Masja Zandbergen

At Robeco we have been integrating environmental, social and governance (ESG) factors into our investments since 2010. For many years we have held the firm belief that integrating material ESG issues into our investment cases leads to better-informed investment decisions. The financial industry has now mostly followed suit and also claims to integrate ESG into investment decisions for large parts of their assets under management.

Due to scrutiny from regulators and the need to become more precise in the wording used around sustainable investing, a recent Bloomberg article suggested that some asset managers have stopped using the catch-all term ’ESG integrated’. I am strongly against this, but would argue that the phrase should be used in the right way, as the Principles for Responsible Investment (PRI) has done for over 15 years.

Why stop talking about ESG integration?

Instead of throwing away the baby with the bathwater and stop talking about ESG integration, it is important to analyse why this is even suggested. One of two things is happening.

1. ESG integration is used to imply that investment strategies are sustainable, which is not always the case.
2. Investors have said they integrate ESG, but they cannot prove that, so it has led to greenwashing.

Structurally integrating ESG information into the investment process helps our teams make better decisions. It does not, however, reduce the universe, and our portfolio managers are still allowed to invest in companies with low ESG scores, so long as they believe the risks are more than priced into the market.

This method of integrating ESG, although infinitely more difficult and profound in its application than only using ESG scores to reduce the universe, is often not categorised as a sustainable strategy. Clients who want to invest in sustainable or impact strategies simply do not want to invest in ‘bad’ ESG companies, even if this is already reflected in the share price. So I would argue that we should keep on referring to ESG integration, but in the correct way that it is described here.

At Robeco we explicitly integrate ESG into our valuation work on the equity side, into our fundamental scores on the credit side, and into our country reports for our sovereign investments. Because this is all reflected in our investment cases, we can actually prove that we structurally integrate ESG. A quality control is also done on these cases to make sure that our approach is meaningful. We have even tried to show the added value of our approach .

Proving that it works is a question that is often asked, but is difficult to answer, as ESG integration is like putting sugar in your tea. After stirring the cup you cannot distinguish between the tea and the sugar. It only tastes better. You can also no longer separate the sugar once it has dissolved. I can imagine that this also applies to ESG integration. if you claim to take ESG into account in investment decision making, but keep no records of the impact on your valuation, or fundamental assessment, it is difficult to prove that you put the sugar in. And therefore it will be more difficult for you to talk about ESG integration.

The concept of double materiality

More scrutiny on how sustainable and impact investment strategies really are, and specifically greater transparency about what is actually being done and not done in the investment process, I believe is important and warranted. The EU finance plan in that respect is doing its work. It uses the concept of double materiality. This concept is far from new and goes into the purpose of sustainable and impact investing.

The ‘why’ should, if you ask me, always be at the heart of any sustainable investment policy.  Are we trying to achieve better investment performance? Do we want to avoid investments for reputational reasons? Are we trying to change the world, or is it all of these things? Only once this is established can the question be answered as to how to implement it. To make better investment decisions, ESG integration is the tool. But it is not a tool to change the world, or to avoid making a negative impact. In the graph below we explain the difference. Between ESG integration and impact investing, where there is a clear intention to add a societal value.

ESG integration versus sustainable and impact investing

Finally, ESG integration as commonly defined is simply done for financial reasons. Sustainable investing, on the other hand, can be done for multiple reasons. Some clients simply do not want to invest in controversial areas of business or controversial companies. They’d rather invest in companies or countries that have good track records in sustainability.

Others want to profit from sustainable development by investing in companies that create solutions for certain sustainability issues such as climate change, inequality, or improving health, etc. Or they intend to create a positive impact. These goals are tied to impact investing. As the goals of the end investors can be different, there is room for multiple strategies to exist alongside each other. As an asset manager with clients globally, we need to offer our clients funds and solutions that fit their needs.

However, the overall bar is being raised all the time, and what is deemed sustainable now might be deemed unsustainable in the future. So, we need to continuously adapt our standard offerings with new areas of exclusions, new engagement themes, and raise the thresholds in our framework for contributing to the Sustainable Development Goals (SDGs). This leads on to real sustainable and impact investing, and not what some people think it is.

By Masja Zandbergen, head of sustainability integration

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Developments in sustainable investing are requiring the fund manager of the future to adapt yet again, most notably moving from integrating material ESG issues, to thinking about the (negative) impacts of investments on the environment and society. This requires a change in mindset for today’s portfolio manager. To be fit for the future, he or she needs to know more than just how to maximise alpha. This is making the job of a portfolio manager even more complex and challenging than it already is!

Skills of the future

According to the CFA survey, ‘The investment professional of the future’, investment industry leaders rank ‘T-shaped skills’ as the most important future skill category. Some 49% of respondents rank these first, followed by leadership skills (21%), soft skills (16%) and technical skills (14%).^[1] T-shaped people are subject matter experts; they adapt to changing environments, and can work across disciplines. They combine deep knowledge in a single field with wider knowledge in other parts of the ecosystem, and have the competencies to connect them.

