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Translating and integrating SI research into investments

Translating and integrating SI research into investments

06-10-2022 | Interview
Rachel Whittaker, Robeco’s Head of SI Research explains the value of sustainability research, its link to financial performance and how it is disseminated and integrated into Robeco's investment decisions.

What’s the purpose of Robeco’s SI research team?

We translate the language of sustainability research into investor speak – that means explaining the impact of sustainability issues on capturing alpha, avoiding risks, and making better informed investment decisions.

We firmly believe sustainable companies will ultimately perform better in the long run. Governments, consumers, regulators and investors increasingly recognize the significant impact company operations have on civil society and the natural environment. As key agents in the economy and society, corporations are under greater scrutiny as sustainability challenges such as climate change, social inequalities and other yet unforeseen crises continue to emerge and escalate. Our SI research focuses primarily on distilling and clarifying the financially material links between sustainability challenges – how companies mitigate their ESG risks and manage their natural and human capital – and corporate performance.

Our SI research focuses on distilling and clarifying the financially material links between sustainability challenges and corporate performance.

What is financial materiality and why is it so important for Robeco?

Material environmental, social, and governance (ESG) factors are anything that can have an impact on a company’s core value drivers, including growth, profitability, risks, and the cost of capital. The range of variables covered are extensive spanning everything from board diversity and talent retention to water management and waste emissions to employee safety and supply chain risks.

ESG variables can impact a company’s competitive position and long-term financial performance which makes them critically important to investors.  This focus on the most financially relevant sustainability factors is essential given our mission of providing the market with sustainable investment strategies that create attractive long-term returns for clients.

Figure 1: Materiality Matrix 2022

Source: Robeco

How do you identify material ESG factors?

Though our SI research process has evolved over the years, it has always started with a top-down industry evaluation by specialized SI research analysts in order to determine the most significant ESG factors for the respective industries and sectors.

After this top-down analysis, analysts focus on bottom-up research which means evaluating how companies within industries manage their industry-critical ESG factors. Analysts publish company profiles with their informed views and assign ratings that indicate the extent to which relevant sustainability factors will impact business fundamentals over the next three to five years.

Are there other sustainability factors investors should consider?

Material ESG factors also include those with substantive impact on sustainable development.  This dual focus on factors with both financial and social effects is often referred to as “double materiality” and demonstrates how firms are increasingly held responsible not only for their financial performance but also their overall societal impact.

'Double materiality’ demonstrates how firms are increasingly held responsible not only for their financial performance but also their overall societal impact.

In addition to material ESG factors, SI and investment analysts evaluate a company’s impact on sustainable development globally. To do this, analysts use an internally developed framework that assesses a company’s contribution to the Sustainable Development Goals (SDGs). Companies receive SDG scores based on their performance across industry-relevant impact metrics.

ESG information is increasing in volume and complexity. What are key areas of focus that help organize the sustainability research agenda?

SI company research and ratings are built around four pillars, namely: corporate governance, climate strategy, product impact as well as additional material ESG factors.

Good companies start with good governance at the top. As a result, we assess company governance structures against best practices globally. Key considerations include, executive pay, board quality and diversity as well as shareholder representation. As governance practices can vary significantly around the world, we focus on the individual company and whether its governance structure will support or hinder its performance in the coming years.

The climate strategy pillar evaluates the extent to which climate considerations impact business fundamentals. We assess both a company’s exposure to and its management of climate risks through data on intensity of 1+2+3 scope emissions, planned reduction targets, stranded assets, capex plans and, more crucially, whether a firm can afford the transition.

Product impact considers the influence and outcomes that a company’s products and services have on society. Companies generating solutions to environmental challenges or creating societal benefits are likely to show above average growth and positively impact company fundamentals.

The last pillar, material ESG factors, addresses how well the company is managing its most financially relevant ESG factors and evaluates the extent to which the company’s performance on a given factor is expected to have a material, forward-looking impact on business fundamentals. Examples include a company’s ability to innovate, attract and retain talent, to defend human rights, to manage water and waste, or to anticipate sustainability-related regulatory changes.

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How is this information used in your investment strategies?

SI analysts work with investment analysts and portfolio managers to integrate information and insights from company sustainability profiles and SDG scores into security selection for Robeco’s equity and bond portfolios. Fundamental equity teams use ESG insights to identify risk and return potential, while credit teams focus on assessing ESG downside risks. As a result, SI analysts contribute to better informed fundamental valuations and investment decisions.

As with traditional equity and credit research, constructive debate is strongly encouraged. SI and investment team analysts hold regular meetings to discuss SI ratings and other investment-related information.

The quality of our SI research is continuously tested by the performance of our funds.

The quality of our SI research is continuously tested by the performance of our funds

What makes Robeco’s SI approach different?

We are sustainable investing pioneers. Our financial materiality framework draws upon more than a quarter of a century of experience in integrating sustainability into the investment processes.

At Robeco, SI Research is not an isolated function carried out by an insular team but rather a dynamic process consisting of fluid interaction between specialist researchers and investment management teams. SI analysts complement traditional investment research with rigorous sustainability analysis that helps investment teams disentangle and interpret complex ESG issues and their potential risks for industries and companies. As a result, investment teams can better assess if companies are a good fit for a portfolio from a sustainability as well as a financial perspective.

The SI Research team is composed of 18 industry-specialized SI analysts in four global locations, with extensive industry knowledge, investment experience and sustainability expertise. What is more, the SI team is broad and diverse in terms of academic, professional and cultural backgrounds; this breadth and depth of experience adds to the value of the team throughout the organization.

At Robeco, SI Research is not an isolated function carried out by an insular team but rather a dynamic process … between specialist researchers and investment management teams

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