australiaen
Focus on financial materiality
Sustainable Investing Research

Focus on financial materiality

Our SI research focuses on the link between sustainability and financial materiality. But what is financial materiality, exactly? Michael van der Meer, Head of SI Research explains how Robeco determines the financial relevance of the sustainability criteria that are incorporated into the investment process.

How do you define financial materiality, and why is this important for the Robeco methodology?

We consider any intangible factor that can have an impact on a company’s core business value – namely growth, profitability, capital efficiency and risk exposure – to be financially material. Factors such as a company’s ability, to innovate, attract and retain talent, to become Paris-Aligned or anticipate regulatory changes matter from an investor’s point of view because they have significant impacts on a company’s competitive position and long-term financial performance.

As an asset manager, we focus on identifying financially relevant sustainability factors. For this reason, we have created our sectorial materiality frameworks which help analysts focus on those factors that are most relevant to financial performance. This helps to ensure that we integrate financially material sustainability factors into our investment process in a structured manner. Because these factors are relatively under-researched by most investors, our integration of financially material sustainability factors in the investment process allows us to make unique and better-informed investment decisions for the long-term.

There has been much discussion about the materiality of sustainability. What makes your framework different?

Our financial materiality framework draws upon more than 20 years of experience in integrating sustainability into the investment process. What sets us apart is that our approach focuses on the intersection between sustainability and business performance. Specifically, we focus on identifying the most important intangible factors that relate to companies’ ability to create long-term value. For instance, lowering energy consumption in manufacturing processes results in significant cost-saving opportunities and has a direct impact on a company’s bottom line. This focus on the most financially relevant sustainability factors is essential, given our mission to create long-term attractive returns for our clients through sustainable investment strategies. However, the link between sustainability and business performance is also a priority for leading companies, which understand the pay-offs of their sustainability investments.
Sustainable Investing Research
Sustainable Investing Research
Read more

So how do you determine which information is financially material?

We begin with a top-down industry and mega-trend analysis. For each of the 60 industries we assess, we ask ourselves which are the key sources of value creation for that industry, and which long-term trends are likely to have an impact on these industry drivers. Once we have identified material factors for each industry, we prioritize them according to their expected magnitude and the likelihood of their impact on growth, profitability, capital efficiency and risk. This results in a materiality matrix for each industry, which maps the relative importance of each material factor against each other and provides us with a visualization of the most important factors for each industry (see Figure 1).

Figure 1: Materiality Matrix 2020 - Automobiles OEMs

Source: Robeco

How is this information used in your company analysis?

Once we have identified and prioritized the material sustainability issues for each industry, our analysis shifts to the company level and evaluates how well company management is addressing each of these factors. Based on this analysis, we adjust our financial, growth and risk assumptions in order to obtain a better estimate of fair value, which not only takes into account short-term financial projections but also gives ample consideration to longer term sustainability factors.

Essentially, we determine which companies are most likely to remain competitive in changing business environments and are therefore best positioned to continue to create value in a sustainable way.

Although the materiality framework focuses on industry-specific criteria, have you identified any sustainability criteria or factors that are significant across all industries?

Yes. A variety of sustainability factors are relevant to companies across a wide range of industries. These include innovation management, human capital management, supply chain management, environmental management and corporate governance. The impact of products and services is also something we always look at, including how these enable, or detract from, achieving the Sustainable Development Goals (SDGs). But we tailor the questions in these criteria to the specific characteristics of each industry.
Sustainable Investing Research
Sustainable Investing Research
Read more

How do you ensure that your research remain up to date?

Our SI Research Analysts work with our Quantitative Analysts to test the financial materiality of the factor we identify. Our quantitative research identifies which intangible factors have demonstrated the clearest correlations to past financial performance. In addition, our assumptions are continuously tested by the performance of our funds as we integrate sustainability into investment decisions.

Tap into our expertise

Keep up with our knowledge and trends through articles, podcasts and videos:

More insights

Tap into our expertise

Keep up with our knowledge and trends through articles, podcasts and videos:

More insights
SI Opener: The meat supply chain is a major threat to global health
SI Opener: The meat supply chain is a major threat to global health
It’s not only ‘wet animal markets’ that are causing health risks, as we have seen with Covid-19.
25-02-2021 | SI Opener
Asset managers are yet to truly embrace sustainability
Asset managers are yet to truly embrace sustainability
Proxy voting is a powerful tool for shareholders to steer corporate agendas towards sustainability-focused decision making.
24-02-2021 | Research
The stunning statistics of sustainable investing
The stunning statistics of sustainable investing
The progress that sustainable investment has made in recent years has been stunning.
24-02-2021 | Stunning statistics
We will set five-year carbon footprint reduction goals
We will set five-year carbon footprint reduction goals
Decarbonization in the making.
22-02-2021 | Interview
Investors use voting rights to address poor climate change policies
Investors use voting rights to address poor climate change policies
Companies that are not sufficiently decarbonizing will face opposition from shareholders, says Engagement Specialist Michiel van Esch.
19-02-2021 | Insight
How regulation will enhance sustainable investing in 2021
How regulation will enhance sustainable investing in 2021
Integrating sustainability into investments will become much higher profile under new EU regulations that take effect this year.
17-02-2021 | Insight
2020 – the year that ESG finally became mainstream
2020 – the year that ESG finally became mainstream
I can still recall that 10 to 15 years ago, the sustainability community including myself would say: “One day, ESG will become mainstream”.
11-02-2021 | Column
Sustainability Yearbook 2021: 7,000 companies, 70 gold medalists
Sustainability Yearbook 2021: 7,000 companies, 70 gold medalists
S&P Global has published its annual yearbook showcasing the sustainability performance of the world’s largest companies.
10-02-2021 | Insight