Factor-based equity strategies can help investors achieve sustainability objectives, in addition to better risk-return characteristics. But striking the right balance between quant factors and sustainability aspects requires a smart approach.
The rising demand for sustainable investment solutions poses challenges for asset managers, who must increasingly take into account environmental, social and governance (ESG) aspects, without sacrificing returns. In this context, the ability to combine some of the highest sustainability standards with efficient quantitative, or factor-based investment approaches has become one of the key ways asset managers can differentiate themselves from the competition.
In fact, over the past few years, a growing number of research papers have been published on the interplay of factor investing and sustainability. Both academics and product providers have dived into this field of research, as awareness about the potential benefits of combining the two investment approaches increased among the investment community.
There are many ways to integrate sustainability in a quantitative portfolio but we have identified three main approaches. The first one is to address ESG and financial objectives independently. This means allocating a certain percentage of the portfolio to a factor based strategy, in order to meet the desired financial objectives, and the rest to an ESG-oriented strategy, to enhance the portfolio’s overall sustainability profile. However, this kind of approach may not be optimal, as integrating sustainability will frequently imply giving up on factor exposures and vice versa.
Another approach is to start by screening the market portfolio according to the desired sustainability criteria and apply a factor based strategy to the remaining universe. While this method may produce better results, it is also far from ideal. This approach is about avoiding investments in companies that score low in terms of the sustainability criteria, such as an ESG score, or a carbon footprint. But it does not focus on the end result: maximizing both returns and the portfolio’s sustainability profile.
A smarter way to ensure return and sustainability objectives are met, is to maximize factor tilts and sustainability criteria simultaneously. This can be achieved by treating sustainability as a theme in the quantitative stock selection model, or as an additional criterion in the portfolio construction process. Robeco’s in-house research and years of experience have shown it is possible to maintain the required factor tilts and ensure that financial objectives are met, while also taking into account ESG aspects, that enable us to satisfy the desired sustainability standards, as well.
A smarter way to ensure return and sustainability objectives are met, is to maximize factor tilts and sustainability criteria simultaneously
Figure 1 below shows a stylized illustration of the tradeoff investors will be faced with, when trying to meet both return and sustainability objectives. The grey line represents the different options available for investors applying the first approach: addressing ESG and financial objectives independently. Meanwhile, the blue line shows the possibilities for those who decide to maximize factor tilts and sustainability criteria simultaneously.
The relationship between factor tilts and sustainability represented by the blue curve can be demonstrated by running backtests on data based on existing Robeco strategies. This is illustrated in Figure 2. It shows a set of portfolios, each with a different factor/ESG profile, based on Robeco’s QI Global Developed Sustainable Enhanced Index strategy.
Robeco’s QI Global Developed Sustainable Enhanced Index strategy integrates ESG by means of the tilt towards companies with enhanced sustainability profiles, compared to the average derived from the reference index. Moreover, the portfolio’s footprint for greenhouse gas emissions, waste generation, water consumption and energy use has been reduced by at least 20%. An extensive values-based exclusion list is also applied. This illustrates how improved sustainability profiles can be achieved while simultaneously capturing most of the factor based exposure provided by our quantitative stock selection model.
Robeco applies three different approaches to sustainability investing in its quantitative equity strategies. Our basic approach ensures that the ESG profile of the portfolio exceeds that of the benchmark or the reference index. Our enhanced approach applies three dimensions of sustainability integration in the portfolio construction process: exclusions, environmental footprint reduction and tilt towards companies with an enhanced sustainability profile. Finally, our advanced approach determines the attractiveness of stocks according to their scores on both sustainability and factor aspects, while still maintaining the aforementioned portfolio construction criteria.
To measure sustainability scores, we use RobecoSAM’s Corporate Sustainability Assessment (CSA). The CSA consists of an annual analysis of financially material sustainability information from approximately 4,500 listed companies. Following the first CSA conducted in 1999, Robeco’s sister company RobecoSAM compiled one of the world’s most comprehensive databases on corporate sustainability.
