After a summer of regional floods and forest fires, followed by COP26 in autumn, now is an opportune time to pause and take stock. The asset management industry has been embracing sustainability en masse, but as with every major shift, change doesn’t happen overnight. Victor Verberk, Robeco’s CIO Fixed Income and Sustainability, talks about seismic shifts, enormous challenges and the extensive media coverage of whistleblowers in the asset management industry.
“Let’s start with a comment I find myself making more and more often: ‘We have no clue what is coming at us.’ Climate management and taking care of biodiversity sound idealistic, but no one really knows what the trajectory to net zero will exactly look like, or what challenges in the decarbonization path we will face in the coming 10 to 15 years. We need more and more reliable data – which will require a huge commitment, both intellectually and financially – to clarify the link between climate impact and asset management. It is crucial that we properly understand the real-world impact of our policies and investments. It’s maybe a bit painful to admit, but at this stage we have to accept that we don’t know the exact route, only the direction. More than ever, we need to trust our people and specialists and keep a close eye on what science tells us.”
“This means we need to invest in more IT resources, more tooling and more SI specialists, and in general we need to adopt a radical change of behavior in our industry. It is no longer just about creating alpha if you want to be leaders of the pack in sustainable investing and meet clients’ needs in the coming decades. Needless to say, every asset manager wants to be part of this major shift and it has become increasingly popular in the industry to over-promise and under-deliver. We prefer to do the opposite.”
“It is also important to realize how fast our industry is developing. Things are happening very quickly. A decade ago, we talked about integrating ESG across the entire investment process rather than having a team of SI specialists in an isolated corner of the company. Now, we are talking about the complexities of carbon data and calculating Scope 3 trajectories towards 2030. We are discussing how to measure the real-world impact of our portfolios. This is a whole new ball game, and one thing is sure: we haven’t seen the end of these changes.”
“Sustainable investing is the big thing in our industry right now. It is where the money is flowing towards. So, no asset manager wants to miss out. They all want to profit from this big shift. But unlike most other asset managers, we have embraced sustainability for over 15 years now and have a solid and proven track record in the field. Now, sustainable investing is not a simple copy-paste exercise. It takes a lot of research, building up knowledge, getting the right systems in place and the right people on board. Even as pioneers in this area we are still learning every day.”
“On the other side of the spectrum, some asset managers have simply jumped on the bandwagon without yet having the right specialists and processes in place. It’s a complex thing. There’s IT, there’s research, there’s the data challenge, and then there’s the implementation into the investment processes, over all assets, of all the facts, figures and knowledge you have gathered. For late joiners, it can take years to catch up and, in the meantime, everything keeps changing at an increasing speed. They aren’t perhaps to blame for being behind, but they should be a bit more modest in their sustainability claims.”
“And then you have the passive asset managers, who by their nature have little room to maneuver. I am simplifying here somewhat, but claiming to be sustainable because you offer some sustainable indices as well is probably overstating things a bit.”
“It’s a good thing that regulators and investors are increasingly aware of potential greenwashing – the intentional and the unintentional shades of greenwashing. We need to understand that from a commercial perspective, it is tempting to position yourself as a sustainable player when in fact you have only taken the first steps in the right direction.”
“One could argue that our industry has the tendency to be complacent at times. SI is not something to get complacent about. We need to step up our efforts and take responsibility. While it’s not our task alone to change the world – that would be impossible – we do need to play our part, just like governments, regulators, investors, consumers and companies.”
“Organizations, NGOs and governmental bodies refer increasingly to each other and in doing so are creating a coherent set of rules and visions. The Paris Climate Agreement, the UN Sustainable Development Goals (SDG) and Europe’s Green Deal are all interconnected. They are all based on scientific work done in the field. And we see a continued stressing of scientific evidence. Sustainability is not for believers; it has become hard science with a growing number of scientific studies and papers being published on it. As a consequence, the integration of sustainability science into new policies, for example in Europe, is now commonplace.”
“I did a lot of reading during the summer break, also on SDGs. All in all, the world is moving fast from ESG investing to impact. An often raised issue with ESG investing is that some controversial companies, such as tobacco producers, often are credited by index providers with relatively high ESG scores because, for example, they provide jobs or they take care well of their employees. So what you see is a trade-off between plusses and minuses that will give companies an average decent ESG profile, while at the same time they would be excluded for obvious reasons by many big investors.”
“Another major concern among investors regarding ESG integration is that it does not lead to positive real-world impact. And that taking ESG considerations into account does not automatically lead to a portfolio of companies that are associated with a positive real world impact. This means we need a much closer link between the real economy and the financial sector, which is a challenge for indices who need to find a way to move away from abstract scores into real-world impact measured on an absolute basis.”
“The biggest challenge is getting the right data. A fundamental problem of carbon footprint data is that it is backward looking, with an average time lapse of around two years. This means the data won’t tell you about the transition readiness of a company. What we really need is more forward-looking metrics. A carbon footprint as it is now doesn't tell me about whether the company is going to decarbonize in the future. The second problem is not that there isn’t enough data, but that it comes from multiple and overlapping sources that are often contradictory. Scope 1 and 2 data is relatively easy to obtain, but there’s hardly any correlation on the scale of it from the different data providers. The real problem is that it's not measured, it's modelled. That means it's estimated.”
“On the other hand, we shouldn’t hide behind issues surrounding data in order to avoid taking next steps. We should stay committed to the goals to which we’ve said we’re committed. To us, as investors, it is very important to understand how sectors will decarbonize in the next decades. Our SI researchers are developing our own sectoral decarbonization pathway. Key sectors to watch are the known ones: Oil & gas, energy, transport, cement and buildings, iron and steel.”
“Now, if you talk about being Paris-aligned, there are several things we should not forget. First, a portfolio that targets 1.5 degrees by 2050 does not have to fulfil a 1.5 degree limit on global warming. The trajectory is crucial. For example, a slow decarbonization trajectory for the coming decades followed by a steep decarbonization trend thereafter would lead to significant carbon emissions over time. However, a steep decarbonization trajectory in the next few years followed by a much slower one thereafter would result in a much lower cumulative carbon emissions schedule. So, 1.5 degrees and being net zero are not the same.”
“We have identified six key actions, with the aim of decarbonizing our activities, accelerating the transition and promoting climate-aligned investing. If we look at our portfolios, Robeco will follow a trajectory of 7% decarbonization year on year, in order to align our investments with the goals of the Paris Agreement. And then we aim to be net zero in our own operations (buildings, business travels and all other activities) by 2050. Active ownership is our prime tool to also make sure the companies in our portfolios will reduce emissions. But it’s not only us and them. We also call on governments to fulfil their role. We can only achieve the ambitious and necessary climate goals together. That is why we collaborate with both clients, peers and other relevant stakeholders. It takes a joint effort to face the climate challenge.”
“Now here’s a bit of irony: my personal guess is that China, the world’s largest source of carbon emissions, might take the lead in bringing about change. The country is centrally guided, which sometimes can be a benefit, so it might surprise us all.”
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