09-05-2022 · Insight

Embracing the sustainability revolution in the world of investing

What does the deep shift to sustainability mean for asset owners and asset managers? Victor Verberk tackles the question in his opening address at the Top1000 Funds conference. This is an extract from his speech.

Embracing the sustainability revolution in the world of investing

Change has always been a feature of investments. But my sense is that we are currently in the process of a deep shift in how the industry operates. Although sustainable investing is not new – we at Robeco have been doing it for more than a quarter of a century – the phenomenon is now developing rapidly and is being embedded across the entire industry, globally.

A growing number of investors and asset owners now have a strong focus on critical topics such as climate, biodiversity and human rights. These issues are central in Robeco’s strategy. They align with our objectives as an investor seeking risk-adjusted returns, and at the same time they contribute to improved well-being in society. We call this double materiality.

To illustrate these points, consider the key themes of climate and decarbonization – and their implications for investing.

Practical steps towards net zero

Many asset owners and asset managers have made the commitment to net zero and we’re now at the very practical stage of working out what this means for how we make our investment decisions, how we look at stocks and bonds, the type of people we should employ, and what data and toolkits we need.

To be frank, none of us knows what the exact route will be to get to net zero. We only know the direction. This uncertainty has some key implications for investors. It means we need to get comfortable with operating with unknowns, and with imperfect foresight. Further, more than ever, we need to trust our specialists to keep a close eye on what the science and the data tell us about climate. In Robeco's case, our climate strategist, climate specialist and SI research team support this process.

It also means we need to work hard to gain more data – data that is forward-looking rather than backward-looking and stale; and data that is reliable and not estimated. Gathering the right data will require a huge commitment – both intellectually and financially. It means we need to invest in IT resources, tooling and SI specialists. To this end, we have expanded our SI Center of Expertise, which works in close collaboration with our investment teams and members of the wider Robeco organization. The Center of Expertise includes an SI data strategist and a team of data specialists who scrutinize the SI data, methodologies and perform deep-dive statistical checks to ensure data quality.

In terms of Robeco contributing to the move to net zero, we have identified six key actions, with the aim of decarbonizing our activities, accelerating the transition and promoting climate-aligned investing.

Within this framework of actions, Robeco will follow a trajectory of decarbonizing credit and equity portfolios by 7% year on year, to align our investments with the goals of the Paris Agreement. We have developed software and tooling that allows every portfolio manager to track the carbon footprint of their portfolio and of each holding, and to assess how their portfolio decarbonizes over time. We also aim to be net zero in our operations by 2050.

How will we do this? We need to employ all the tools at our disposal, and we need to collaborate. Active ownership is a prime tool for us in ensuring that the companies in our portfolios reduce their emissions. This will require a multi-pronged approach that targets all the relevant stakeholders. We therefore also call on governments to fulfil their role in this. We collaborate with clients, peers and other relevant stakeholders, and where needed we apply pressure. This year we sent over 130 letters to the CEOs of the largest emitting companies in our investment universe, and we will be voting against the relevant directors of more than 300 companies for their lack of climate action.

The role of carbon markets

Another important consideration as we follow a decarbonization pathway is the role of carbon markets and carbon offsetting. While we are well aware of the risks in carbon markets, they are an essential component of a future net-zero economy. There will be residual emissions in industries like cement and chemicals, so by definition we need negative-emission technologies and carbon offsets. Estimates show that the use of carbon markets, whether through free market forces or using mandates, could halve the costs of implementing the Paris Agreement.

Here, too, Robeco is hard at work, and intends to provide guidance to clients on the use of carbon credits in net-zero strategies. We will also monitor the development of carbon credits as an asset class and will innovate with carbon-neutral product offerings.

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Climate investing comes down to careful stock picking

For seasoned investors, sustainable investing is an exciting world. In this, the most important aspect is to assess which part of climate change is priced by markets.

For example, in the case of the EU Green Deal, which entails plans to introduce import tariffs and carbon policies over time, markets are starting to price these developments. This means there will be winners and losers in the short term, as markets respond to regulatory developments and other changes.

And that's the exciting aspect of climate and markets. It's not a theoretical exercise; it really comes down to the discipline of stock picking. And we consider ourselves to be ideally suited to do this, with our research-based, contrarian approach.

Biodiversity and nature

Another illustration of our methodical approach in sustainable investing is the way in which we are tackling biodiversity and nature. We recently published our roadmap for aligning our investment activities around biodiversity, and have partnered with the WWF Netherlands to promote the integration of biodiversity into asset management. Through the partnership we will engage with clients and other stakeholders in the financial sector to create more awareness of the issue, and to inspire them to integrate biodiversity into their policies.

The partnership gives us the opportunity to leverage the vast scientific knowledge available within WWF. We are co-developing a thematic biodiversity investment strategy, to be launched later this year. Furthermore, we are working on a biodiversity investment framework that will enable us, across all of our investments, to link individual companies to biodiversity impacts. Biodiversity data is robust at a sector level but linking it to companies’ assets and supply chains is a true challenge; for me, this is the holy grail. We therefore enhance the data with KPIs, in the same way as we have done with our SDG framework, where we link companies’ products and services to the SDGs.

A challenging road ahead

We’re on an exciting but challenging road. That’s why our SI Centre of Expertise is embedded within the investment department: it enables us to strike that essential balance between investment and sustainability expertise. This in turn merges into the making of the Portfolio Manager 2.0 – the portfolio manager of the future.

Legislation, product design and client demands will be more complex, scattered and cumbersome. But that’s what we do. We will accommodate that complexity in the way we work and accept that much is still unknown. We understand that being pioneers means going into uncharted territory. Being at the frontier of SI investing means pushing boundaries and continuously learning. We’re committed to doing this, to help contribute to a better future.