With increasing evidence that ESG is going mainstream, Rainer Baumann, head of Investments, RobecoSAM discusses what this means for equity investments going forward.
How do you ensure an equity fund meets responsible investment criteria?
At RobecoSAM, ESG criteria are systematically and fully integrated into all the investment decisions. After all, we have focused on Sustainable Investing (SI) since day 1 of our foundation and we've been doing nothing else than SI since.
Next to our expertise in sustainable theme investment strategies, we can also draw on our comprehensive database of sustainability information developed over 20 years, which is based on the annual SAM CSA (Corporate Sustainability Assessment).
For over 4,700 companies, our analysts have access to information on numerous criteria within the 3 dimensions E (environmental), S (social) and G (governance). In total we have 600 data points per firm covering financially material ESG aspects. These data points get aggregated to a total sustainability score that sets the basis for the construction of our investment universes. All companies that do not meet any minimum thresholds regarding ESG get removed.
On the other hand, sustainability data are used for the systematic and fundamental analysis of a company. Given a internally developed Materiality Framework that identifies the financially most relevant ESG criteria per sector, companies get assessed in detail in respect to their actual business models. Combining respective findings with traditional financial research, a comprehensive understanding of a company is developed that builds the basis for better informed investment decisions. Portfolio construction is based on integrated investment recommendations, which combine financial and non-financial factors specific to the company.
Another discipline that is gaining increasing relevance is data engineering, which plays a central role at RobecoSAM. With the help of statistical methods and models, we are in a position to process basic data into so-called "Smart ESG Scores" in order to make them better comparable across regions and size classes (small vs. large caps) and to strengthen the expected financial signal.
In addition to the general ESG criteria, we also calculate specific data for all companies that capture their ecological footprint (water, energy consumption, waste production and GHG emissions). Based on the CSA we also can further define other specific ESG scores that focus on a very specific criteria, like for example the RobecoSAM Gender Equality score.
On top, we apply active voting and engagement programs for all our equity strategies.
Will certain existing equity funds face headwinds in future depending on ESG/sustainability regulatory developments?
Given various national or international efforts, a stricter regulatory environment must be expected regarding ESG investing. This includes areas such as transparency, taxonomy or investment guidelines. We expect ESG labels to become more used by institutional asset owners to meet more widely accepted standards. We see it already now, that institutional asset owners as well as wholesale platforms require from external asset managers that ESG must be strictly considered in the investment processes, certain minimum exclusions must be applied or a serious engagement program is put in place. Clearly, considering ESG is becoming a must.
In this regard, RobecoSAM is very well positioned as we have been active in that field since many years and have the experience and necessary tools to apply ESG in our equity portfolios in a very comprehensive manner.
Will certain existing equity funds face headwinds in future depending on shifts in investor demand related to, say, decarboniation/climate change responses?
Absolutely. Measuring the environmental footprint of a portfolio and/or managing a portfolio towards certain emission targets will also become a requirement, by both institutional but more and more also by private investors. This process has started some years ago already but has gained tremendous momentum after the Paris Climate Agreement.
Do you see an opening for new types of equity funds to meet new investor demand for, say, carbon neutral funds, or funds that promote solutions to the UN Social Development Goals?
SDG investing can be seen as a further development of SI. While traditional ESG data and investing have predominantly focused on companies that have included high standards in their operational processes, Impact Investing takes a focus on companies whose products and services are aligned with social or environmental targets as they are for example summarized in the SDGs. The broad acceptance that SI/Impact Investing by nature does not harm financial performance as well as the increased professionalism among sustainable asset managers will make such products much more popular in the future.
RobecoSAM is active in SI Investing since 1995. In line with our longstanding investment architecture, we have launched a dedicated Impact strategy end of 2017. The RobecoSAM Global SDG Equities strategy intentionally only invests in companies that provide solutions to global challenges and contribute markedly to achieving the SDGs. Because we are convinced that these companies will outperform in the long term, we have created this win-win-win opportunity for society, investors and the companies that we have identified as SDG enablers.
Bringing SDG investing to the space of listed equities securities increases the capital allocated to companies with the expertise, scale, and technology to move the needle significantly towards a more sustainable economy. Investing in the SDGs is a societal imperative, an economic necessity, as well as a great multi-billion opportunity for investors, who are looking to instigate positive, measurable impact while generating competitive returns.
Is it easier to launch new equity funds that incorporate ESG factors embedded in the investment process, rather than change the investment process of existing funds?
It is fair to say that the investment community and increasingly the public at large understands the need to apply ESG investment processes. As they understand the different SI concepts, like negative/exclusionary screening, best-in-class, norms-based screening, integration of ESG factors, sustainability themed investing, impact investing, and corporate engagement and shareholder action, it has become easier recently to change the process of existing funds and turn them into a more or less excessive ESG product. Main reason for the higher acceptance is the fact that in the meantime, a high number of studies show that ESG integration by definition does not come along with a negative impact on financial returns. While this perception was dominant over many decades it has now started to turn into the opposite. Given the huge challenges caused by megatrends such as climate change or demographic developments it has become obvious that companies which offer innovative solutions and are managed in a very sustainable way, will have a substantial competitive advantage.
The only fact that the larger public as well as asset owners still need to understand is: these SI concepts mentioned above are only tools. They are not investment strategies per se. It still requires decent asset managers that are well able to understand them and that are capable in the most reasonable way.
Every asset owner can apply these tools in every existing asset class and asset allocation and strategy they have, with any thinkable risk/return profile and by combining them in a multitude of ways. Today, the beauty and applicability of ESG comes in all different shapes, sizes, and colours.
We had several situations with asset owners which at some point asked: "Fine - I see the value of ESG. But when I want to start considering ESG in my strategic and tactical asset allocation, do I then have to change everything I've been doing over past years?" The answer I always give is: no. Asset owners can keep their existing assets and strategies, and without causing immediate disruption in the portfolio, ESG can be applied easily and cater to three basic ambitions we see in all the RFPs we receive: They want to invest smartly and improve the risk/return profile of a portfolio by using and integrating financially material ESG information. They want to sleep well at night and avoid investments in areas of controversial products or business practices. And they want to make a difference and invest for socio-economic impact, while generating competitive returns.
These three ambitions can be met in every existing asset class and asset allocation they have in place and with any thinkable risk/return profile with every thinkable level of impact.
Essentially, this is ESG mainstreaming. And mainstreaming ESG means, that it can be done in a way, which doesn't need to turn everything asset owners have been doing in their strategic and tactical asset allocation until now or everything they have committed to in their investment policies and processes upside down. On the contrary: Applying ESG can help asset owners live up to their investment policies and processes. And by smoothly applying ESG everywhere, we are fixing the financial system while it's operating.
Having said all this, there will be always room for new, innovative products that target specific investment objectives. Regardless of an asset owner's overall ESG strategy, areas that cannot be covered with appropriate in-house expertise and available products can still be invested in with products made available by specialised asset managers like RobecoSAM.