The next step in improving the sustainability of our factor credit strategies is to reduce the water and waste footprints of the portfolios, in line with the principles of the Paris Agreement.1 2 We believe that, going forward, companies with lower environmental footprints will be more successful in the future.
Importantly, we find that quantitative investment strategies lend themselves well to integrating secondary objectives, such as reducing environmental footprints, in addition to the primary objective of realizing attractive risk-adjusted returns. This is due to the large investment universe that the strategy is able to screen for the most attractive opportunities. If a company with a relatively high footprint issues a bond with attractive factor scores, the portfolio construction algorithm often is able to find a bond with similar factor scores, but with lower footprints. This efficiently tilts the portfolio towards bonds of more sustainable companies, without having to forego a great deal of factor exposure.
Our research shows that imposing water and waste constraints ensures that the weighted average water and waste footprints of the portfolio are, at most, as high as those of the benchmark. This leads to small adjustments in portfolio allocation to sectors and in issuer selection within sectors, and results in a limited reduction in the backtested outperformance.
The European Commission’s Sustainable Finance Action Plan recognizes the need for decarbonization to achieve a better and more sustainable future for all. It looks beyond climate change, though, and includes resource depletion and environmental degradation as focus areas. This has encouraged a broader approach to measuring environmental footprint; in addition to carbon emissions, water consumption and waste disposal are now two widely used footprint measures.
We measure a company’s water consumption as the difference between freshwater withdrawn and freshwater discharged, denoted in cubic meters. Freshwater is withdrawn from municipal water supplies, fresh surface water (lakes, rivers, etc.) and fresh groundwater. Brackish water and seawater are not considered freshwater. Hence, the withdrawal of such waters is excluded from the calculations. Water discharged, or water returned to the source of extraction, needs to be at a similar (or higher) quality as raw water extracted. If the total water consumption is higher than the net withdrawal (e.g., due to the use of recycled water), then the net withdrawal amount is used.
Figure 1 shows some summary statistics on the water footprint for a global universe of investment grade and high yield companies. The left chart shows that the median (50th percentile) company has a water footprint of 224 cubic meters per USD 1 million of revenues. The chart also shows that the distribution is heavily skewed: the 75th percentile is already more than six times larger than the median (1,588 vs. 224), and the 95th percentile, in turn, is six times larger than the 75th percentile (9,448 vs. 1,588). In fact, more than 75% of the total water footprint is related to only 10% of the companies.
The chart on the right shows the median water footprint per sector. Financials are less water intensive (with the exception of REITs), than technology and transportation companies. Utilities, on the other hand, have a higher water footprint, as have some of the industrial sectors, like basic industry and energy. The strong concentration of water use among only a few companies indicates that to efficiently reduce the water footprint of a portfolio it is best to avoid some of the most water-intensive companies.
We measure a company’s waste disposal as the difference between total waste generated and total waste repurposed, denoted in metric tons. Total waste generated consists of hazardous and non-hazardous waste. Hazardous waste is waste that poses substantial or potential threats to public health or the environment. Non-hazardous waste does not pose a direct threat to human health or the environment, but could nevertheless pose a risk if it were dumped into a trash receptacle or a sewer line, for example. Waste stored temporarily counts towards waste generated. Total waste repurposed consists of recycled waste, (re-)used waste, sold waste and waste that has been incinerated for energy recovery.
Figure 2 provides summary statistics on the waste footprint for the same global universe of investment grade and high yield companies. The left chart shows that the median company has a waste footprint of 1.8 tons per USD 1 million of revenues. The waste footprint distribution is also heavily right-skewed, with the 75th percentile being five times larger than the median (8.9 vs. 1.8), and the 95th percentile in turn being five times larger than the 75th percentile (46.6 vs. 8.9). In fact, more than 60% of the total waste footprint is related to only 10% of the companies. As is the case with the water footprint, there are large differences between sectors. Financials and communication & technology companies are among the sectors with the lowest waste disposal levels, while REITs, basic industry and energy are at the higher end of the scale. This finding illustrates that there generally is a positive correlation between the various measures of environmental footprints.
We believe this approach to restricting the water and waste footprint helps to reduce transition risks in the portfolio, while still providing attractive risk-adjusted returns. As Robeco continues its active participation in the debate on sustainable investing, and on the role of the investment industry in this, our approach to reducing sustainability-related risks in the portfolio may evolve further.
1This article is based on a more detailed paper by the authors, entitled “Reducing the water and waste footprints of factor credit strategies”.
2See the article “Creating sustainable multi-factor bond portfolios”, which describes, among others, the sustainability approach in factor credits.
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.