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Robeco

PRI reporting framework 2020

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Outputs and outcomes

LEI 12. How ESG incorporation has influenced portfolio composition

12.1. Indicate how your ESG incorporation strategies have influenced the composition of your portfolio(s) or investment universe.

Describe any reduction in your starting investment universe or other effects.

For our mainstream strategies we apply exclusionary criteria that reduce our investment universe, which reduces the investment universe by less than 5%. 

For our sustainability funds we apply exclusions, negative screening and environmental footprint reduction. Here the reduction of the universe ranges from around 4% to 9%

The percentage reduction depends on the investment universe (Europe, Global, Asia etc.).

Specify the percentage reduction (+/- 5%)

5 %

Select which of these effects followed your ESG integration.

          impact on valuation and conviction
        

12.2. Additional information.[Optional]

The investment universe is reduced by applying our exclusion policy.

Robeco's exclusion policy and exclusion list is published on its website: https://www.robeco.com/docm/docu-exclusion-policy-and-list.pdf

For the sustainability focus strategies RobecoSAM's exclusion policy applies: https://www.robecosam.com/media/5/6/6/56679f0a621f6bc55d41d67ae508ff6b_robecosam-exclusion-policy-201910_tcm1011-17898.pdf 

The portfolio composition is affected by our ESG integration efforts both on the quantitative and on the fundamental side. All quantitative portfolios have an ESG score at least as high as the benchmark or better. Our fund range that incorporates the Robeco exclusion policy, Active Ownership and ESG integration on average has a 3.3 Morningstar globe rating, which is slightly higher than the peer group.

On the fundamental side we have two examples where ESG integration has also led to better ESG scores of the portfolio. The improvement over the years has lead to the rebranding of several funds as sustainable. Due to the integration the ESG score of the Global Equity fund continued to improve on RobecoSAM and on Sustainalytics scores and now applies all the criteria that are necessary to be called sustainable. The same holds true for the Property fund. Overall our Sustainability Focus range has an average of 4.1 Morningstar Globes reflecting the higher impact of ESG information on the investment universe.


LEI 13. Examples of ESG issues that affected your investment view / performance

13.1. Provide examples of ESG factors that affected your investment view and/or performance during the reporting year.

ESG factor and explanation

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. in 2019 we designed a methodology to improve the environmental footprint of the conventional 'Value'-factor without lowering its return premium. Even though we improve each of the four environmental footprints, we refer to the enhanced version as decarbonized Value, as GHG emissions seem to be on most investors’ minds at the moment.

ESG incorporation strategy applied Screening|Integration

Impact on investment decision or performance

The high environmental footprint of conventional 'Value' factors is undesirable. Since a relatively small number of companies are responsible for most of the pollution, an approach with dummy variables is appropriate to capture the time-varying dynamics of the interaction between value metrics and environmental footprint. These decarbonized value scores indeed lead to decarbonized value portfolios, while the risk, return, and correlation metrics are hardly affected. Hence, it is possible to avoid exposure to a potentially important risk factor that is not rewarded with additional returns. It aligns with our investment philosophy to incorporate these insights to our quantitative equity portfolios. This leads to a reduction in the environmental footprint of these portfolios, without altering its attractive returns.

The full article on decarbonizing value is available for professional investors.

ESG factor and explanation

In the Sustainable Global Stars strategy, we have been integrating ESG into our decision-making process since its inception, but only actively measuring its impact to performance since 2017. The most important approach in doing so is through our ‘bottom-up’ ESG integration process, adjusting the valuation model on the back of the most financially material ESG factors. In this research we attributed our ESG integration outcomes to the outperformance of the fund. 

The calculations are made by finding out how much ESG factors contribute to the price target set for a company under analysis when deciding whether or not to buy its shares. For example, the fund owns a German industrial company that scores highly on sustainability, as it is involved in the transition to a low-carbon economy. On the back of the ESG analysis, the price target was lifted from EUR 155 to 185. This EUR 30 increase effectively means that ESG makes up about 16% of the company’s perceived value. As the company added 59 bps of outperformance to the portfolio during 2017-2019,  16% of this means 9 bps of excess performance is attributable to ESG. 

ESG incorporation strategy applied Screening|Integration

Impact on investment decision or performance

​When this process is applied to all 201 investment cases in the portfolio over 2017, 2018 and 2019 we find that the use of environmental, social and governance (ESG) factors in the investment process added a cumulative 210 basis points of the 1,107 bps of gains for the Sustainable Global Stars Equities strategy from 2017-2019.

We now have a full three-year track record for our analysis. Interestingly, with 2018 being a very difficult year for stock markets, ESG acted as a performance cushion, explaining 38% of the excess performance. However, in 2017 and 2019, stocks rallied and the ESG component ‘only’ explained about 15% and 10%, respectively, of the excess performance. It was albeit a lower impact, but for sure a positive one nonetheless.

