Guido Moret: “This announcement was made as Robeco helped launch the Net Zero Asset Managers initiative, which fostered the commitment of 30 asset managers representing USD 9 trillion in assets to help achieve net zero GHG emissions by 2050 or sooner. With this, we want to give more substance to our support to global efforts to limit global warming to 1.5°C, as agreed in the Paris Climate Accord.”
The Paris Agreement was signed in 2015. So, it was time to take bolder steps
“The Paris Agreement was signed in 2015. So, it was time to take bolder steps. From now on, we will set five-year goals in terms of carbon footprint reduction across all our portfolios. This is no small feat. To give you an idea of the disruption needed, the pandemic only cut CO2 emissions by a mere 12% to 15% at best in 2020. That’s the reduction we’ll need to achieve every two years to get near to zero by 2050.”
G.M.: “This will be a learning process. In December 2020, we launched two new climate fixed income strategies. These are the first global fixed income strategies to be fully compliant with the EU benchmark regulation for Paris-aligned investments. They will represent a yardstick for other fixed income portfolios, including quantitative strategies.
“The two strategies will aim to reduce their weighted carbon intensity by 7% year on year, while outperforming their Paris-aligned benchmarks. This will be done taking into account scope 1, 2 and 3 GHG emissions. In other words, we will be taking into account all emissions, direct and indirect ones, including those of each company’s value chain.”
Arnoud Klep: “On the quant equity side, we plan to bring several of our sustainable strategies in line with the Paris Climate Accord in the coming months. The first will be one of our Global Sustainable Conservative Equity strategies, for which we have already completed the client consultation process and received the greenlight from existing clients.”
“This strategy will become ‘Paris-aligned’ as early as March 2021. The most important change will obviously be a much stricter carbon footprint reduction objective. Currently, our entire sustainable quant equity range has a reduction objective of 20% relative to its reference index. We would implement a 50% reduction as a starting point. In addition, we would target a 7% footprint reduction every year thereafter.”
G.M.: “There are several ways to do this. The first one is to stop investing in certain businesses that are incompatible with net zero emissions. This means, for instance, excluding all production of fossil fuels. Meanwhile, you would still be able to invest in other sectors, but their emissions would need decrease by 7% every year, on average, to remain investable.”
While our sustainable quant equity portfolios have already reduced exposure to the energy sector, restrictions will become even stricter once they are Paris-aligned
A.K.: “So, to give you an example, while our sustainable quant equity portfolios have already reduced exposure to the energy sector, restrictions will become even stricter once they are Paris-aligned. Companies involved with thermal coal will be excluded, and so will most oil & gas companies, especially the oil majors. Restrictions on electric utilities will also be much tighter.”
G.M.: “In the short term, divesting from fossil fuel producers overnight across all portfolios would be next to impossible. In the longer term, achieving the 7% annual decrease target will largely depend on the path we take collectively towards net zero emissions. If companies fail to reduce their emissions to the extent needed, we will face additional constraints.”
A.K.: “Indeed, if we, as a global community, do manage to decrease our GHG emissions over time, then the 7% decrease target may never become a significantly restrictive constraint for stock or bond selection. But if companies do not succeed, then asset managers will have to compensate, and the 7% reduction target may become more difficult to achieve.”
One way we can support the transition towards net zero emissions is through engagement with companies
G.M.: “One way we can support the transition towards net zero emissions is through engagement with companies. Another way would be to compensate GHG emissions, for example through carbon capture and storage, reforestation, or simply more sustainable agricultural practices. But all these options come with challenges and limitations, and there is no silver bullet.”
G.M.: “In fixed income, our tests suggest the risk-return profile of portfolios should remain practically unchanged, or even improve. Decarbonizing would lead to lower returns but also even lower risk, and therefore improved Sharpe ratios. One reason for this is that the energy sector was among the most volatile recently, due to its relatively high correlation with oil prices. So, by excluding fossil fuel-related businesses you mechanically lower volatility in the prevailing conditions.”
A.K.: “For quant equities, our simulations show that we can build Paris-aligned portfolios that still enable strong factor exposures. In theory, limiting the opportunity set should bear some cost in terms of performance. And this is what we actually find, although in a global investment universe with ample investment opportunities the impact is limited: Paris-aligned quant equity strategies would be able to capture about 90% to 95% of the risk-return potential compared to the standard quant equity strategies.”
“But these simulations are based on past prices and therefore assume that there is no alpha potential from getting a strategy Paris-aligned. If climate change-related risks, like stranded assets or transition risks, rise and materialize, then we will not be discussing the negative impact of getting Paris-aligned but rather its positive effect. So, it is also a matter of perspective.”
Robeco Institutional Asset Management B.V. (DIFC Branch) is regulated by the Dubai Financial Services Authority (“DFSA”) and only deals with Professional Clients and Market Counterparties, and does not deal with Retail Clients as defined by the DFSA.
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