The key focus of our credit analysis is the cash-generating capacity of the issuer, the quality of cash flows, and the ability to repay debt. We assess five factors to reach a conclusion on this. This conclusion is expressed in the form of a fundamental score, referred to as an F score. The issuer’s ESG profile is one of these five factors.
For this factor, we analyze each issuer to determine how it is positioned in terms of the key ESG factors defined by our team for each industry, including climate change considerations, and how this could affect fundamental credit quality.
Our assessment of ESG factors and their implications for an issuer’s fundamental credit quality considers four elements. These are the impact of the product or service produced, to the company’s governance system, how the company is positioned in terms of the key ESG criteria that our analysts have identified for each sector and sub-sector, and its decarbonization strategy. (As a case study, see: European utilities on the cusp of a decade-long investment opportunity”).
Product impact: our view is that companies offering unsustainable products and services (e.g., oil, tobacco, refinery services, oil field services, manufacturers of internal combustion engine cars, coal miners) face additional risks. Demand for these products may shrink, while stricter environmental regulations may further constrain a firm’s business model and result in higher capex and R&D expenses. The issuer’s SDG score, determined by our proprietary SDG framework which draws from the UN Sustainable Development Goals, helps to inform our assessment of the product impact.
Governance: we rely on a variety of inputs to assess the quality of the governance framework. These are the S&P Corporate Sustainability Assessment scores, Glass Lewis and the Sustainalytics risk scores.
Key ESG factors: this step is aimed at determining how a firm is positioned in terms of our list of key ESG factors for each sector and sub-sector. The process starts with an analyst assessment that incorporates a range of inputs, including our research and meetings with management, the company profile reports created by our SI research team, the S&P Corporate Sustainability Assessment, Sustainalytics risk scores, and the company’s track record in conduct.
Depending on the company, other factors may be relevant, too. If a firm has been involved in a bribery scandal, for example, it would be important to examine this issue – even if bribery is not considered a key risk factor for the industry in which the issuer operates.
Climate strategy: climate change has a prominent role in our credit research process. Our analysts follow a formal process which takes into consideration the philosophy of the Taskforce for Climate-related Financial Disclosures (TCFD) on climate risks and opportunities. The below section provides further detail on how this criterion is analyzed.
The central question for this last criterion is to assess the extent to which a firm’s decarbonization strategy – or failure to have an appropriate one in place – may have an impact on its fundamental credit quality. This assessment comprises three steps.
Step 1:Identify: determine the exposure to climate risk and opportunities. The average Scope 3 CO2 intensity per sector is used as a starting point to assess a firm’s climate-risk exposure. A high CO2 intensity, as is the case in the automotive, metals & mining and building materials industries, would indicate that the sector is vulnerable to climate risk. Among other reasons, this could be due to the high capex commitments needed for companies to improve their emissions profile. For lower-emission sectors, such as supermarkets, for example, the climate risk is significantly lower. Our overall approach is to evaluate the exposure to climate-related transition and physical risks, as well as the opportunities.
Step 2:Analyze: what is the company’s response? We consider aspects such as a firm’s climate strategy, GHG reduction targets, capex, R&D, and how all of this is embedded in its governance framework. Important inputs can also be derived from company rankings in the various Paris-aligned pathway assessments. These assessments include those from the Science Based Target Initiatives (SBTI) and the Transition Pathway Initiative (TPI).
Step 3:Quantify: draw a conclusion about the impact on the company fundamentals, including capex, margins, asset valuations, and cash flow. Critical questions are whether the issuer’s plans are sufficient and whether it can afford the transition and related investment plans.
A similar three-step approach is used for the other ESG factors.
In analyzing and investing in corporate bonds, the focus is tilted towards detecting downside credit risk. This makes sense as risk is asymmetrical for credit investors. A good risk management system at a bank, for instance, does not lead to a strong improvement in credit quality; a weak one, though, could lead to its total collapse. In a limited number of cases, we do find companies where ESG factors contribute positively to the fundamental view. This is often owing to the product impact criterion, such as in cases where the product is a solution for a better environment.
We scan all the company profiles created by our credit analysts and keep track of the extent to which ESG factors have a financially material impact on these profiles. Our latest data shows that ESG information has a financially material impact in about 24% of company profiles. In most of these cases, the impact is negative, in the sense that it weighs negatively on our fundamental assessment of the company.
ESG screening has been a fundamental aspect of our credit analysis for more than a decade, and is fully integrated in our bottom-up security analysis. We apply it to each company in which we invest – and across all our fundamental strategies, regardless of whether they have a specific sustainability focus.
Our proven methodology considers four distinct elements – product impact, governance, key ESG factors and climate – and helps shape our overall fundamental assessment of an issuer. In fact, our data shows that ESG information has a financially material impact in about a quarter of our company profiles.
The integration of ESG considerations in our fundamental analysis is critical in our management of downside risk in credit portfolios, and is important in enabling us to identify those issuers that will be part of a more sustainable future.
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. The Company does not hold client assets and is subject to the licensing condition that it shall seek the SFC’s prior approval before extending services at retail level. This website has not been reviewed by the Securities and Futures Commission or any regulatory authority in Hong Kong.
2. Important risk disclosures
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
This website includes material from third parties or links to websites maintained by third parties some of which is supplied by companies that are not affiliated to Robeco. 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. Third party off-site pages or websites are provided for informational purposes only.
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.