It is our conviction that analying sustainability information leads to better informed investment decisions. Whereas sustainability integration has been applied to equity investments for years, in fixed income it has only recently gained broader interest. At Robeco, we currently have six ways in which we can improve the sustainability of credit portfolios. But we are also looking ahead and, together with RobecoSAM, we are in the process of developing a framework to measure the contribution of companies to achieving the Sustainable Development Goals, a set of sustainability goals released by the United Nations in 2015 as a successor to the Millennium Development Goals. This framework will be a further step in the ongoing process of integrating sustainability into Robeco’s credit solutions.
A growing number of investment managers apply some form of sustainability integration to the portfolios they manage. Approaches range from basic exclusions to full sustainability integration and impact investing. At Robeco we see sustainability as a long-term driver for change in countries and companies, which can impact performance. Depending on the strategy, we have an array of six methods to integrate sustainability into our credit investment processes.
The first way to improve the sustainability of our credit portfolios is the exclusion of companies we consider to be highly controversial in their business conduct. We apply this to all our credit portfolios. We exclude a number of companies that structurally breach the United Nations Global Compact and do not show any sign of improvement after an intense process of three years of engagement. Such breaches can for instance relate to human rights, corruption and environmental issues. Companies that are involved in the production of controversial weapons are also excluded from our investable universe. Although generally we prefer to engage with companies rather than to exclude them, we do exclude these two groups of companies from all our credit portfolios.
The fundamental analysis of companies in which we invest is the foundation of our approach to credit investing. The credit analyst performs an in-depth assessment of a company’s business position, strategy, corporate structure and financial position, and consistently complements this with an assessment of how the company handles environmental, social and corporate governance (ESG) matters.
This ESG assessment is a perfect addition to the traditional analysis because it enables the analyst to identify potential additional downside risks that otherwise would have remained below the surface. Examples are the risk of claims related to pollution or lacking safety measures for personnel, or weak corporate governance that could lead to fraud. If these additional risks are material enough to pose a threat to the financial stability of the company, the analyst will adjust his company appraisal. This happens in approximately 30% of cases.
ESG integration in quantitative credit portfolios
For the quantitatively managed credit portfolios, we apply portfolio construction rules to ensure that companies with high RobecoSAM sustainability scores are more likely to be included in the portfolio than companies with low scores. In addition, our credit analysts assess whether the companies the quantitative model proposes for investment bear additional ESG risks. If these risks are financially material, we will not invest in these companies.
Although we as bondholders don’t have formal voting rights for the companies in which we invest, we do exercise our influence as creditor to discuss potential improvements in their business conduct. We focus on improving sustainable corporate behavior as this can result in better long-term performance of the company and hence better quality of our investments. The selection of the right engagement themes per industry is a joint effort between portfolio managers, active ownership specialists and sustainability researchers from RobecoSAM.
Another way to improve the sustainability of a credit portfolio is to reduce its aggregated environmental footprint. For the companies in which we invest, RobecoSAM measures their greenhouse gas emissions, energy consumption, water use and waste generation. We use this information to substitute companies with the largest negative impact on society with those that have less of an impact. We apply this simple yet effective way to a number of credit portfolios to ensure that the aggregated environmental footprint of these portfolios is below average.
Our approach to ESG integration in corporate bonds was rewarded with a high A score by the UNPRI in their 2017 assessment.
More and more institutions and companies issue bonds whose revenues are used to finance green projects. These ‘green bonds’ comprise a growing part of the investment grade credit universe. A way to improve the sustainability of credit portfolios is to allocate to this type of bonds.
We only invest in green bonds with and attractive performance potential. Furthermore, we thoroughly screen the green documentation of the bonds to ascertain that the proceeds raised by the bond issue are actually used to finance green projects. Not only has the supply of green bonds increased over recent years; demand is also on the rise. This makes the performance potential of many green bonds attractive.
The five sustainability approaches described above are all focused on preserving or even enhancing the portfolio’s alpha. For those investors that want to take sustainability a step further and that consider a portfolio’s sustainability just as important or perhaps even more important than its alpha, we can adjust the investment universe in such a way that only the most sustainable companies are included. For various credit portfolios we apply such a ‘best in class’ approach. For each business industry, we rank the companies in that industry on the basis of their RobecoSAM sustainability score and only include the top-50% companies. Regardless of the subsequent investment decisions, the resulting portfolio is by nature much more sustainable than its benchmark.
Sustainable Development Goals
As a signatory of the Dutch SDG Investing Agenda, Robeco is committed to contributing to the Sustainable Development Goals and considers them to be catalytic drivers for positive change. Robeco is also involved in various activities to investigate how the investment industry can contribute to achieving these goals. In one of these initiatives, we are working closely with RobecoSAM to develop an SDG framework that enables us to score companies based on the contribution they make. This framework will be the first step towards constructing credit portfolios that have a tangible positive impact on the realization of these goals.
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