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Robeco

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You are in Direct - Listed Equity Incorporation » ESG incorporation in actively managed listed equities » Implementation processes » (C) Implementation: Integration of ESG factors

(C) Implementation: Integration of ESG factors

LEI 08. Review ESG issues while researching companies/sectors

08.1. Indicate the proportion of actively managed listed equity portfolios where E, S and G factors are systematically researched as part of your investment analysis.

ESG issues

Proportion impacted by analysis
Environmental

Environmental

Social

Social

Corporate Governance

Corporate Governance

08.2. Additional information. [Optional]

Within Robeco listed equity assets are managed either on a quantitative or a fundamental basis.

In our quantitative models the ESG scores of companies are used in addition to traditional quantitative variables. A key feature of our approach is that we ensure that the portfolio's weighted ESG score is at least as strong as that of the benchmark. This integration of sustainability factors in our investment processes is applied to all quantitative strategies. Furthermore in 2019 a decarbonized value factor was developed that is applied to all quantitative strategies.

For fundamental equities we use a factor model resulting in a ranking of stocks, where the factor model also includes ESG scores. The use of this model is to generate new ideas for the portfolio. The final decision of incorporating a stock in the fundamental portfolio is based upon the investment case of a stock. Each investment case includes a thorough assessment of material ESG issues and the impact on the company valuation. In the construction phase, the portfolio is monitored versus the benchmark or reference index on the dimension of ESG scores and environmental impact (GHG emissions, Energy consumption, water use, and waste generation).


LEI 09. Processes to ensure integration is based on robust analysis

09.1. Indicate which processes your organisation uses to ensure ESG integration is based on robust analysis.

          interaction between the SI research specialists at RobecoSAM, the Robeco Active Ownership team and the investment teams also improves the quality of the information used.
        

09.2. Indicate the proportion of your actively managed listed equity portfolio that is subject to comprehensive ESG research as part your integration strategy.

09.3. Indicate how frequently third party ESG ratings that inform your ESG integration strategy are updated.

09.4. Indicate how frequently you review internal research that builds your ESG integration strategy.

09.5. Describe how ESG information is held and used by your portfolio managers.

09.6. Additional information. [Optional]

ESG information is available through a portal to which all investment teams have access. The research of RobecoSAM and Sustainalytics is checked with companies and updated at minimum twice a year.

Fundamental Investments: each investment case includes thorough research on ESG and the impact on value drivers. Investment cases and valuation of portfolio holdings are updated at minimum twice a year and are discussed during portfolio management meetings. Results from the ESG integration process are logged by each team in a central location. Furthermore an ESG integration manual is available and quality control is applied by the Head of Sustainability Integration. Monthly sector calls are held to review company ESG issues between the SI research analyst, the Active Ownership specialist and the relevant financial sector analysts. 

The quantitative equity team has access to all ESG information via its portfolio implementation system. The team manages and measures the ESG profile of its portfolios systematically through this system.

We find that systematic use of ESG information is the best way to scrutinize and improve the information used. In 2019 MSCI data was researched and the new ESG risk rating of Sustainalytics was presented to all investment professionals. Feedback was given to Sustainalytics.


LEI 10. Aspects of analysis ESG information is integrated into

New selection options have been added to this indicator. Please review your prefilled responses carefully.

10.1. Indicate which aspects of investment analysis you integrate material ESG information into.

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

Proportion of actively managed listed equity exposed to investment analysis

          Quantitative investment models
        

Proportion of actively managed listed equity exposed to investment analysis

10.2. Indicate which methods are part of your process to integrate ESG information into fair value/fundamental analysis.

          Competitive advantage period (CAP)
        

10.3. Describe how you integrate ESG information into portfolio weighting.

Fundamental equity

As ESG is integrated in the investment analysis, it affects convictions and company valuations and as such is considered in the construction of the portfolio (weights of the stocks). In emerging markets strategies ESG is also incorporated in country weights. 

Quantitative equity

All quantitative strategies incorporate ESG restrictions in their portfolio modelling. All quantitative portfolios are managed to have as good or better an ESG score than the benchmark. And on E, S and G separately the portfolios should also score better than the benchmark. In 2019 two improvements were made: a decarbonized value factor is incorporated for all strategies and the company assessed RobecoSAM scores are added to the factor that assesses quality for all quantitative strategies, both affecting the portfolio weighting of stocks.

Sustainable Focus

For our sustainable range Smart ESG scores are used in the portfolio construction. For quantitative strategies, the Smart ESG score of the portfolio should be at least 20% better than the benchmark. For fundamental strategies the 20% worst companies are excluded and the portfolio should score at least as good as the benchmark on total Smart ESG score.

10.4. Describe the methods you have used to adjust the income forecast/valuation tool.

Fundamental equity

To quantify return potential for an individual stock, we identify five value drivers: revenue growth, margin development, invested capital needed, competitive advantage period and risk (as defined by a discount factor). To assess the fair value of a stock, these five factors are estimated and applied in our valuation tools

Quantifying the impact of ESG factors on companies' valuation takes place in three steps. The first step is to identify the most material issues - i.e. those ESG issues that may substantially affect the company's business model and value drivers - either positively or negatively and identifying red flags. The second step is to analyze the impact of these material factors and red flags on the individual company. These first two steps are done in close collaboration between the RobecoSAM SI Research analyst and the Robeco fundamental equity analyst. In the third and last step, the Robeco fundamental equity analyst estimates the impact of the ESG factors and the associated competitive advantages and disadvantages to the five value drivers (see above) of the company.

Quantitative equity

Our factor model incorporates CO2 emissions to decarbonize the value factor and company assessed SAM ESG scores in the quality factor.

10.6. Additional information. [OPTIONAL]

Material ESG information in economic analysis applies to our Emerging Markets team where the top down country selection and the cost of capital is affected by the Country Sustainability Ranking.

Examples of developments in 2019:

  • In 2019 a qualitative review of the ESG integration sections of the investment cases for the Emerging markets and Asia Pacific teams were done. Results were shared and discussed.
  • Continuing quantitative research efforts on sustainability bore fruits. One prime example is our ‘decarbonized value’ research, which was finalized ánd implemented in the quantitative equity strategies in 2019. The equity value factor exhibits high environmental footprints as measured by greenhouse gas (GHG) emissions, water use, waste generation, and energy consumption. This is partially due to its structural tilt towards asset-heavy companies and sectors such as energy, utilities, and materials. We have designed a methodology to improve the environmental footprint of the conventional value factor without lowering its return premium.
  • Our EM team increased coverage from 3,400 to almost 4,000 companies and to 125 datapoints per company in their ESG dashboard.

We refer to the SI section of our website where many of these issues are discussed: https://www.robeco.com/en/key-strengths/sustainability-investing/ 
And to the ESG integration document: https://www.robeco.com/docm/docu-esg-integration.pdf 


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