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The Global Total Return Bond Fund aims to capture opportunities in fixed income classes around the globe. The backbone of the investment process is in-depth fundamental research on companies and countries. An important element in this analysis is the assessment of environmental, social and governance factors (ESG). We are convinced that integrating ESG factors into the investment process leads to better informed investment decisions.
In our opinion ESG is under researched, while ESG information will help in identifying both investment risks and opportunities. We therefore believe it is rewarding to actively integrate ESG analysis into the management of the fund, as we do for other Robeco funds as well. Being early movers in this field we can build on our experience in successfully using ESG information and effectively integrating it into the investment process.
ESG is a consistent part of the investment process. ESG factors have a fixed place in the credit reports produced by our analysts. For corporate bonds (both investment grade and high yield) we have coverage of nearly all (>95%) of the corporate names. The primary focus of a corporate bond holder is the company’s ability to repay debt. The key focus of credit analysis in Global Total Return Fund is therefore the cash generating capacity of the issuer and the quality of the cash flows. The credit analysts perform this analysis through a structured format assessment of five different factors of which ESG is one. The other variables are the company’s business position, corporate strategy, financial profile and corporate structure. Based on these five factors the analyst assigns a fundamental score which expresses the overall fundamental view on a company given its rating.
For government bonds we cover all the countries in which the fund is invested. The country research for developed and emerging markets government debt is structured in the same way. Boundaries between these markets are fading – Is Greece developed? Is South Korea emerging? – and our investment process reflects this trend. We have anchored ESG factors into our investment process via our country sustainability ranking. This ranking gives an overview of how well a country scores on sustainability criteria that we find relevant. These criteria give a broad overview of how well a country guards the interests of future generations. They include ESG data that one probably would expect, like policies on greenhouse gas emissions and corruption, but also non-traditional angles like investments in innovation, labor market unrest, or aging policy.
ESG impact in circa 30% of the company profiles
In analyzing and investing in corporate bonds, the focus is tilted towards detecting downside credit risk. This makes sense as risk is asymmetrical for credit investors; a good risk management system at a bank, for instance, does not lead to a strong improvement in credit quality but a weak one can actually lead to the total collapse of a bank. Positive ESG factors are often less tangible and sometimes only make a very long-term positive contribution to a company’s fundamentals, which are outside the time frame of the credit assessment and only accrue to the company value for equity holders. Obviously the information gathered will result in a better understanding of the fundamentals of all companies involved. Nevertheless, all company profiles from the credit analysts are scanned to quantify in how many cases we find a financially material impact of ESG factors on these profiles. Currently, we find 20% in which the ESG information has a financially material negative impact versus 10% with a positive impact on the fundamental view.
Governance and Active Ownership
Robeco exercises its investor responsibilities in terms of governance and active ownership. Together with the engagement specialists the credit analysts discuss themes or company specific issues to be addressed via engagement and research studies. In return, the engagement process gives valuable information to the credit analysts on the results of their discussions with management. This helps the credit analysts get more relevant ESG data and knowledge on the companies in their sector. And Robeco has found active engagement with listed companies to be a useful instrument to influence corporate behavior.
For the fund as well as most other Robeco funds we believe integrating ESG analysis into our investment decisions is preferable to excluding companies or countries. First of all, our ESG analysis is aimed at identifying both risks and opportunities in fixed income. By using our ESG information only to exclude companies or countries, we run the risk of neglecting the opportunities that may arise from this analysis. Second, where we do identify risks this does not necessarily mean we avoid investing in that company or country. For example, the current ESG profile of a company could be poor, but the price of a bond may already have been corrected for this risk. If this is the case and if there are signs of improvement in the profile we can decide to invest in such bonds in spite of the higher risks involved.
In April 2015, S&P Dow Jones launched the S&P ESG Pan-Europe Developed Sovereign Bond Index. This first ESG-weighted bond index from S&P Dow Jones is based on the RobecoSAM Country Sustainability Ranking.
The starting point for the index is the market cap weighted index. Subsequently, the country’s sustainability score in the RobecoSAM Country Sustainability Ranking and the change in this score are compared with the average score of the investment universe. Based on the deviation from the average, the country’s weight is adjusted.
We see the fact that S&P Dow Jones now bases its ESG index on our Country Sustainability Ranking as a ‘stamp of approval’ for our country sustainability analysis process.
External recognition has also come from the UN PRI. The UN-supported Principles for Responsible Investment (PRI) have recently awarded us the highest scores for our approach to active ownership and for the integration in fixed income in each of the asset classes. For integration in both government bond and corporate bond investments our A+ score was significantly higher than the vast majority of the asset managers involved in the study.