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Pim van Vliet: “The idea had already come up several times over the past ten years. But besides finding the right idea, it is also important to get the idea right. This new strategy is based on the proven concept of Conservative Equities, which exploits the low-volatility anomaly, the fact that low-volatility stocks tend to generate better risk-adjusted returns than the market in the long run. We have taken this and added three important elements relating to sustainability: values-based investment rules, impact investing and ESG investing.”
“From our conversations with several clients and with RobecoSAM, we found that most existing solutions only cover one dimension of sustainability and ignore others. We realized that integrating all these different aspects in a comprehensive way, while maintaining optimal exposure to the Conservative Equity strategy, addresses a real market need, one which is currently unfulfilled.”
Arnoud Klep: “Some investors, for example, want a further de-carbonization of their portfolio while others want to fully exclude the thermal coal industry. Another area of concern is ethical values. A number of clients want to stay well away from certain ‘sin’ sectors or stocks. We therefore decided to combine all this feedback to build what is a very ambitious investment solution from a sustainability perspective.”
‘This new strategy addresses a real market need, one which is currently unfulfilled’
Van Vliet: “Yes, it is. All of Robeco’s quantitative equity strategies already integrate ESG scores, based on RobecoSAM’s annual Corporate Sustainability Assessments. However, this new fund goes much further. First, it uses stricter ESG criteria. Second, it also aims to limit impact scores in terms of CO2 emissions, energy consumption, water usage and waste output. Third, the fund also applies values-based exclusions and avoids stocks that may be seen as inappropriate from an ethical point of view. These include securities from firms with exposure to controversial sectors or business practices, such as child labor, alcohol, tobacco, gambling, weapons manufacturing, military contracting, adult entertainment and thermal coal. All these different elements, together with an active low-volatility strategy, make our new fund truly unique.”
Klep: “It is also important to highlight the fact that this new strategy takes a much stricter stance in terms of ESG scores than our existing Conservative Equity funds do. While for our other strategies the overall portfolio ESG score is higher than the market index, here, we aim to achieve a significantly better score. Our portfolio’s ESG score has to be at least 20% higher than that of the market. The same applies to individual impact scores: each one of the four footprints we calculate for CO2 emissions, energy consumption, water usage and waste output must be at least 20% lower than those of the index.”
Van Vliet: “Sustainability factors are not included in the Conservative Equities stock selection model, even though they are part of our portfolio construction process. On the one hand, stricter selection rules also imply additional constraints when investing, and we know that the broader the investment universe the easier it is for an active manager to add value. But on the other hand, one could argue that integrating sustainability into the investment process could also help to reduce undesired risks.”
“Only about 8% of the investment universe is not included due to values-based considerations. This means the investable stock pool remains very large, so taking the sustainability criteria into account only has a limited impact on the strategy. As a result, we can achieve almost the same level of low-risk exposure as with other Conservative Equity strategies. This new fund can offer both a very high exposure to the low-volatility premium and efficiently integrate diverse client preferences on sustainability.”
Klep: “Another important aspect is that we follow a symmetrical approach when integrating ESG scores and footprint data. Unlike some of our competitors, we do not purely and simply exclude stocks that fall outside certain parameters. Instead, we calculate all the scores at portfolio level and then compare them to the market index. This means stocks with very good low-volatility, value and momentum characteristics but less impressive sustainability scores can still be included in the portfolio, as long as other stocks with higher sustainability scores compensate for this.”
“Ultimately, we aim to combine the best possible Conservative model exposure with high sustainability standards. Our research shows this is a very efficient way of integrating sustainability requirements, as it enables us to offer almost the same level of exposure to the low-volatility premium.”