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.
Please read this information carefully.
This website is prepared and issued by Robeco Hong Kong Limited ("Robeco"), which is a corporation licensed by the Securities and Futures Commission in Hong Kong to engage in Type 1 (dealing in securities); Type 4 (advising in securities) and Type 9 (asset management) regulated activities. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
Robeco Capital Growth Funds (“the Funds”) are distinguished by their respective specific investment policies or any other specific features. Please read carefully for the risks of the Funds:
3. Local legal and sales restrictions
The information contained in the Website is being provided for information purposes.
Neither information nor any opinion expressed on the Website constitutes a solicitation, an offer or a recommendation to buy, sell or dispose of any investment, to engage in any other transaction or to provide any investment advice or service. The information contained in the Website does not constitute investment advice or a recommendation and was prepared without regard to the specific objectives, financial situation or needs of any particular person who may receive it. An investment in a Robeco product should only be made after reading the related legal documents such as management regulations, prospectuses, most recent annual and semi-annual reports, which can be all be obtained free of charge at www.robeco.com/hk/en and at the Robeco Hong Kong office.
4. Use of the Website
The information is based on certain assumptions, information and conditions applicable at a certain time and may be subject to change at any time without notice. Robeco aims to provide accurate, complete and up-to-date information, obtained from sources of information believed to be reliable. Persons accessing the Website are responsible for their choice and use of the information.
5. Investment performance
No assurance can be given that the investment objective of any investment products will be achieved. No representation or promise as to the performance of any investment products or the return on an investment is made. The value of your investments may fluctuate. The value of the assets of Robeco investment products may also fluctuate as a result of the investment policy and/or the developments on the financial markets. Results obtained in the past are no guarantee for the future. Past performance, projection, or forecast included in this Website should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Fund performance figures are based on the month-end trading prices and are calculated on a total return basis with dividends reinvested. Return figures versus the benchmark show the investment management result before management and/or performance fees; the fund returns are with dividends reinvested and based on net asset values with prices and exchange rates of the valuation moment of the benchmark.
Investments involve risks. Past performance is not a guide to future performance. Potential investors should read the terms and conditions contained in the relevant offering documents and in particular the investment policies and the risk factors before any investment decision is made. Investors should ensure they fully understand the risks associated with the fund and should also consider their own investment objective and risk tolerance level. Investors are reminded that the value and income (if any) from shares of the fund may be volatile and could change substantially within a short period of time, and investors may not get back the amount they have invested in the fund. If in doubt, please seek independent financial and professional advice.
6. Third party websites
Following links to any other off-site pages or websites of third parties shall be at the own risk of the person following such link. Robeco has not reviewed any of the websites linked to or referred to by the Website and does not endorse or accept any responsibility for their content nor the products, services or other items offered through them. Robeco shall have no liability for any losses or damages arising from the use of or reliance on the information contained on websites of third parties, including, without limitation, any loss of profit or any other direct or indirect damage.
7. Limitation of liability
Robeco as well as (possible) other suppliers of information to the Website accept no responsibility for the contents of the Website or the information or recommendations contained herein, which moreover may be changed without notice.
Robeco assumes no responsibility for ensuring, and makes no warranty, that the functioning of the Website will be uninterrupted or error-free. Robeco assumes no responsibility for the consequences of e-mail messages regarding a Robeco (transaction) service, which either cannot be received or sent, are damaged, received or sent incorrectly, or not received or sent on time.
Neither will Robeco be liable for any loss or damage that may result from access to and use of the Website.
8. Intellectual property
All copyrights, patents, intellectual and other property, and licenses regarding the information on the Website are held and obtained by Robeco. These rights will not be passed to persons accessing this information.
10. Applicable law
The Website shall be governed by and construed in accordance with the laws of Hong Kong. All disputes arising out of or in connection with the Website shall be submitted to the exclusive jurisdiction of the courts of Hong Kong.