Asset owners want to integrate sustainability in their equity investments, but the question is how?
“We wanted to create an alternative to the existing active and passive ESG solutions.” Portfolio manager Machiel Zwanenburg manages RobecoSAM Quant Sustainable Global Equities (QSGE) together with Peter Ferket. One and a half years after its launch in October 2013, this enhanced-indexing strategy broke through the EUR 100 million assets under management barrier. The strategy is managed on a purely quantitative basis, ranking stocks on sustainability (80%), valuation (10%) and momentum (10%). We interview him to find out more about the strategy.
“The QSGE strategy offers investors access to global equity market returns with a superior sustainability profile. To achieve this, we developed the strategy in close cooperation between RobecoSAM, Robeco Quantitative Research and Robeco Quant Equities.” “The main question we asked ourselves before starting this process was: how can we improve the sustainability profile of a portfolio while limiting deviations from the benchmark? The answer: an integrated inclusion approach proved to be superior above an approach that relies on exclusion.”
“Combining the two requirements – corporate sustainability and equity market exposure – is not as straight forward as it seems. After all, the more environmental, social and governance (ESG) factors are integrated, the more a portfolio tends to deviate from the benchmark.
We have solved this dilemma with a quantitative approach.” “The model driven stock-selection strategy is 80% based on sustainability information from RobecoSAM, the investment specialist focused exclusively on this field and owned by Robeco. The remaining 20% is based equally on valuation and momentum factors, in order to add extra alpha.
This approach provides the right balance between relative performance and sustainability. The strategy invests in an average of 500 stocks and the active share is about 35%.”
“The starting point of the investment process is an in-depth assessment of the corporate sustainability performance of every stock in the benchmark. RobecoSAM invites the world’s largest 3,400 publicly traded companies to participate in the annual Corporate Sustainability Assessment (CSA). An industry specific questionnaire featuring between 80 and 120 questions constitutes the basis for RobecoSAM’s annual assessment.
Each company’s relative score within its industry is the key determining factor in the composition of the portfolio. Currently more than 95% of the securities in the universe have a sustainability score.”
‘Improve the sustainability while limiting deviations from the benchmark’
“In the second part of the investment process, each stock in the benchmark is assessed and scored based on valuation and momentum factors, which generate above-average investment returns in the long run. In the third step, we combine both parts of the investment process to produce the stock ranking and construct the portfolio. Stocks with attractive sustainability and quantitative characteristics are overweighted relative to the benchmark, while companies with less attractive profiles are underweighted.”
“The strategy is characterized by its flexibility and can be tailored to meet client needs. This includes the use of different universes or the use of an exclusion list, based on the client’s sustainability investing strategy. Furthermore, the portfolio construction process is flexible enough to allow for different tracking error levels.”
“We wanted to create an alternative to the existing active and passive sustainable solutions that help pension funds face four major challenges:
“The QSGE strategy addresses these challenges. Sustainability is the starting point of the strategy and it is integrated in the investment process. The cost structure is competitive with passive solutions. The strategy offers transparency on the scores of the various ESG criteria. As to deviating from the benchmark, the active risk is in line with that of a passive index like the MSCI World ESG Index or the Dow Jones Sustainability World Diversified Index.
We see that we are able to outperform an investment in passive (ESG) solutions after costs.”
“The interest in the QSGE strategy is also coming from parties looking at quantitative solutions who are positive on the ESG edge. It is inspiring to see how we have moved ahead from client need to research project, and finally to a successful strategy.”