No one can ignore climate change, least of all investors, as we have the means to put money to work where it can make a difference. Active ownership can also help transform companies. With great power comes great responsibility.
Our planet is in trouble. We can no longer ignore the reality that our climate is changing and that biodiversity is collapsing. On top of that, we have yet to adequately manage the pandemic that has been afflicting us since early 2020. It’s vital to act now: the longer we wait, the bigger the trouble ahead.
I believe that investors need to lead in this crisis. In fact, one of the biggest risks for asset owners and managers is not seeing the opportunity to transform towards a more sustainable planet. Sustainability is now a key driver of innovation: the search for solutions to climate change, in particular, is driving technological innovation at an unprecedented rate. If investors don’t seize such opportunities by investing in sustainable innovations, they will not only hurt their own bottom line. They will also fail to support the solutions that can reverse the tide and get our planet out of trouble.
The single most important issue for investors should be how we can have real-world, sustainable impact. I believe there are three priorities in this regard.
First, it’s critical that we scale sustainable investing. Sustainable investing must become mainstream in order to be a force that helps drive the transformation towards more sustainable and resilient societies.
Despite the surge in the number of ESG and impact funds on the market, our work is not yet done. For every fund that integrates sustainability criteria, there are many more that don’t. This presents a challenge: although investors are increasingly steering capital towards sustainable firms, plenty of financing is still going to companies that have an adverse environmental and social impact. It means that, rather than treating sustainable investing as niche, we must go all in and make it the standard way of doing business.
Our second priority is to innovate. If we are to achieve the goal of making sustainable investing mainstream, we must come up with innovative ways to integrate sustainability into different asset classes. Today, the main focus remains on listed equity. Fixed income, particularly credits, is following, but surveys show that sustainability integration in this asset class is at an early stage.
That means that there is a world to gain for sustainable investing. If we succeed in creating innovative ways for integrating sustainability across different types of asset classes – particularly sovereign debt – then we will see many more opportunities to make a positive impact.
The third priority is impact. Here, we still see many unknowns: how can we measure the impact of companies on societies and the environment? Is ESG a good indicator of impact or do we need better metrics that focus more on the goods and services that companies deliver rather than focusing on their operations? And which metrics can indicate whether companies will successfully increase their impact in the future?
We are tackling these challenges through research and by creating new products. We have, for example, created a proprietary SDG Framework that enables us to assess what impact companies have on each of the SDGs – and with this framework we create investment strategies that invest in companies that have a positive impact. We have also launched two innovative climate-focused fixed income strategies, which are fully compliant with the EU benchmark regulation for Paris-aligned investments. As such benchmarks are not yet readily available to the market, we innovated – and developed these indices by working with a specialist in this area.
Ultimately, sustainable investing must be about impact – and there is a great deal more good work to be done here.
These are very complex challenges and this complexity is to be embraced rather than avoided. This requires us to have a much better understanding of what we are dealing with and what the consequences are. There is much work to be done to understand how investments influence climate change and especially biodiversity loss, and vice versa.
It also requires us to act together as an industry. No sustainability challenge will be solved if we do not act collectively. A planet that is safe and healthy can only exist if sustainable investing becomes run of the mill rather than the exception.
We need to just do it. Yes, it is complex and will take time. But we no longer have the luxury of waiting until all the unknowns are known and we have mastered all the complexity. We understand more than enough today to roll up our sleeves and get moving. Now.
Apart from the fiduciary duty to maximize returns for their clients, particularly when it involves ERISA assets, there is a global, increasing focus on the sustainability aspect. Asset managers decide what equities and bonds to buy for portfolios, which means they can target companies working towards decarbonization. This is primarily done through negative screening (typically exclusions) and positive screening, which uses models to find companies with higher ESG profiles.
Engagement is also used to persuade companies to do better. Robeco has two engagement themes in 2021, targeting financial institutions that fund higher-carbon companies, and those companies that have been slow or reluctant to move to lower-carbon business models.
Meanwhile, a swathe of new strategies are being launched that invest in companies making a direct contribution to combating global warming. In December 2020, Robeco launched two fixed income climate strategies that have benchmarks aligned with the Paris Agreement – the first time this has been done in this space.
Other climate-related investment products include those involved in carbon capture technology, the circular economy, and reforestation. Other forms of impact investing target the UN’s Sustainable Development Goals (SDGs) – particularly SDG 13: climate action – along with green bonds. So, is it just a case of channeling all the money into these kinds of strategies?
