Sustainable investing has risen to become a high-profile form of managing money – but does it actually benefit anyone else? It can sometimes be difficult to show what positive impact it has on wider society, particularly if it is seen as coming at a cost.
An example of how green initiatives do not always lead to the intended results can be seen in Germany phasing out its nuclear power program following the 2011 disaster in Fukushima, Japan. While this in essence was a worthy cause, one side effect was that it made the country more reliant on its coal-fired power stations. This contradicted Germany’s energiewende (energy transition) program which aimed to reduce carbon, raising emissions instead.
Subsequently, a more holistic approach is needed, where all the relative benefits (or damage) to the whole system should be measured, and not just parts of it. One way of demonstrating a measurable impact is by investing to meet the UN’s Sustainable Development Goals – a list of 17 targets to improve living standards around the world. Few would disagree that this is not a good idea – so how is it done in practice?
Making a tangible impact on the SDGs when building a portfolio fundamentally means picking the right securities to begin with. Robeco and RobecoSAM do this in three steps. Firstly, we find out what a company produces, and whether its products contribute positively or negatively to the SDGs. Positive contributions include companies making medicines, assisting with clean water supplies, or improving health care. Negative examples would be companies involved in shale gas, tobacco, or high carbon-intensive utilities.
Secondly, we analyze how a company produces its goods or services. Analysis here includes looking at its previous business conduct, labor relations records and any red flags for human rights. Finally, we check for any known controversies surrounding the company, including pollution episodes, bribery allegations or mis-selling in areas such as financial services or pharmaceuticals. The outcomes are quantified in another proprietary RobecoSAM research tool, its SDG rating methodology.
This scoring methodology can be used across sectors. For example, higher scores are given to retail banks which lend more money to emerging markets, thereby contributing to SDG 1 (no poverty), or to food companies with more than half their range in healthier or low-sugar products, contributing to SDG 2 (zero hunger). Examples can be found for most companies for the rest of the SDGs, although some are excluded point blank as never being able to contribute to them, such as tobacco companies or weapons manufacturers.
Another way of making an impact is through ‘active ownership’ – using voting and engagement to get improvements at companies whose behavior does not meet environmental, social and governance (ESG) best practices.
Shareholders who are unhappy with a company’s policies can vote against them at annual general meetings, or block resolutions that they do not like. This was seen to great effect in 2017 when investors filed proposals at the shareholder meetings of two oil majors asking them to run stress tests on how their businesses would be affected by the need to meet climate change targets.
Both resolutions were passed with large majorities, compelling the oil companies to detail the impact on them of limiting global warming to 2 degrees Celsius. This includes the potentially costly issue of stranded assets – fossil fuel resources that cannot be burnt in order to meet the targets. Since everyone on the planet is affected by climate change, the social benefit of the role played by oil companies in minimizing it is obvious.
Engagement through an active dialogue is another powerful tool. It occurs when the investor meets with the company to seek improvements in one ESG field or another. Robeco routinely engages with its shareholdings and bond holdings, talking to around 200 companies in 2017. Over EUR 240 billion of assets were under engagement and over EUR 60 billion under voting at the year’s end.
A 2017 research paper by three academics specializing in corporate governance aimed to find out whether such engagement by shareholders generally had any effect. It analyzed a dataset of 660 companies that investors engaged with for a range of ESG issues, with 847 separate engagements in total.1
Their conclusion was unequivocal: “The engagements lead to significant ESG rating adjustments. Activism is more likely to succeed for companies with a good ex-ante ESG track record, and with lower ownership concentration and growth. Successful engagements positively affect sales growth, without changing profitability. Targets outperform matched firms by 2.7% over 6 months post-engagement, while the (ex-ante) lowest ESG quartile earns an extra 7.5% over 1 year.” This research shows that money literally does talk, and engagement does create both a financial and a social impact.
And investors do care about what impact they are making on society. A 2015 survey by the Responsible Investor media group said three-quarters of owners said ESG issues were one of their top five criteria when choosing an asset manager. Some 85% reviewed their asset manager’s sustainable investing policies, while more than 80% wanted to better understand and improve the positive impact that their investments can have on society.2
1Tamas Barko, Martijn Cremers and Luc Renneboog, ‘Shareholder Engagement on Environmental, Social, and Governance Performance’, Working paper for the European Corporate Governance Institute, 2017
2ESG 2.0, Responsible Investor Asset Owner Survey 2015