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2020 – the year that ESG finally became mainstream

2020 – the year that ESG finally became mainstream

11-02-2021 | Column
I can still recall that 10 to 15 years ago, the sustainability community including myself would say: “One day, ESG will become mainstream”. Well, it has taken a long time! But this year, I feel the use of environmental, social and governance factors in investments has indeed become standard practice.
  • Masja Zandbergen - Albers
    Masja
    Zandbergen - Albers
    Head of sustainability integration

Speed read

  • Integrating sustainability finally becomes standard practice in investing
  • Impact investing AuM overtakes sustainability focused funds at Robeco
  • Clients now demand focus on issues such as climate or societal benefits

The need for this is clear – tackling Covid-19, climate change and inequality – and the willingness is there. Any self-respecting broker, asset manager and asset owner has (at least a few) people that specialize in the topic and (claim to) integrate ESG into all their investment decisions. A lot of words have been placed between brackets as not everyone is at the same level of development, and the actual implementation might still needs work… but the basics are there. So, how has Robeco fared in 2020? There have been three notable developments:

  • The total amount of sustainably managed assets has grown further
  • Impact investing strategies have overtaken sustainability focused strategies in assets under management
  • Regular discussions with clients confirmed that climate change, the EU’s Sustainable Finance Disclosure Requirement (SFDR) and reporting have taken center stage. 
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Double materiality: finance and impact

For 10 years already, Robeco has had the goal of increasing assets under management (AuM) that apply ESG integration. This has steadily risen over time, now covering almost 90% of total AuM, and 100% of the assets for which ESG integration is possible. For assets that are built up using derivatives, or for savings accounts, ESG integration cannot be applied, or does not add value.
The amount of assets with ESG integration in billions of euros. Source: Robeco.
So, by far the largest part of our assets apply ESG integration. This is done so that we can make better-informed investment decisions. This means we focus on financially material ESG issues and only take a financial approach. We also have specific sustainable strategies, explained in the graph below.
The definitions of the different kinds of strategies. Source: Robeco

And we are increasingly seeing that our clients want to make a positive impact, looking beyond financial materiality towards social and ecological materiality. Combatting climate change and achieving the Sustainable Development Goals (SDGs) are two objectives that many have in mind. As a result, our assets in Sustainability focused and impact investing (thematic and SDG-aligned) strategies are growing rapidly. At the end of 2020, impact investing assets under management overtook sustainability focused investing AuM for the first time. 

This is due to the fact that we have seen a lot of client interest in our fixed income impact investing range, be it the various SDG-aligned credit strategies, the green bonds fund or the newly introduced Paris-aligned fixed income strategies. Another area of interest for our clients was our thematic strategies. At the beginning of 2020, we launched the RobecoSAM Circular Economy Equities fund. And following the announcement of the EU Commission to actively promote sustainable businesses via its Green Deal, and in anticipation of a government change in the US, we realized a surge in demand for thematic products addressing climate change via innovative solutions in the clean energy, infrastructure and transportation sector. RobecoSAM Smart Energy in particular attracted a number of large clients, lifting the strategy’s AuM over EUR 2.3 billion.

The rise in assets under management in sustainability focused and impacting investing strategies since 2017 in billions of euros. Source: Robeco

What about financial performance?

The year 2020 brought with it many challenges, both socially and economically. Sustainable funds and Sustainable Exchange-Traded Funds (ETFs) outperformed, specifically during the downturn. This was mainly driven by a size and sector effect – sustainable funds have less exposure to ‘old’ capital-intensive industries such as energy, and more exposure to technology, health care and the more innovative industries that profited during the Covid-19 lockdowns. And this can reverse quite quickly of course. 

However, sustainable investing is about long-term investing, and the good news is that research from Morningstar shows that there is no performance trade-off associated with sustainable funds. In fact, a majority of them have outperformed their traditional peers over multiple time horizons of up to 10 years. 

In our own investment funds, we have indeed seen that most of our thematic and fundamental sustainable strategies have done really well. The performance attribution of ESG integration in fundamental strategies is more difficult to calculate, but our emerging markets team found that ESG integration brought 82 basis points of outperformance for Sustainable Emerging Stars. In addition, the fund’s exclusion policy led to an additional 173 basis points of outperformance, predominately due to excluding producers of coal, oil and gas. The exclusion of tobacco also contributed positively1

For our fundamental global equity strategy, the same contribution analysis (which has now been done for three years) again also pointed to a positive impact of ESG integration on outperformance, amounting to about 20% of alpha on average over this time. The impact of ESG on the investment cases in the research universe of our China team is substantial. In 2020, a country premium was added in 93% of cases, and the ESG analysis has an impact on one of the value drivers (growth, margins, cost of capital ) in 76% of cases.

