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The link between ESG and performance: SDG Credits stands the test

The link between ESG and performance: SDG Credits stands the test

21-04-2020 | Insight

“An attribution analysis confirms our view that screening credit holdings for their sustainability characteristics is positive for performance,” says Guido Moret, Robeco’s Head of Sustainability Integration Credits.

  • Guido Moret
    Guido
    Moret
    Head of Sustainability Integration Credits

Speed read

  • SDG Credit strategies outperformed their respective indices in Q1 2020
  • SDG screening supports the ability to screen out poor performers…
  • …and does not impede our capacity to generate alpha through credit selection

Positive link to sector performance

Robeco developed a unique approach in 2018 to screen for UN Sustainable Development Goals (SDGs), which is applied across a range of Robeco strategies. Last year, the initial analysis showed that sectors which were positively aligned with the SDGs had lower credit risk and that, over a five-year period, sectors with a positive or neutral SDG rating had a superior risk-return relationship compared to those with negative SDG scores.

Figure 1 | Investment grade credit: risk-return, five-year history

Source: Barclays, and Robeco calculations based on the global IG universe. Data up to August 2019, five-year history. The above chart is for illustrative purposes and does not represent the performance of any specific Robeco investment strategy.

With the SDG Credit strategies now having developed a track record, the next step of evaluating results at the portfolio level was taken, to determine how the SDG measurement framework adds value in practice. In particular, the results were assessed in the wake of the Covid-19-related market sell-off.

Holding strong during Covid-19 crisis

Following a positive start, 2020 has proven to be unprecedented, with a dramatic sell-off in global credit markets in response to the Covid-19 crisis. Spreads moved from late bull market tights to recessionary levels in both investment grade and high yield within just four weeks. The Global Investment Grade Credit Index1 declined by -6.07% (EUR) in March and -3.6% over the quarter, while the Global High Yield index2 showed a steeper decline of -12% (EUR) in March and -13.7% over the quarter.

This analysis shows that supporting the SDGs is not only a good way to make a difference, it is a means to support financial performance

Moret says that, by using detailed attribution analysis at the portfolio level, Robeco’s SDG screening methodology for credits shows positive results during the crisis.

Performance of the RobecoSAM Global SDG Credits strategy3
The RobecoSAM Global SDG Credits strategy outperformed the Bloomberg Barclays Global Aggregate Corporate Index by +90 basis points in March, bringing the outperformance over the first quarter to +103 basis points (DH EUR share class, gross of fees). Since inception in June 2018, the strategy has outperformed the index by 128 basis points per annum, and the cumulative outperformance over this period was 239 basis points (DH EUR share class, gross of fees).

“Importantly, half of this cumulative outperformance is directly attributed to the SDG screening, through avoiding the bad names,” Moret says. The findings show:

  • Avoiding names with negative SDG scores contributed 81 basis points cumulatively over the period since June 2018 – almost 70% of the SDG-related outperformance. This included avoiding some large integrated oil and gas companies that have a negative SDG score, avoiding large automotive manufacturers with little or no revenues from electric vehicle sales and avoiding some large well-known utilities and banks with a negative SDG score (including banks, for example, with negative SDG scores owing to concerns related to corporate conduct).
  • 43 basis points of the outperformance is linked to favouring companies with a positive SDG contribution. Robeco’s SDG methodology led to the inclusion of a number of firms due to their positive SDG scores for business practices, including a global paper pulp producer, an Indian telecoms operator and a German automotive parts producer – among others – which contributed to the overall outperformance.

Moret adds: “Beyond the SDG screening process, we see a strong contribution from issuer selection: 161 basis points since June 2018. This is support for our conviction that SDG screening does not hinder our ability to generate performance through bottom-up issuer selection, which is an important performance driver in all our credit capabilities.”

Performance of the RobecoSAM Euro SDG Credits strategy4
SDG screening was implemented for the RobecoSAM Euro SDG Credits strategy in January 2019. Over the period January 2019 to March 2020, the strategy outperformed the Bloomberg Barclays Euro Aggregate Corporate Index by +6 basis points. A similar outcome is seen here with regard to the contribution of the SDG screening to relative performance, albeit over a shorter period.

The SDG screening added 68 basis points, with equal contributions from avoiding names with a negative SDG score and being overweight in names with a positive SDG score. A strong contribution from issuer selection is evident here, too (79 basis points).

How the SDG screening works

Robeco selects the SDG-eligible universe of credits using its proprietary SDG screening methodology, which was developed in 2018 in cooperation with RobecoSAM. This process of screening companies and giving each an SDG score comprises three steps: establish how the products or services produced by the company contribute in a positive or negative way to the SDGs, analyze how the company’s conduct contributes to the SDGs, and determine whether it is or has been involved in any controversies and, if so, whether measures have been taken by the management to prevent this from reoccurring. The SDG scores range from +3 to -3. Only bonds with a positive or neutral SDG score are eligible for inclusion in the portfolio; those with a negative score are excluded from further consideration.

1Global Investment Grade Credit Index: Bloomberg Barclays Global Aggregate Corporate Index
2Global High Yield Index: Bloomberg Barclays US Corporate High Yield + Pan Euro HY ex Financials 2.5% Issuer Cap
3Source: Robeco. RobecoSAM Global SDG Credits strategy DH EUR, gross of fees, based on gross asset value. Benchmark: Bloomberg Barclays Global Aggregate Corporate. In reality, management fees and other costs are charged. These have a negative effect on the returns shown. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.
4Source: Robeco. RobecoSAM Euro SDG Credits strategy, gross of fees, based on gross asset value. In reality, management fees and other costs are charged. These have a negative effect on the returns shown. Periods shorter than one year are not annualized. The value of your investments may fluctuate. Results obtained in the past are no guarantee for the future.

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This information is for informational purposes only and should not be construed as an offer to sell or an invitation to buy any securities or products, nor as investment advice or recommendation.
The contents of this document have not been reviewed by the Monetary Authority of Singapore (“MAS”). Robeco Singapore Private Limited holds a capital markets services license for fund management issued by the MAS and is subject to certain clientele restrictions under such license.
An investment will involve a high degree of risk, and you should consider carefully whether an investment is suitable for you.

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