The structural integration of information on Environmental, Social and Governance (ESG) factors into the investment decisionmaking process.
Sustainable investors believe that sustainability can have a material impact on companies’ performance. Factoring in financially relevant sustainability information thus leads to better investment decisions.
As a wide variety of sustainability information is available, investors first determine which ESG information is financially relevant. The second step is to analyze the impact of these material factors on the individual company and any competitive advantages or disadvantages that arise. The third step is to translate this impact into adjustments to the valuation models used for equities.
Robeco also integrates sustainability information into the analysis of government and corporate bonds. Robeco’s credit analysis focuses on a bond issuer’s cash-generating ability and the quality of those cash flows. The team uses a fixed analysis model for this with five different variables, including ESG. The importance of E, S and G factors differs for each sector. The credit crisis, for instance, revealed the importance of good corporate governance in financial credits.
Within its government bond portfolio, Robeco uses the proprietary Country Sustainability Ranking. The ranking is based on a comprehensive ESG database. The ranking is updated twice a year and functions as an early-warning system that helps to identify both the threats and the opportunities in a country before they are reflected in spreads or ratings.
Also read: Seven steps to ESG integration