For the sustainability core strategies, we reduce the investment universe by applying the RobecoSAM universe restrictions, environmental impact filter and minimum Smart ESG scores.
Exlusions (Negative Screening)
An increasing number of investors recognize the value that they can derive from integrating environmental, social and governance factors into their investment decisions. One of our strongest-held beliefs is that companies that are able to add value for society will deliver superior returns to their shareholders over the long term. The flip-side of this is that firms that are lagging behind in this regard are likely to face headwinds from increasing regulation, public scrutiny, and reduced demand from their customers over the long term. Besides this systematic integration of ESG factors in our investment process, we believe that some products and business practices are detrimental to society in a way that makes them incompatible with a sustainable investment strategy. With this in mind, at RobecoSAM we exclude from our investment universe companies whose practices breach the principles of the United Nations Global Compact and turn out to be unwilling or incapable of changing these practices even after active engagement by our specialized team. In addition, our investment universe restricts firms with a significant exposure to damaging activities, such as the production of tobacco or firearms. We believe that the resultant benefits to our clients are two-fold: it increases the likelihood of them achieving the investment returns that they need, and enables them to make a positive contribution to society through the deployment of their assets.
The sustainability core strategies' investment team uses a proprietary tool, the Impact Optimizer, to maximize the reduction of the portfolio environmental footprint, while minimizing the number of companies excluded from the investable universe. The Impact Optimizer was developed, in order to apply the environmental impact data in an efficient way in the universe screen and portfolio construction. The analytical reporting tool helps monitor the impact of the portfolio on the following four quantitative environmental impact indicators
Greenhouse gas (GHG) emissions: measures direct GHG emissions generated by sources owned or con-trolled by the company (Scope 1 emissions) and indirect emissions associated with the generation of purchased electricity or heat (Scope 2 emissions).
Energy consumption: measures total energy directly consumed by the company as well as indirect energy consumed outside the organization.
Water use: measures company's total water withdrawal, excluding water discharged with an equivalent quality level than the water extracted.
Waste generation: measures metric tons of dry waste generated by the company, consisting of by-products of the extraction or production process that can no longer be used for production or consumption and which the company intends to discard.
The environmental impact objective within the portfolio is a 33% reduction of the portfolio- versus the index footprint across all four impact measures.
To achieve this objective, companies in the investment universe are ranked according to their total footprint per million enterprise value on all four indicators (e.g., companies with large footprints on all indicators are likely to be removed first). We then balance the four impact areas by removing one company at a time, and using dynamic weights to prioritize removal of companies whose exclusion will ensure each impact measure is reduced equally in the final product (e.g., if the first company removed has very high GHG emissions, the next company removed is more likely to have very high exposure to one of the other three metrics). In order to ensure industry diversification, we limit the maximum removal of 2/3 of companies per GICS III sector. Our optimized approach balances the impact that a company has on the four different criteria. Through this approach, we create a starting universe with a superior impact profile. The portfolio manager accordingly still has a broad set of investment opportunities, but one that ultimately leads to the creation of a low environmental impact portfolio.
After the impact optimizer has vetted out the worst environmental polluters from the starting universe, we apply our proprietary Smart ESG scores to the remaining investment universe.
Based on extensive empirical studies, RobecoSAM has found that the leading sustainability companies (those with the highest Smart ESG scores) have outperformed the lagging sustainability companies over the time period for which proprietary sustainability data of RobecoSAM are available. Smart ESG is our new generation of ESG scores that build upon our existing sustainability data by eliminating known biases such as market cap, industry and regional biases. We are able to pinpoint which ESG indicators are the most financially relevant for different industries, sharpening our focus on financial materiality. This results in an unbiased, evidence-based ESG score - or Smart ESG - a powerful score that has an attractive risk-return profile and low correlation to other common investment factors. RobecoSAM's Smart ESG data have thus a positive contribution to stock-picking.
Smart ESG scores are based on the annual RobecoSAM Corporate Sustainability Assessment, RobecoSAM's proprietary methodology that was developed over 18 years and covers 60 sectors. It allows for a detailed assessment of underlying key economic, environmental, and social criteria which are linked to the business model and the financial value drivers of a company. RobecoSAM's proprietary database contains sustainability information for over 3'900 listed companies. This assessment and database also enables the construction of the Dow Jones Sustainability Indices
We select the top 2/3 of the highest ranking Smart ESG Score companies