Our view is that incorporating the SDGs in an investment strategy creates awareness of the potential additional sources of risk for the portfolio. Launched in 2015 by the United Nations, the SDGs have become a widely adopted framework for assessing the ESG-related behavior and sustainability characteristics of companies.
Those companies and sectors that offer solutions to help achieve the SDGs may well be the winners of the future – as well as being attractive investment candidates. Conversely, those companies and sectors that do not work towards the SDGs could face severe operational and financial repercussions, including fines, license withdrawals and reputational risk, that ultimately could detract from their investment appeal.
To capture these benefits and to help manage the risks, Robeco uses a proprietary SDG screening methodology based on the RobecoSAM SDG framework, which is the starting point for its credits selection process. It is a three-step methodology that looks at what the company produces, how it does so, and whether it is involved in any controversies. The use of SDG screening for credit issuers results in a set of SDG scores, ranging from -3 (for issuers with a high negative contribution to the SDGs) to +3 (a high positive contribution to the SDGs).
In our SDG credit portfolios we exclude individual issuers with a negative rating and only invest in issuers with a neutral to positive SDG rating. The outcome of our screening process is that 24% of our universe has a negative score, and is thus not eligible for our SDG strategies.
To test our observation in practice that bonds from companies that contribute positively to the SDGs tend to perform better than bonds from companies that make a negative contribution, we looked at data on 50 credit sectors going back five years.
Using the SDG scores generated by our SDG screening methodology, we mapped sector-wide SDG scores to the Barclays sector indices.
Sectors were then aggregated into three theoretical portfolios: one made up of sectors with positive SDG scores (from +1 to +3), one consisting of sectors with neutral (zero) SDG scores, and one with sectors that have negative SDG scores (-1 to -3).
Of the 50 sectors analyzed, 10 sectors received a negative SDG score. A further 17 sectors received a positive SDG score. The remaining sectors received a neutral score.
The findings show a striking difference in the performance of the SDG-positive sector relative to the SDG-negative sector.
The data shows that, over the past five years, sectors with a positive or neutral SDG rating had a superior risk-return relationship compared with sectors with negative SDG scores. In other words, risk was lower without returns being diluted. This finding held for both investment grade and high yield credits. The difference between positive and neutral sectors on the one hand and negative sectors on the other was more pronounced for high yield credits.
The finding of a better risk-return profile for positive and neutral SDG sectors is a result of lower credit risk compared with the sectors with negative SDG scores. And, importantly, this risk reduction is achieved without sacrificing returns.
Lower portfolio risk is also reflected in the relative default performance. Examining data for the past five years shows that, over time, sectors with a positive SDG score have lower default rates than neutral sectors. Furthermore, positive and neutral sectors have lower default rates than sectors with negative SDG scores.
It is important to qualify that the above analysis focuses only on sector performance and not on the performance of individual credits. In our SDG measurement framework, we apply a three-step screening process to arrive at SDG scores for the individual companies. If a sector has a negative SDG rating, we do not avoid the entire sector. Instead, the sector score is the starting point, from where we then look at what the issuing company produces, how it does so, and whether it is involved in any controversies. This process could result in a changed score, based on how well the company is aligned with the SDGs.
Our empirical analysis that maps sector-wide SDG scores to sector performances shows a positive link between healthier portfolio performance and neutral-to-positive scoring on sustainability. As we develop a longer track record in SDG credit strategies, we will have more data points for further analysis of this relationship. In particular, it will be interesting to perform the analysis at company level, especially for those sectors in which there is a wide range of SDG scores for individual issuers. In the meantime, these findings support our commitment to incorporating sustainability criteria in our credit selection process, and our view that doing so helps build robust portfolios that perform well financially.
The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).
This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.
This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.