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ESG integration, in particular for corporate bonds

ESG integration, in particular for corporate bonds

08-09-2014 | Insight

Institutional investors are becoming increasingly aware of the fact that trends such as population growth, the scarcity of raw materials and globalization have an impact on a company's risks and opportunities. 

  • Edith Siermann
    Edith
    Siermann
    CIO Fixed Income

Under the pressure of regulators and investors, such as participants in pension funds, sustainable investing is slowly but surely evolving from a 'niche' to a general trend. As an illustration: there are simply no longer any Requests for Proposal without questions about ESG (environment, social and governance). And the assets that are managed by organizations that have signed the UN Principles for Responsible Investment (PRI) have risen from USD 4 trillion at the introduction in 2006 to USD 34 trillion in 2014. This represents 15% of global assets available for investment. In addition, the signatories of the PRI have to comply with increasingly strict requirements.

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The many interpretations of sustainability

There is general consensus now on the fact that sustainable investing in not simply a hype that is going to blow over. Although most institutional investors no longer regard this as a 'green' or 'ethical' strategy, there are still a large number of interpretations and implementations, varying from excluding weapons manufacturers to a way to manage long-term risks. Robeco helps pension funds to develop their convictions, ambitions and policy in the field of sustainability. In addition, we implement this policy by integrating sustainable investing in the existing investment policy or by offering voting and engagement services. We can also screen portfolios on sustainability and provide a detailed report on this. 

'There is general consensus now on the fact that sustainable investing in not simply a hype that is going to blow over'

The integration of sustainability in credit investments

Robeco applies complete integration of ESG factors in all credit strategies. Besides a company's competitive position, strategy, financial position and structure, ESG is one of the five pillars of the credit analysis. We do this because we are convinced that ESG factors provide additional relevant information so that we are better able to analyze a company and to limit the downward risk of investment portfolios. The weight of the ESG pillar in the total analysis depends on how financially material this is. There are a large number of ESG indicators for each company and we only analyze the ESG aspects that are the most relevant for the company's financial position and profitability.

Focus on limiting risk

The Corporate Sustainability Assessment (CSA), or the sustainability scores of RobecoSAM, Robeco’s sustainable investing subsidiary, is based on surveys held among approximately 2800 companies and plays an important role in the credit process. These scores are discussed by the credit team with the specialized RobecoSAM sustainability analysts. We mainly focus on negative elements such as weak spots in the corporate governance or in the environmental policy. In addition, we supplement our research with other sources that can expose even more risks. For example, we scan the media to see if the company is involved in legal proceedings or settlements. After all, the amounts involved in issues like this can have a substantial impact on the company's financial position.

Is sustainable investing expensive?

At Robeco, we look at ESG from a financial perspective. Return is the most important issue for us. It is a myth that ESG integration is at the expense of return. Many questions in RobecoSAM's CSA concern financially material issues such as governance, risk management, personnel policy and other factors that ultimately also affect a company’s profitability. ESG analysis enables us to take better informed decisions and to pick up risk signals in an early stage. This way, we are able to avoid the losers. 

'It is a myth that ESG integration is at the expense of return'

Unique: an active dialog with credit issuers

And we go a step further than just analysis. A team of engagement specialists enters into an active dialog - engagement - with selected companies about financially important themes that are determined in consultation with portfolio managers, investment analysts and sustainability analysts. That this not only takes place for equities but also for credits is unique. We encourage companies to take concrete steps to improve their sustainability, as this also has a positive effect on their creditworthiness. 

An example is our engagement with the Brazilian energy company Petrobras. Petrobras subsidizes gas prices by purchasing at the market price and selling under the market price. As a result, the company has a large influence on the inflation rate. The chairman of the board of Petrobras is also the Brazilian Minister of Finance and therefore the company's independence is doubtful. Together with a number of institutional investors and in cooperation with our credit analysts, our engagement analysts proposed two independent members of the Board. This proposal was approved by the shareholders, which has resulted in a considerable improvement in the company's corporate governance.

Exclusion also excludes improvement

It is exactly because we believe in a constructive dialog that we only exclude companies if there is no other option, for example, if they structurally violate the principles of the UN Global Compact or manufacture controversial weapons. The most important objection to exclusions – especially exclusions on the basis of conduct – is that as an investor you then deny yourself the opportunity to exert a positive influence on the operations of the company in question. 

'A company that has an answer to today's challenges in the field of the environment, people and good governance, is more attractive for credit investors' 

We believe in long-term relationships with companies – a positive approach in which we try to convince a company that improvement is also in its own interest. Moreover, we are convinced that a company that has an answer to today's challenges in the field of the environment, society and good governance, offers better prospects and entails fewer risks and is therefore more attractive for credit investors.