No, because investors need to think laterally too: it’s not enough to just avoid the bad guys and buy into greener securities, says climate change specialist Lucian Peppelenbos. “The irony is that we currently need to use fossil fuels in order to abolish them,” he says. “Take the oil and gas industry, an everyday necessity that is both at the heart of the problem and part of the solution. Oil and gas will be needed for transport and heating right up until 2050, though to a declining extent each year. And we still need fossil fuels and chemicals to build wind farms.”
“Oil majors need to transform into renewable energy companies, and we need to help them to do that. Just divesting from them and only investing in renewables won’t get us there. For example, we know of one company that has a large carbon footprint because of its mines, but it also has the largest renewable energy power generation capacity in Europe. So, you want to be invested in that company to help achieve the transition and gain exposure to the renewables. That's the balance you need to strike.”
The investible oil and gas companies still need shareholder money to survive – and that’s where investors can wield their power. “The threat of exclusions or divestment is particularly effective when combined with engagement,” Peppelenbos says.
“I have engaged with oil companies for many years and for them, the threat of their leading investors divesting them is very real for them – they genuinely fear it. So, they're very willing to listen to what we want from them to avoid this happening, because they know that we’re under pressure too. We saw that with Shell. So, I think it works.”
Unfortunately, not everything is within investors’ reach. “We can only invest in listed securities; most of the world’s coal reserves are owned by governments, so we can’t threaten to exclude them,” Peppelenbos says. “At Robeco, we also don’t buy real assets such as wind farms, which are a critical part of the equation. What we can do though is invest in the companies developing the technologies behind the wind farms and other renewables instead.”
“It is our responsibility to maximize investor’s returns, but we also need to keep an eye on offering investment opportunities in any of these areas while remembering that we can’t just dump all the fossil fuel producers and users overnight.”
One thing that will help in steering money towards the more sustainable companies is the EU’s new Taxonomy. This will establish for the first time a unified classification system for ‘green’ and ‘sustainable’ economic activities under the EU’s sustainable finance regulations.
Under the Taxonomy, environmentally sustainable activities must make a substantial contribution to one or more of six environmental objectives. These are climate change mitigation, climate change adaption, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.
Only activities that contribute to the first two environmental objectives – climate change mitigation and adaptation – have so far been defined. The first disclosures to meet for these objectives are due to be filed in January 2022. Technical screening criteria for activities that make a substantial contribution to the other four criteria will be released by the end of 2021, with disclosures due in the course of 2023.
Robeco has long believed in using engagement with companies as a means of pursuing positive change. This can be seen in six engagement programs that are directly related to climate change, with an increasing focus on decarbonization. Every year the Active Ownership team chooses four or five new themes that it will pursue through engagement. As each theme typically runs for three years, those chosen since 2018 are still active. They are summarized here:
Regulators are increasingly looking at the financing of climate change and how the financial sector can support rather than undermine the low-carbon transition. An example of this is to make sure that banks align their lending policies with the carbon reduction targets being set by governments to meet the Paris Agreement.
“We know that many banks are still lending to high-carbon emitters without gaining any commitment from them to change to lower-carbon business models,” says Peter van der Werf, senior engagement specialist in the Active Ownership team.
“In this way, they are not aligning their lending activities with the Paris Agreement commitments. We expect the financial sector to gain much more insight into the climate risks and opportunities that are increasingly falling within their purview.”
The other side of the coin is targeting the high-carbon emitters themselves. This engagement program is aimed at companies that are falling behind in the transition. “In the past, we have engaged with a large number of companies on the need to transition to lower-carbon business models – but some are still not making sufficient progress in that process,” says Van der Werf.
“So, for this program, we wanted to further shift gears and focus on the ‘worst of the worst’. These are the ones that won’t be pushed with a little nudge: they really need fundamental change to transition towards lower-carbon business models.”
A theme of combatting diversity loss began in 2020, and was boosted in September of that year when Robeco was one of 26 financial institutions to sign the Finance for Biodiversity Pledge. “Investors are exposed to biodiversity loss predominantly through land use change as a result of deforestation through clearing land for expansion of agricultural production,” says Van Der Werf.
“We want companies that produce soy, cocoa or palm oil, or companies that manufacture food to conduct a biodiversity impact assessment of their operations and/or supply chains. We also want them to develop plans to achieve net zero deforestation by 2023.”
A second theme for 2020 focused on the increasingly urgent need to achieve net zero carbon emissions by 2050. This was followed later in the year by Robeco’s pledge to achieve net zero greenhouse gas emissions across all its assets under management by 2050.
