switzerlanden
Sustainability integration in Quantitative Equity strategies

Sustainability integration in Quantitative Equity strategies

10-03-2015 | Insight

Robeco is committed to sustainable investing. All Robeco Quantitative Equity strategies already integrated ESG factors (Environment, Social and Governance), and since December 2014, we have taken this one step further. 

  • Bart van der Grient
    Bart
    van der Grient
    Reseacher
  • Wilma de Groot, PhD
    Wilma
    de Groot, PhD
    Lead Portfolio Manager and Head of the Quant Equity Portfolio Management team
  • Pim  van Vliet, PhD
    Pim
    van Vliet, PhD
    Lead Portfolio Manager Conservative Equities

Speed read

  • All Robeco Quant Equity strategies integrate ESG factors to ensure a better sustainability profile 
  • Risk/return characteristics remain the same, while unrewarded ESG risks are avoided 
  • Increased ESG coverage in emerging markets allows for consistent integration across strategies

It goes both ways

A key feature of our new approach is that companies with a favorable ESG score have a higher chance of ending up in the portfolios as we ensure that the portfolio’s ESG score is at least as strong as that of the benchmark or reference index. This implies that we also positively screen stocks, contrary to an exclusion policy which only allows for negative screening.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates
Subscribe

Increasing sustainability while maintaining exposure to the model factors

Whereas a holding in one or two mediocre companies would not be a reason for immediate alarm, a strong exposure to unsustainable companies at the portfolio level poses a serious risk, as certain sustainability risks could materialize in the future. We expect our policy to be beneficial in such cases. Empirical analyses show that the improved sustainability profile can be achieved while maintaining the same attractive exposure to the quantitative model factors. Stocks with corporate governance issues or major litigation or regulatory risk may be excluded from the investable universe. 

Sustainability measured by RobecoSAM scores

To measure sustainability, we build on the experience of RobecoSAM. Every year since 1999, RobecoSAM obtains financially material information from a range of public sources and directly from companies by inviting them to the annual Corporate Sustainability Assessment (CSA) survey. RobecoSAM has one of the largest proprietary corporate sustainability databases with over 3,000 companies. Dedicated sustainability researchers integrate the latest sustainability insights into the survey and analyze the information obtained. 

Rapid increase in emerging markets coverage

RobecoSAM follows a best-in-class approach. Companies receive a RobecoSAM score between 0 (low) and 100 (high) on environmental, social and corporate governance factors and are ranked against other companies in their industry. The growing attention for sustainability is reflected by year-on-year increases in the company participation rate. Especially in emerging markets, RobecoSAM’s coverage has increased significantly, with around 75% of the companies in the MSCI Emerging Markets index being covered. In terms of market capitalization this is more than 90% of the index. This allows for a consistent integration of sustainability in all quantitative products. The sustainability scores are further enhanced in-house to be most effective for our quantitative strategies.

“We ensure that the portfolio has a weighted sustainability score that is at least as high as that of the relevant index”

ESG integration in the investment strategies

We made an enhancement to the investment processes of all quantitative equity strategies in December 2014. In our Global Enhanced Indexing strategies we have already been integrating ESG factors since 2010, as the stock selection model used for this strategy contains a sustainability factor. For our other strategies we used an exclusion policy by not overweighting or including stocks of companies that score very poorly on the RobecoSAM sustainability score in each sector. With our new policy we integrate ESG factors in all the quantitative equity strategies. 

Portfolio sustainability score at least as high as that of the index

In the portfolio construction phase we ensure that the portfolio has a weighted sustainability score that is at least as high as that of the relevant benchmark or reference index. This implies that companies with a favorable sustainability score have a higher chance of ending up in the portfolios, especially during moments when needed, namely when the portfolio score is on the low side.

“The improved sustainability profile does not change the exposure to the quantitative model factors” 

Unchanged risk-return characteristics

In these simulations, we find that the exposure to the quantitative models hardly changes when the new policy is implemented. A measure to quantify this is the average weight of the portfolio in the 20% most attractive stocks, which e.g. for our Global Conservative Equities strategy is more than 70%. We observe that this number stays similar or decreases by 0.2% at most in our strategies. The reason this figure hardly changes is that for each attractive stock that does not score well on the sustainability factor, there are sufficient sustainable alternatives.

Empirical analyses

The figure presents simulated historical empirical analyses for four of our core strategies that we use as an example: Global Enhanced Indexing, Global Conservative, Emerging Markets Core Quant and Emerging Markets Active Quant. Our sample starts in September 2001 for developed markets, when the RobecoSAM scores became available, and in September 2008 for emerging markets, when there was sufficient coverage. It ends in December 2013. We show the weighted enhanced sustainability scores of the simulated portfolio and benchmark through time, where a higher score means more exposure towards companies with a higher sustainability score.

Indeed we observe that the portfolio’s score is mostly higher and sometimes equal to that of the index for all strategies. For strategies with a larger active share, such as Conservative Equities, we can expect larger differences in terms of sustainability score. This is also visible from the graph.

Simulated weighted portfolio and index sustainability scores for four quant equity strategies

Source: Robeco. Figures present results of historical simulations based on the current strategies. Sustainability scores are ranked on a scale from 0% (lowest) to 100% (highest). 

A form of avoiding unrewarded risks

We consider the integration of sustainability factors a form of prudent risk management. With our enhanced form of ESG integration we avoid the risk of being overexposed to less sustainable companies, and our empirical results show that this is associated with unchanged risk/return characteristics. This is in line with our general risk management philosophy to avoid all risks which are not rewarded with higher returns.

Logo

Disclaimer Robeco Switzerland Ltd.

The information contained on these pages is for marketing purposes and solely intended for Qualified Investors in accordance with the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”) domiciled in Switzerland, Professional Clients in accordance with Annex II of the Markets in Financial Instruments Directive II (“MiFID II”) domiciled in the European Union und European Economic Area with a license to distribute / promote financial instruments in such capacity or herewith requesting respective information on products and services in their capacity as Professional Clients. 

The Funds are domiciled in Luxembourg and The Netherlands. ACOLIN Fund Services AG, postal address: Affolternstrasse 56, 8050 Zürich, acts as the Swiss representative of the Fund(s). UBS Switzerland AG, Bahnhofstrasse 45, 8001 Zurich, postal address: Europastrasse 2, P.O. Box, CH-8152 Opfikon, acts as the Swiss paying agent. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association, the annual and semi-annual reports of the Fund(s) may be obtained, on simple request and free of charge, at the office of the Swiss representative ACOLIN Fund Services AG. The prospectuses are also available via the website www.robeco.ch. Some funds about which information is shown on these pages may fall outside the scope of the Swiss Collective Investment Schemes Act of 26 June 2006 (“CISA”) and therefore do not (need to) have a license from or registration with the Swiss Financial Market Supervisory Authority (FINMA). 

Some funds about which information is shown on this website may not be available in your domicile country. Please check the registration status in your respective domicile country. To view the RobecoSwitzerland Ltd. products that are registered/available in your country, please go to the respective Fund Selector, which can be found on this website and select your country of domicile. 

Neither information nor any opinion expressed on this website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. An investment in a Robeco Switzerland Ltd. product should only be made after reading the related legal documents such as management regulations, prospectuses, annual and semi-annual reports. 

By clicking “I agree” you confirm that you/the company you represent falls under one of the above-mentioned categories of addressees and that you have read, understood and accept the terms of use for this website.

I Disagree