What about impact?

In 2020, Robeco kept on further developing and innovating its sustainability approach and its offerings for clients. Active ownership, which has been an important part of our sustainability approach for more than 15 years now, has paid off. Most of our engagement themes run for three years. In 2020, we had 941 engagement activities with 222 companies. We were able to close 67% of our engagements successfully. 

For example, in 2020 we closed our auto engagement theme with nine car manufacturers in the US and Europe, with a 66% success rate. The engagement aimed at encouraging companies to innovate for a low-carbon transportation future, ensure effective quality management and impeccable product quality, and increase transparency on lobbying activities. Cases were closed successfully when a majority of these targets were met. We report on engagement and voting results on our website every quarter.

Examples of success achieved through our auto industry engagement

The carbon intensity2 of our investment strategies fell in 2020. Our climate data scientist has worked on developing a tool that shows the carbon emissions for all scopes over all of our strategies. This tool shows that the carbon footprint across our fund range has come down for all data providers and across almost all metrics. This was partly influenced by market developments (as mentioned earlier), where carbon intensive ‘old economy’ companies lagged growth stocks. But it was also partly because our large quantitative investment strategies decreased the carbon footprint as part of their ESG integration efforts. As Robeco has announced its ambition to achieve net-zero greenhouse gas emissions across all its assets under management by 2050, this is a trend that will continue in the future.

Lastly, for our thematic strategies that are part of our impact investing range, we are developing impact indicators to measure ESG performance. For example, clients investing in the RobecoSAM Smart Energy strategy3 helped generate 109 gigawatt hours of renewable energy and avoided 70,170 tons of CO2, which is the equivalent of taking 26,000 cars off the road each year. It should be noted though that impact measurement is not an exact science and requires many assumptions. More about this can be read in our magazine SIX. and in the monthly portfolio manager’s updates of our thematic strategies.

What’s on our clients’ minds?

At the end of 2020 and the beginning of 2021, we conducted a series of feedback sessions on sustainability with 10 global clients, talking to institutional investors as well as wholesale partners. ESG has been put firmly on the agenda of our clients’ management boards. The fact that ESG has become mainstream has become clear, since most of our clients do have a specialized sustainability/ESG committee in place, to whom operational responsibility for implementation of ESG policies is delegated, while the ultimate responsibility for policy setting and oversight remains at executive board level.

The use of exclusions/negative screening to avoid doing harm is widely accepted and, next to regulation-driven exclusions such as controversial weapons, values-driven categories like tobacco and thermal coal have now been added to the list by many of our clients. The use of financially material environmental, social and governance criteria has become standard practice, and many of our clients now want to move beyond the mere adoption of relevant extra-financial ESG information in the investment due diligence process and set increasingly higher requirements on the portfolio composition in terms of sustainability metrics. 

Given the lack of opportunities to get pure exposure to ‘ESG solutions providers’, impact investing for many of our clients is limited to relatively small, dedicated strategies (often in private equity). Nevertheless, a growing number are looking at ways to bring impact investing to the core of their portfolios, by investigating how exposures to (some of) the 17 SDGs could be integrated into their existing (liquid) investment strategies.

Looking ahead to the coming years, the key ESG ambitions can be summarized in the following three items.
  1. Climate change: help mitigate the negative effects of global warming through reduced carbon footprints. A number of our clients are explicitly committing to net-zero carbon emissions by 2050, and starting the process of devising Paris-aligned carbon pathways.
  2. Further promote ESG integration by putting higher demands on taking financially material ESG criteria into account in investment strategies. Many clients mentioned the need for a higher quality and consistency of ESG data to allow more reliable monitoring of their portfolios.
  3. Clients are increasingly embracing impact investing by seeking societal benefits alongside acceptable financial returns, with the 17 SDGs providing a useful framework for the alignment of their ambitions with potential investment solutions. Although climate change is by far the top priority, the Covid-19 crisis has driven higher interest in social issues such as labor rights and equal opportunity as well.

Onwards and upwards

Now that ESG has become mainstream, we can look forward to increasing knowledge, research, data and collaboration across many areas in SI. This is very much needed. We believe that Robeco is very well positioned for this, and we look forward to working together with our clients to help them achieve both their financial and sustainability goals, by delivering superior investment returns and solutions.

1These numbers are taken over the one-year period since the inception of the fund in September 2019. The methodology used to calculate ESG attribution is more of an art than a science. Well aware of this daunting task, the approach we took was quite simple. We attempted to quantify both the valuation impact of ESG on our investment cases as well as the attribution from the exclusion of controversial companies.
2carbon emissions scope 1 and 2 divided by revenue
3https://www.robeco.com/docm/pmup-smart-energy-general.pdf

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