Robeco has a unique sustainability culture that goes back to the 1990s – and today it has never been more important to us.
Together with our sister company RobecoSAM, we were one of the first asset managers to see the potential of sustainability to enhance the returns of clients’ portfolios. And with this same aim in mind, today we integrate ESG information across our range of investment processes and actively engage with the companies in our portfolios.
Why is sustainability so important to us? We see it as a long-term force that is driving change in markets, countries and companies – which of course also means it can have a major impact on investment returns. So, it makes sense to treat sustainability like other return drivers, such as a company’s financials or market momentum, in our investment processes.
At the bedrock of our approach lies our company’s founding principle – that every investment strategy should be research-driven. This still holds true today: all of our actions linked to sustainability are grounded in exhaustive research.
Over the past quarter of a century, we have adapted and improved our methods and strategies in the face of changing markets and the evolving needs and expectations of our clients. This is reflected in our high score from the United Nations Principles for Responsible Investing (PRI), to which we have been a signatory since it was founded in 2006.
An important element of our sustainability culture is our active ownership approach, which dates back to 2004. Every year, a dedicated team of Robeco engagement specialists is in active dialogue with around 200 companies and 70 private equity managers, discussing financially material themes that we identify in consultation with our investors.
Our approach covers environmental, social and governance (ESG) topics. Our engagements are a highly effective way of influencing behavior and practices, particularly once companies realize it is in their own interests to improve. Better ESG performance can translate into lower costs and better risk management, which feeds right through to the bottom line. Megatrends such as climate change and cybersecurity are prominent themes in our engagement program.
We can only run sustainability strategies properly if we have access to all-encompassing, trustworthy data on sustainability practices. Fortunately, we are in a privileged position as we have at our disposal the unique proprietary sustainability databases compiled by RobecoSAM over many years.
The Corporate Sustainability Assessment (CSA) is an annual evaluation of companies’ sustainability practices that has been carried out since 1999. The CSA analyzes sustainability in much more depth than frameworks based on public disclosure alone. Each year, over 4,500 listed companies around the world are asked between 80-120 industry-specific questions.
The Country Sustainability Ranking (CSR) reflects the ESG performance and credentials of 65 countries and is based on a comprehensive biannual survey. By focusing on long-term factors such as aging, competitiveness and environmental risks, the CSR highlights countries’ strengths and weaknesses that are not typically covered by rating agencies.
In tandem with this, we have significantly improved our corporate ESG scoring process over time. Our Smart ESG methodology uses the wealth of sustainability data in our proprietary databases to assign each firm a Smart ESG score that corrects for potential biases arising from differences in a company’s size, region of listing or industry sector.
Of course, not all companies are the same – ESG factors considerably vary among industries. For example, there is little point in assessing the CO2 emissions, water use or paper consumption of banks, as there is no link between these environmental factors and the banks’ long-term business models.
Instead, it is much more useful to analyze banks’ corporate governance, risk management processes and cybersecurity measures. For a utility or energy company, however, CO2 emissions are extremely important indicators, as they can have a major impact both on their long-term business models and society at large.
At Robeco and RobecoSAM, we integrate ESG criteria across our range of strategies – often at several stages of the investment process – and tailor how we do so according to the characteristics of each asset class. We have been implementing ESG criteria in both the country and company analysis we use for our fundamental equities processes since 2001.
A portfolio construction algorithm ensures that all of our quantitative equities portfolios have a total weighted RobecoSAM sustainability score that is at least as high as their reference index. The upshot of our process is that stocks with higher sustainability scores are more likely to be selected for inclusion in our quantitative equity portfolios than those with low scores.
In effect, this means that the strategies positively screen stocks. This is in contrast to an exclusion policy, which remains the most commonly used method of integrating sustainability criteria among quantitative investors, and only facilitates negative screening.
So, sustainability is no mere box-ticking exercise for us – it has a significant impact on our investment decisions. For example, ESG matters affect our fundamental view of 35% of the companies we analyze in our credit processes. And in our global equity portfolios, ESG typically accounts for 7% of the target prices of the companies in our universe.
For other asset classes, we have been incorporating sustainability principles into how we run our private equity strategies since 2004. We integrate ESG analysis in our due diligence process and in the post-investment, monitoring stage. We monitor the ESG activities of private equity managers we invest with, and assess their progress on ESG integration on an annual basis.
Assessment results serve as input for our ESG engagement program, through which we encourage private equity managers to integrate ESG considerations in their investment process and report on their ESG results. In 2015, in 2015 we introduced a more reactive engagement with private equity managers based on ESG incidents that take place in their portfolio companies. We use RepRisk, a media-search tool specializing in ESG news, as input for our analysis of incidents, and for the dialogue with the affected private equity managers.
Robeco and RobecoSAM also aim to help improve society and the environment by developing and running high-quality impact investing strategies. These solutions range from CO2 footprint reduction strategies and investing in companies that have a positive impact on the UN’s Sustainable Development Goals, to more niche offerings.
Finally, portfolio decarbonization – measuring a fund’s carbon footprint and reducing it by selling the biggest contributors – is a common way to reduce climate change risks in portfolios. But the successful creation of a lower-carbon society involves not just divesting from firms such as high-carbon utilities. It means also investing in many positive developments – such as more efficient buildings, renewables and other aspects – that will help limit global warming.
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