“As climate change represents a significant threat to investments, investors should align their portfolios with the goals of the Paris Agreement,” says Van der Werf. “Key industries need be decarbonized. The energy industry accounts for more than half of global emissions. The steel and cement industries are also significant emitters.”
In 2019, an engagement program was launched to tackle challenges in the palm oil industry such as deforestation, which adds to climate change by removing important carbon sinks and destroying biodiversity. “We’ve actively engaged with palm oil companies in the past, but we wanted to step up our efforts and make sure that palm oil-producing companies commit to producing palm oil sustainably,” says Van der Werf.
“We will focus on producers and traders in Malaysia and Indonesia, to bring them in line with the standards of the Roundtable for Sustainable Palm Oil.”
Going full circle, our global focus on collaborative engagement on climate change began in 2018, when we joined other members of the Climate Action 100+ initiative to target the world’s largest corporate greenhouse gas emitters. As a joint leading investor, Robeco achieved an important breakthrough in December 2018 when Shell agreed to set short-term targets for decarbonizing its main oil and gas business, and link executive pay to these targets for the first time.
“This shows that engaging with the companies we invest in is a powerful mechanism and key differentiator in bringing change to help combat major challenges such as climate change,” says Van der Werf. “The Shell case shows just how well this approach can work.”
But under the policy announced in September 2020, companies that derive 25% or more of their revenues from thermal coal or oil sands, or 10% from Arctic drilling, have been barred from Sustainability Inside portfolios. This expands the thermal coal exclusion policy that previously only applied to the more bespoke Sustainability Focused and Impact Investing strategies.
Investments in companies actively engaged in oil sands and Arctic drilling were also barred for the first time. This means that 242 fossil fuel companies in the energy, mining and utilities sectors joined the exclusions list.
Stricter thresholds have been applied to Sustainability Focused and Impact Investing portfolios, excluding companies with just 10% of their activities in thermal coal and oil sands, or 5% in Arctic drilling.
“Although the preferred approach is to engage with companies, we believe it is very difficult to drive significant change at companies whose portfolios are skewed to coal or oil sands,” says Carola van Lamoen, Head of Sustainable Investing at Robeco. “Therefore, we prefer to focus our efforts on the companies and sectors where we are more confident that our engagements will be effective.”
What has Robeco committed to doing?
Meeting the Paris Agreement’s goal to limit global warming to below 2°C by the end of this century means the world needs to become carbon neutral by 2050. Many nations along with the EU have since pledged to become net zero carbon by this deadline. As a leader in sustainable investing, we felt that we had a fundamental duty to do the same.
What does this mean in practice?
All Robeco’s assets under management must become carbon neutral, which means that all the companies held as stocks or bonds in our portfolios must meet this goal by 2050. As such, they will have to cut their greenhouse gas emissions and engage in carbon offsetting. To achieve that, they will need to make major changes to their economic models, including such as the long-term transition away from fossil fuels into renewables.
Doesn’t this just mean divesting problem companies?
It’s not just a matter of decarbonizing portfolios by throwing out high-carbon companies – this kind of divestment doesn’t solve the underlying problem. We need to work with the more carbon-intensive companies, including the use of engagement, to help them move their business models towards lower-carbon solutions
How will Robeco achieve this?
A roadmap will be used by all our investment teams to map out how we can gradually decarbonize all our billions of euros of investments. The targets set in the road map include the reduction of portfolio emissions using our data models that can calculate how much greenhouse gas emissions companies are producing.
Are we doing this unilaterally, or with others?
It was a decision taken by us as something we should do anyway, but we’ve always believed in the power of collaboration to work together and achieve a wider goal. So we’ve done this as part of an international effort by the Net Zero Asset Managers Commitment, launched by the Institutional Investors Group on Climate Change (IIGCC), of which Robeco is a member.
What about any new products?
In December 2020, we became the first asset manager in the world to launch fixed income climate strategies targeting companies that are making a direct contribution to combating global warming. We also have products targeting the Sustainable Development Goals, including SDG 13: climate action. And we have investments in solutions such as green bonds, smart energy and the circular economy.
What steps have been taken so far?
We think fossil fuels are the ‘low-hanging fruit’ in that they are an obvious issue on which to take a stand. In September 2020, we extended our fossil fuel exclusion policy to include all UCITS-registered funds (not just the bespoke ones), subject to certain thresholds. We combine this with extensive engagement to target not just the high-carbon companies, but also the financial institutions funding them.
Has Robeco boosted its resources to help with this?
