Conventional ESG scoring methodologies do not fit into traditional factor models and typically result in size or regional biases. Large cap companies tend to have better corporate sustainability processes and disclosures than smaller companies, and European companies tend to be more transparent. As a result, these companies tend to receive higher ESG scores. In addition, in contrast to mainstream factors such as value or momentum, traditional ESG scores are broad, often aggregating hundreds of individual indicators into a single score, diluting financially material information. To address these challenges, we have built upon our existing methodology to develop unbiased and financially material ESG factor scores that are more relevant for investors.
Our Smart ESG methodology leverages the wealth of sustainability data in our proprietary sustainability database to identify the most financially material sustainability criteria in order to develop an ESG signal that can be effectively used in portfolio management.
Our sustainability research is based on a forward looking financial materiality framework for each industry, which reflects our Sustainability Investing Analysts’ (SI Analysts) expectations on which ESG indicators are most likely to contribute to a company’s financial performance. Quantitative research is further used to test which sustainability indicators have had a strong impact on past financial performance. Together, questions are weighted in such a way to ensure the most materially relevant factors are well reflected in the Smart ESG Score.
Simply put, the RobecoSAM Smart ESG methodology uses quantitative analysis to remove the bias that clouds standard ESG data and helps clarify the true sources of sustainability. As a result, investors are better equipped to reduce risk, spot opportunities and improve portfolio performance.