The rising demand for sustainable investment solutions poses challenges. Asset managers are increasingly required to apply high ESG and environmental standards, even to the most basic index-based strategies. In this context, being able to combine some of the highest sustainability standards with efficient quantitative investment techniques has become a key distinguishing feature. This was clearly demonstrated by Robeco’s recent win of a mandate from France’s Fonds de Reserve pour les Retraites.
Back in 2015, the French pension fund Fonds de Reserve pour les Retraites (FRR) was looking to renew its passive equity mandates and, in the process, it wanted to integrate high sustainability standards. In particular, the French organization wanted to reduce its portfolio’s carbon footprint by 50% and to enhance the ESG profile of the portfolio with a focus on the environmental dimension, in line with its ambitious investment policy.
At the same time, however, methodology requirements for the different targets mentioned in the tender were intentionally left open for interpretation. Very limited guidance was provided in terms of precise metrics and quantitative constraints.
“Our Zurich-based sister company and sustainable investing pioneer, RobecoSAM, was actually already looking into similar requests from other clients,” says Machiel Zwanenburg, a portfolio manager from Robeco’s quantitative equities team. “Moreover, it appeared that many of the elements sought by the FRR were already part of the building blocks of our existing RobecoSAM QI Global Sustainable Equities strategy.”
The chosen approach relies on the new Environmental Impact Monitoring tool developed by RobecoSAM. This tool (see Figure 1 below) helps investors assess the footprint of their portfolios and to make better informed decisions, based on four key metrics: greenhouse gas emissions, energy consumption, water consumption and waste generation.
“The solution we were able to develop for the FRR was avant-garde because it systematically included the RobecoSAM Environmental Dimension Score,” says Daniel Wild, Head of Sustainable Investing R&D at the Switzerland-based firm. This forward-looking score complements the firm’s current environmental rating, and allows one to gauge the readiness of a company to master future environmental challenges and opportunities.
In addition, drawing on its proprietary Corporate Sustainability Assessment (CSA), RobecoSAM can also help ensure the portfolio maintains its high ESG quality standards. RobecoSAM’s CSA consists of an annual ESG analysis of over 3,800 listed companies and is one of the most comprehensive databases of financially material sustainability information.
In practice, this means the FRR will be able to:
The FRR also appeared to be quite flexible regarding the reference indices that could be used as benchmarks and actually came up with a list of possible benchmarks. And, despite the fact that the fund was initially looking for passive solutions, some of those selected were actually smart beta indices. In this context, an enhanced indexing strategy, designed to systematically capture the market return and, in addition, benefit from well-rewarded factor premiums, quickly appeared to be the best way forward.
This kind of rules based approach lends itself particularly well to combining performance targets with sustainability goals. While most passive-leaning investment strategies deal with sustainability as a separate issue, this solution aims to strike an optimal balance in order to maximize sustainability profile of a portfolio and its ability to harvest factor premiums.
Enhanced indexing portfolios take the capitalization-weighted index as a starting point. Then they give slightly more weight to stocks with favorable factor characteristics and slightly less to stocks with unfavorable factor characteristics, using proprietary investment models. This ensures the investment is relatively cost effective, while preventing overcrowding and arbitrage.
A portfolio with a positive environmental impact while providing an attractive risk/return profile
Robeco’s Core Quant equity strategies follow this kind of enhanced indexing approach. They exploit proven factor premiums such as value, quality and momentum, combined within a transparent portfolio algorithm and a unique set of risk controls, designed to consistently outperform the market after costs. In addition, our proprietary portfolio construction algorithm features a flexible structure, so we can easily adapt mandates to a variety of individual requirements concerning, for example, the investable universe, the level of active risk and the integration of stricter sustainability criteria.
Robeco stood out from the competition by pitching a strategy that was not purely passive. One crucial element in the selection process was to convince the FRR that sustainable investing and risk-controlled quantitative techniques could be fully integrated in one comprehensive solution. By combining well-known factor premiums with a higher exposure to companies with enhanced sustainability profiles, the strategy generates a portfolio with a positive environmental impact while at the same time providing an attractive risk/return profile.
Finally, active ownership aspects were also among the key elements that influenced the FRR’s decision. At Robeco, we believe that voting in our clients’ interests, as well as engaging with the companies in which we and our clients invest have a positive impact on both investment results and on society.
“This mandate win clearly proves that in addition to generating returns, pension funds also want to make an impact by integrating ESG data into their investment portfolios,” Wild says. “It highlights the progress we are making on developing the third generation ESG scores, which complement well-known factors such as value, momentum, low volatility and quality.”
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.