Georgi, the Sustainable Index Solutions team recently passed the EUR 10 billion milestone. Can you shed some light on how you set up the infrastructure to make this possible?
Georgi Kyosev: “Our index solutions are a good example of client-driven innovation. To give you some color, the journey was precipitated by an engagement with a large client. Throughout our discussions, they were impressed with our research and intellectual property (IP). But the one sticking point was that they carried out the implementation and execution of their portfolios only internally, or with their preferred partners.”
“The outcome at the time was that we would design and build our first index solution and outsource the operations to Standard & Poor’s (S&P). This allowed the client to access the best of both worlds: Robeco IP and S&P operational excellence.”
It sounds like an entrepreneurial mindset was required to set this up from scratch. Are there any reasons why you could not use an existing infrastructure?
Georgi Kyosev: “This is because Robeco Indices is quite a unique entity. By this, I mean that it should not be compared to a generic index provider as our focus is not on index calculation, but on our investment, sustainability and index construction IP. By outsourcing the index calculation activities, we wanted to create a scalable portfolio management platform, while ensuring that we fostered an environment that is conducive to innovation.”
“We had the ambitious goal of reaching a point where we could rebalance 100 indices in a day. At that stage, we could rebalance only one index over five days. Fast forward several years, we have now made inroads on our objective and currently rebalance more than 30 indices in a day. What is exciting is that we are not even close to our operational capacity and have ample room for growth.”
Rodney, I imagine that this process requires sound checks and balances to ensure everything runs smoothly. Can you elaborate on this?
Rodney Yartey: “Indeed! In the last few years, we have undertaken a firm-wide project to further strengthen Robeco’s Enterprise Risk Management Framework. This framework is the basis for all risk and compliance management activities and clarifies the principles behind the management of risk. To do this, we needed to take a closer look also at the firm’s processes, risks and controls. We therefore conducted risk and control self-assessments (RCSA) to execute this efficiently and effectively.”
“This also coincided with the reformatting of the then existing RCSA procedure, and the Indices entity was the primary target to pilot the new process. The Sustainable Index Solutions team was therefore the first one to complete the new and improved RCSA.”
“The outcome was that Robeco Indices identified inherent risks that were outside of our risk appetite and implemented several controls to mitigate these to an acceptable level. These controls brought order, fortified integrity, and strengthened the oversight of the model development process. Furthermore, they enhanced the model maintenance and validation processes, while putting in place additional structure to the already existing quarterly index rebalancing process.”
“Although implementing additional new controls might seem tedious, we deliberately designed them around the activities the team was already performing. With these improvements in place, we felt that the time was right to formalize this in an annual assurance report that is issued together with our external auditor.”
“So by mid-2022, the team had gone through the international standard on assurance engagements (ISAE) 3000 Type 1 exercise. In regard to this, our auditor reviewed the design of the controls in place and rendered a clean opinion. Put differently, this means the index controls were designed fairly and accurately.”
This is thorough, but I suppose even the most sophisticated risk framework is ineffective without cross-team collaboration. Georgi, how do you manage the cooperation among the teams?
Georgi Kyosev: "We have learned that the recipe for achieving efficient cross-team collaboration lies in formalizing the responsibilities of the different teams and individuals. The increased transparency and role clarity ensures accountability, significantly boosting cooperation as a result.”
“Role clarity is a key element that we focused on during the RCSA process and this is reflected in the target operating model. As a result, the improved cross-department collaboration, combined with the risk assessments and controls, gives us the opportunity to confidently manage our existing business while also exploring new opportunities.”
“For example, we recently launched a new SDG low carbon index family. We are also engaging with new client segments, such as investment banks, that are looking to create products using our indices as the underlying investment instrument.”
“Through the RCSA process, we have realized that by managing risk well, we can take on more risk. This might sound like an oxymoron, but if you trust that your operations are under control, you feel more confident to explore new opportunities.”
Jean-Paul, as the Sustainable Index Solutions team participates in innovative projects, how do you manage risks on that front?
Jean-Paul van Brakel: “During the RSCA, we identified risks and implemented necessary control measures beyond just portfolio management, but for other key processes as well. This includes model development, model validation and model maintenance.”
“To give you an example, for every enhancement that we make to a model or for each new model that we create, we first investigate the impact of the change on our strategies and systems. We then submit the main decisions and milestones to our standardized approval workflow using Azure DevOps and register the key documents in our risk management system.”
“This means that we have historical access to the most important documents pertaining to every research project, as well as the formal approvals that were given for any subsequent improvements to the model. This provides us with clear oversight on all the models we run and formalizes the impact of our research.”
Georgi, how do you then combine and juggle creativity with highly scrutinized activities in your daily work?
Georgi Kyosev: “This is only possible by managing the team with diversity in mind. This means putting the right people in the right spots, which helps to create an environment conducive to creativity. To facilitate this, we use a ‘Management Drives’ test to assess personalities and take into account diversity in our hiring process.”
“This helps us to ensure that we hire people who are different from the existing team members. While it is easier to work with people who are similar, such an environment can foster groupthink. So we purposefully hire people with different profiles who can challenge their colleagues, cover their blind spots, while also spurring creativity and innovation.”
“Furthermore, such a focused environment can only be possible if we collaborate effectively with all the relevant departments within Robeco, such as Risk, Compliance, Legal, Sales and Product Management.”
Rodney, are you able to demonstrate that Robeco Indices has the right controls in place?
Rodney Yartey: “Yes. I want to emphasize that the firm-wide project to further enhance the risk and control framework was about being able to better demonstrate to our internal and external stakeholders firstly that we manage all risks well, and secondly that we comply with the relevant laws and regulations.”
“Properly managing our risks allows us to optimally focus on serving our clients. In this regard, Robeco Indices can demonstrate that it has the appropriate controls in place by undertaking the RCSA exercises, identifying the risks, designing adequate controls, and executing those controls effectively.”
“Once that is done, by evidencing those controls in our global governance, risk and compliance (GRC) system – which can then be reviewed by external auditors for design and effectiveness – we can prove that Robeco Indices’ risk and control framework works and performs as expected.”
This sounds overwhelming but isn’t it too good to be true?
Georgi Kyosev: “I want to conclude by quoting Mohammad Ali here: “It’s not bragging if you can back it up.”
Important information
The contents of this document have not been reviewed by the Securities and Futures Commission ("SFC") in Hong Kong. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice. This document has been distributed by Robeco Hong Kong Limited (‘Robeco’). Robeco is regulated by the SFC in Hong Kong. This document has been prepared on a confidential basis solely for the recipient and is for information purposes only. Any reproduction or distribution of this documentation, in whole or in part, or the disclosure of its contents, without the prior written consent of Robeco, is prohibited. By accepting this documentation, the recipient agrees to the foregoing This document is intended to provide the reader with information on Robeco’s specific capabilities, but does not constitute a recommendation to buy or sell certain securities or investment products. Investment decisions should only be based on the relevant prospectus and on thorough financial, fiscal and legal advice. Please refer to the relevant offering documents for details including the risk factors before making any investment decisions. The contents of this document are based upon sources of information believed to be reliable. This document is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation. Investment Involves risks. Historical returns are provided for illustrative purposes only and do not necessarily reflect Robeco’s expectations for the future. The value of your investments may fluctuate. Past performance is no indication of current or future performance.
