The impact of the US-China trade war and Brexit, the macroeconomic cycle and earnings outlooks, are being analyzed and its effect on markets estimated. These are all extremely important topics for investors to form opinions on.
However, in this column I would like to give a different perspective, and look to 2019 and beyond from a sustainability perspective. We see many sustainability trends that are relevant for investors... I have chosen to focus on three of them in this column.
Climate change is an important topic for many industries. Fossil fuels and high energy-intensity industries still account for about 70% of greenhouse gas emissions. So, companies in high-emitting sectors such as oil & gas, electric utilities and chemicals are key players in the energy transition. The car and real estate industries (buildings account for 30% of energy use globally) are also significantly affected by this development. Recently, many reports were published to show the need for regulators and the private sector to act on this issue. Stronger regulation is expected, and companies will need to deal with it.
We take risks and opportunities of climate change regulation and developments into account in our investment process, and also structurally engage with companies in high-emitting sectors in our portfolios to request change.
As part of the biggest ever collaborative engagement between investors – Climate Action 100 – we make our expectations clear. We expect companies to implement a strong governance framework that clearly articulates the board’s accountability and oversight of climate change risks and opportunities. We also ask companies to integrate climate risks in their regular risk management framework in order to identify, assess and manage transition and physical risks.
Furthermore, we expect companies to implement measures and take action to reduce greenhouse gas emissions. This includes investments in clean technologies and emission-reduction targets. And lastly, we ask them to implement the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) in their mainstream annual financial filings.
The information coming out of the many and long engagement programs that we have with companies in CO2 intensive industries is combined with RobecoSAM’s sustainability research and incorporated into our investment decision making. We assess the materiality of ESG issues on the sector, and companies’ performance on these issues. This then has an effect on the valuation and/or our fundamental assessment of companies and issuers. The charts below shows an example of the materiality and valuation impact in one of the industries prone to climate change, the utility sector. We expect this effect to become larger in the coming years.
We see that the economic progress that has been made in the past has a price that is currently not visible in the profit and loss accounts and balance sheets of companies; the external costs.
With the increasing number of people on our planet, who are also all moving forward in terms of living standards, the old way of our linear economy in making, using and disposing of products is no longer tenable. The expected growth in use of energy, steel, grain products and water will be high for the coming decades, and is probably underestimated. The question is whether this is feasible.
One thing is certain, however – the pressure on the environment will increase even further. At current rates of urbanization and population growth, global waste generation is estimated to rise to 2.2 billion tons per year by 2025, which translates into 1.42 kg of waste per person per day.
So, a different way of thinking is needed. Moving from linear to circular. Taking life cycle analysis of products into account in the design. Embedding circular principles into operations will reduce resource consumption, improve resource efficiency and reduce the overall cost of waste management, which is good for the bottom line.
The importance of this topic is also reflected in the United Nations Sustainable Development Goals (SDGs), which are discussed further below. SDG 12 covers responsible consumption and production, and its sub-clause 12.5 specifically the substantial reduction of waste generation through prevention, reduction, recycling and reuse.
We specifically see single-use plastics as an issue that is fast rising in importance. This is witnessed by the growing amount of shareholder proposals that focus on this issue, such as the shareholder proposal at McDonalds in 2018 to phase out plastic straws. We acknowledge this risk, and that is why we joined the Plastic Solutions Investor Alliance. Reducing plastic waste – as important as it is – sometimes has a less direct link with financial results.
Yet, we see that a number of companies in the food industry are already taking action. Recognizing the problems with single use plastics, Coca Cola, for example, launched a strategy for a ‘World Without Waste in 2030’. However, plastic waste is not just a risk for companies: innovation, and thinking about replacing plastic, can also bring opportunities. Tetra Pak, for example, is busy developing a high-quality paper straw.
A barrier for the large application of this kind of innovative solutions is that it is technically a challenge. New bioplastics and other solutions are still quite expensive compared to traditional packaging. So, achieving a direct impact on profits, in the sense of possible cost savings, is not a driving force for companies to address this problem.
Why, then, do we see that companies are taking action on this topic? And why do we, as an investor, consider this subject important? This has everything to do with image and brand value. Large food companies see risks for their brand name in the long term. Plastic waste is already a huge problem, and will only increase if not dealt with. The time will come when companies are held accountable for this, and stricter regulations will be introduced, and/or consumer behavior will change. These external costs will then become internal costs for the company or for investors in the form of lower (brand) value.
The Sustainable Development Goals have made quite some impact since their launch at the end of 2015. Since then, many asset owners and asset managers have assessed their existing investment portfolios and engagement strategies against these goals, and published results.
Recent research by the Dutch Association of Investors for Sustainable Development (VBDO) sponsored by Robeco shows that in the Dutch pensions market – which is generally considered leading in this area – over 80% of the funds have discussed the SDGs in board meetings, while 34% already have a policy in place. These policies and strategies are mostly aimed at making a positive contribution to the SDGs. Negative contributions are often not yet taken into account. Seen in this light, it is understandable that there is also a lot of criticism on the progress made, and some people consider SDG investing as a marketing gimmick.
I have a different view. Compared to the traditional way of SRI investing, which is often a best-in-class approach investing equally in all sectors, taking into account not only the operational and behavioral aspects of companies, but also the contribution of their products to sustainable development, is bringing a different perspective. This is leading to different and distinct portfolios.
And even if we have only taken the first step, and by no means are we there yet, the direction is clear: investing for true sustainable development is the way forward.
I wish you a prosperous and sustainable 2019!
Carola van Lamoen, Head of Active Ownership, contributed to this column
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商号等： ロベコ・ジャパン株式会社 金融商品取引業者 関東財務局長（金商）第２７８０号
加入協会： 一般社団法人 日本投資顧問業協会