe in 1999.  ESG factors are now integrated as standard across the entire fixed income and equity ranges.

In tandem with this, the growth of sustainability investing itself has moved away from a focus on ‘save the world’ philosophies to a firm belief in proving the financially materiality of ESG factors. However, the use of ESG in an investment process differs greatly. This was the main takeaway from roundtables held with institutional and wholesale clients to gauge their views.

“Some view it has a hygiene factor, where they won’t invest in contentious weapons such as cluster bombs, while others think that voting and engagement is sufficient,” says Bas Eestermans, Director of Institutional Relations for Benelux at Robeco.

“Others go further by saying they want to improve the world for future generations using sustainable funds. Some funds also look at counterparties and will exclude certain brokers, looking for more sustainable partners, which takes sustainability to the next level. So it’s not just about seeking investment partners … there is a wide spectrum of how sustainability is implemented.”

‘Some funds also look at counterparties and will exclude certain brokers’

ACTIAM’S four-pronged approach
ACTIAM, the Dutch asset manager with around EUR 50 billion under management, has used sustainability investing principles for a long time. “ESG is the starting point of our investment process and is integrated into the way we invest,” says Florus van Meijl, Head of Allocation & Selection. “It’s not because it’s a ‘green wash’ or it looks good as a marketing tool; we really believe that it is necessary, and that it is our responsibility in looking after money for clients.”

“We have done this since before it became mainstream. Some things you just don’t want to invest in. Even if it isn’t financially material, the lines that we will not cross can include human or labor rights at a company, corruption, or even integrity. It can be a gray area but we do have an exclusion list on different topics.”

The ESG team at ACTIAM is now headed by Dennis van der Putten, who pursues a four-pronged approach to ESG. Firstly, certain laws rule out investing in the makers of products such as cluster bombs. Secondly, he looks for funds that adopt the more common ethical principles such as adherence to the Global Compact or UNPRI. ACTIAM then uses its own focus teams applying ESG specifically to in-house investments such as natural resources; and finally the company engages in impact investing to further the cause generally.

‘Some things you just don’t want to invest in’

But does it add value?
However, many investors still doubt whether such dedication to ESG adds value on the bottom lines of the companies themselves. “There is no reason to believe that investing in ESG or non-ESG firms gives differing risk-adjusted returns. The social return that is gained can be seen as an extra profit,” says Van der Putten.

“The evidence supporting a nexus between performance on ESG issues and financial performance is growing. The combination of fiduciary duty and a wide recognition of the necessity of the sustainability of investments in the long term have meant that environmental social and corporate governance concerns are now becoming increasingly important in the investment market. Due to this development, the costs of ESG investing do not significantly differ between investors.”  

Van der Putten says the growth of ‘green bonds’ is a good example of the dilemma many managers face in trying to be ethical, but also needing to earn money for their beneficiaries. “The financial yields of green and grey bonds are currently the same. But what will happen when this situation changes? Are you willing to give up some financial yield in order to gain the social benefits? That’s the tough question.”

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