Yes. We wanted to add some extra expertise in this arena. So in 2020, we hired a climate strategist and a climate data scientist to work exclusively on this project. They work within our news SI Center of Expertise, which we also created in 2020, partly to intensify our efforts on climate-related investment issues. They advise investment teams across the company.
Does Robeco publish all its findings?
Yes. We believe strongly that full transparency is an important part of sustainability. So, we publish all our sustainability policies on our website, including a climate change policy which was updated in September 2020. We also produce regular updates on how sustainability is translating into fund performance and showcase our engagement work in quarterly reports.
Carola van Lamoen - Head of Sustainable Investing
Business now only institution seen as both competent and ethical
(competence score, net ethical score)
Source: 2021 Edelman Trust Barometer. The ethical scores are averages of nets based on INS_PER_DIM/1-4. Question asked of half of the sample. The competence score is a net based on TRU_3D_INS/1. Depending on the question, it was either asked of the full or half the sample. General population, 24-mkt avg. Data not collected in China, Russia and Thailand.
Indeed, the various degrees of success – or, rather, failure – in combating the outbreak across the globe have led to a loss of public trust in government, as shown in the 2021 Edelman Trust Barometer. As can also be seen in the barometer, survey respondents continue to view government as the least competent and ethical institution. In fact, business is the only institution seen as both competent and ethical.
That said, respondents in our global client survey said that government should play the biggest role in reducing carbon emissions, followed by business.
While there might be a lack of consensus on which institution should take the mantle of leadership, what is clear is the increasing urgency to address the underlying reality of climate change.
In this context, all pillars of society have to play a role in moving towards a more sustainable world. Change should not only be determined by government regulation, but also by the proactive efforts of other institutions. Closer to home, the responsibility also lies with the asset management industry as well as the companies we invest in and engage with.
The race to zero is on. We explain what the key components of Paris-aligned investing are and what we’ve learned from the process of developing our own net zero roadmap.
Commitments are being made across business and society to help achieve the goals of the Paris Agreement. Experts estimate that countries with net zero targets represent as much as 61% of global emissions and 68% of global GDP.1 In the shorter term, however, there is a critical ambition gap. While science tells us that we need to halve global emissions by 2030, the policies envisaged by national governments will result in a mere 0.5% reduction, according to the United Nations.2 This means there is a hundredfold gap between ambition and reality.
A forceful policy response, sooner or later, is inevitable. Leading investors are anticipating a low-carbon future by aligning their portfolios with the goals of the Paris Agreement. According to Robeco’s 2021 Global Climate Survey,3 climate change will be central to the investment strategy of almost 90% of global investors in the next two years, while over 50% of investors will commit to aligning their investments with the ambition to realize a net zero economy by 2050.
3Downloadable at: https://www.robeco.com/en/sustainability/climate-investing/
Companies have since 2015 had access to science-based market standards with which to align their business strategies with the goals of the Paris Agreement. Until recently, there have been no such market standards for investors. The absence of an industry-wide methodology has not discouraged the investment community from taking action, though, and investors have increasingly been focused on mitigating climate change through various approaches.
These include driving the reduction of carbon footprints, excluding fossil fuels, engaging with companies in high-emitting sectors, implementing climate risk metrics and models, and investing in green bonds and other climate solutions. With the recent introduction of four frameworks for Paris-aligned investing, published by various initiatives, these tools and measures can now be integrated in a consistent fashion and deployed to create a fully Paris-aligned approach.
We’ve set out the key components for Paris-aligned investing, based on guidance from the Net Zero Investment Framework of the Paris Aligned Investment Initiative, the Target-Setting Protocol of the Net Zero Asset Owner Initiative, the financial sector guidance of the Science-Based Targets initiative, and the EU Benchmarks Regulation.
We also share Robeco’s views and experiences from developing our own net zero roadmap with interim targets for 2025 and 2030. Our view is that integrating climate change and other sustainability factors into the investment process leads to better-informed investment decisions and healthier long-term, risk-adjusted returns.
While the future is low carbon, the costs and risks of the transition towards that goal are not yet sufficiently understood and priced into the market. That is why we believe that being at the forefront of the low-carbon transition is sound from a portfolio and risk management perspective. We provide a number of case studies with concrete solutions for Paris-aligned investing. These solutions include the climate strategies we have developed in line with the EU Benchmarks Regulation.
Further, we discuss our research that shows the benefits of incorporating information about carbon betas as a forward-looking investment metric, which correct for the biases inherent in traditional carbon data. Our engagement on climate with carbon-intensive companies in the utilities, automotives, and oil and gas sectors is also presented as a practical solution.