The process also takes into account the effect of exclusions, which can both positively and negatively contribute to the fund’s overall performance. Over the 2017-2019 time period, the negative effect of excluding aerospace and defense companies for making contentious weapons was more than offset by excluding tobacco companies. By not owning aerospace and defense stocks, the portfolio incurred 33 bps of opportunity costs. Selling tobacco stocks in early 2017 contributed 91 bp. to the performance.

https://www.robeco.com/en/insights/2020/01/from-alchemy-to-gold-how-esg-adds-value-in-a-robeco-fund.html 

ESG factor and explanation

The quantitative equity team since 2019 take sustainability scores into account when determining (and tilting to) the quality and income characteristics of companies. This was already in place for all core quant developed market strategies since 2010, and is now applied in all strategies. For this purpose we use the company assessed scores of SAM.

SAM collects ESG data in two ways: either by companies filling out a questionnaire (Company Assessed), or by assessing companies with publicly available information themselves (Self Assessed ). Already in 2008 we examined the relation between RSAM ESG factor and stock returns. 

ESG incorporation strategy applied Screening|Integration

Impact on investment decision or performance

Although history was limited, we found a positive relation between ESG scores and stock returns when:

  • focusing on the companies that participated the questionnaires. These companies provide more information than is standard available on websites and annual reports.
  • when correcting for risk factors that are not rewarded with extra returns. Most importantly here is the size bias. Large cap stocks have on average higher ESG scores, but large cap stocks do not outperform small cap stocks in the long run.

As of end 2019 these company assesses SAM scores are used in all quantitative strategies that have exposure to the quality factor.

ESG factor and explanation

Case Study: Asian real estate company

Step 1: assessing materiality.

Most material issues for the real estate sector are climate strategy, operational eco efficiency, corporate governance and risk & crisis management.

Step 2: analyzing the company's management of these material ESG issues. 

  • Climate strategy: 100% of the company's projects under development achieved the highest ratings of credible building certificates schemes. This is better than peers and the company was the first in its country to issue green bonds. This means they can finance its debt at lower costs, However this is not material yet to the business model.
  • Operational eco-efficiency: the companies assets are more eco-efficient compared to peers. This can command better rental growth in the long term.
  • Risk & Crisis management: the companies risk assessment is fully in line with the TCFD recommendations. The company for example has evaluated the exposure of specific assets and operations towards see level rise. This is much more advanced than peers. The resilience of the portfolio for crises will lead to better rent (increases) in the future.
  • Corporate Governance: Management has shown accountability, but metrics on CG remain low. Concerns are on audit oversight and insider control. Company is improving. No adjustment.
ESG incorporation strategy applied Integration

Impact on investment decision or performance

Step 3: Adjusting the value drivers:

                                           Sales growth                          Margins                     WACC                 Target price

Pre-ESG valuation               3.5%                                      87%                           8.4%                   34.10

ESG adjustments               +0.5%                                     None                          None                     1.90

Final Valuation                      4%                                        87%                           8.4%                    36.00

 

Our ESG integration adds 5.5% to the target price. Furthermore it increases the conviction of the analyst on this stock.

ESG factor and explanation

Case study: European refinery

Step 1: assessing materiality.

Most material issues for the refining & marketing industry are climate strategy, supply chain management and innovation management.

Step 2: analyze the company's management of these material ESG issues

Climate strategy: Transportation is ~55% of oil demand. As the transition to EVs doesn’t happen overnight, especially not within heavy transportation, the role of alternative fuels or next generation biofuels are crucial to keep a lid on carbon emissions. In addition, the potential for aviation fuel, bio-based plastics and chemicals is significant and teh company's global market share of ~50% in biofuel refinery gives it a significant competitive advantage. This is positive for sales growth.

Supply chain management: very flexible base of raw material feedstock, so company is able to process the widest range of vegetable oils and waste residues into renewable fuels in the industry. However, palm oil sourcing is always risky and not as ‘clean’ as the company suggests in its reporting. Moreover, its conventional oil products business is ~80% reliant on Russian crudes. The impact of these risks are unclear.

Innovation management: pioneer in renewable fuels. Patented technology. Flexible use of raw material. High innovation effectivity. Positive for margins.

 

ESG incorporation strategy applied Integration

Impact on investment decision or performance

Step 3: Adjusting the value drivers:

                                           Sales growth                          Margins                     Competitive advantage period                 Target price

Pre-ESG valuation               2-2.5%                                    9%                                15 years                                                    34                  

ESG adjustments               +100 bp                                   +50bp                              None                                                         6

Final Valuation                      3-3.5%                                   9.5%                              15 years                                                    40

 

Our ESG integration adds 17% to the target price. Furthermore it increases the conviction of the analyst on this stock.

13.2. Additional information.[Optional]

We integrate ESG into all investment strategies. Therefore, the examples presented above represent only a few of the many available across our product range including fundamental equity, quant and trends investing in both developed and emerging markets. Whilst in some cases the impact is large, and in other cases the impact is more limited, ESG is always analyzed.

 


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