We would argue that most investment professionals actually have T-shaped skills, being experts in analyzing companies, but always curious and interested in the world around them. However, working across disciplines comes less natural to the fund manager. To keep up with developments on the sustainability front, portfolio managers need to read up on the work of climate and human rights experts. Being able to use big data and machine learning to exploit behavioral biases is another skill that the future fund manager needs to have.

From T-shaped people to T-shaped teams

This is also the reason why we believe consultants and clients of asset managers focus more on the topic of diversity. The investment industry has already moved from the star manager model to the investment team model. However, the investment teams of today are mostly compiled of people that come from rather similar backgrounds, and more importantly are mostly trained to be an expert in the same subject matter. There is hardly any investment professional who does not have a CFA or similar qualification. But there are a very limited number of climate scientists or psychologists with a focus on business ethics, for example.

In the field of AI and big data, it is already quite common for investment teams to include data scientists^[2], making the team more T-shaped. Moreover, the two trends can complement each other; to make up for the lack of data on ESG, at Robeco we employ two climate data scientists. Of course, all of these professionals also need to understand finance. And for the fund manager, this means he or she needs to manage a team with different specialists and characters to come to better-informed investment decisions.

From ESG integration to impact

When Robeco started the process of integrating ESG in its investments about 10 years ago, portfolio managers needed to become familiar with the subject. They needed to start thinking about how topics like climate change, the rising costs of health care, use of child labor in supply chains, and the ever-growing mountain of single-use plastics was affecting the ability of companies to create value in the long run. How these trends are changing markets, affecting brand value, or if not managed, simply increasing risk.

Focusing on financial material ESG issues was a good place to start, as it was closer to the heart of fund managers, and did not have any impact on their investment universe. This leaves the most room to create alpha according to the good old fundamental law of active management. However, 10 years on, we see that our clients, the regulator and society are moving towards focusing on the actual (negative) impact our investments  have. This is adding another dimension to analyzing companies and constructing portfolios: return, risk and social and environmental impact.

How to not be a dinosaur

So, we see the fund manager 2.0 as a professional who can take a carbon budget into account as well as a tracking error and alpha. Someone who understands that decarbonisation through time is a given, and that negative externalities (like waste or carbon emittance) should be priced. Because policy makers will push for externality pricing, while stranded assets are the minefields of the coming years.

The fund manager 2.0 understands that real world impact via our investments are equally important, in some products at least, to generating alpha. Taking into account real world impact is the future.

Combining these efforts is a whole new challenge. Not adapting will make you extinct.

By Masja Zandbergen, Head of ESG Integration and Victor Verbeck, Chief investment Officer, Fixed Income and Sustainable Investing.

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[1] https://www.robeco.com/en/insights/2019/08/applying-big-data-to-investment-processes.html
[2] CFA Institute, Investment professional of the future, May 2019

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Masja Zandbergen, Head of Sustainability Integration.

Robeco has published a survey on how investors are approaching the opportunities and risks associated with climate change. The survey covers 300 of the world’s largest institutional and wholesale investors in Europe, North America and Asia Pacific, representing a total of around USD 23.4 trillion in assets under management.

Carried out by CoreData Research, Robeco’s 2021 Global Climate Survey shows climate change is already a significant factor in the investment policy of almost three-quarters (73%) of investors surveyed. Nearly all respondents indicated that they already have a formal policy on climate change in place or that climate will be integrated as part of a broader sustainability policy in the near future.

One of the possible paths to a low-carbon economy is to set net zero carbon emissions targets. While the number of investors that have already set a net zero target is relatively small (17%), it’s on an upward trajectory that is expected to rise to over half of all investors (52%) in the next five years. The shift will take place mainly in Europe and North America, where in both regions more than 60% of investors expect to adopt a zero carbon target within this time frame. The Asia Pacific region is behind, with only 29% of investors expecting to do the same.

There is an increasing awareness among investors of the need for decarbonisation and to support the transition away from a dependence on fossil fuels and towards a low-carbon economy. The survey revealed that divesting from carbon-intensive assets will rise sharply in the next five years. And yet, over 40% of investors globally have not divested their carbon-intensive assets over the past five years. This is expected to fall to just 19% for institutional and 25% for wholesale investors in the next five years.

At the same time, there’s a clear demand for more specialised expertise, support and education on climate change, with 44% of respondents globally viewing the lack of data and reporting as the biggest obstacle to implementing decarbonisation. That percentage is even higher in Europe (58%). In the Asia Pacific region, the shortage of suitable low-carbon investment strategies is the biggest concern (54%), and North America sees the lack of internal expertise on decarbonisation as the biggest challenge (45%).

Gilbert Van Hassel, CEO Robeco said: “Moving to a low-carbon economy needs a global effort, with governments, regulators, the corporate sector and individuals all playing their part. This survey shows that the vast majority of investors are committed to tackling climate change, which is a promising sign. Yet it has also revealed a substantial knowledge gap when it comes to fully understanding these major issues, with many investors not knowing where to start or how to make a difference. The time to act really is now. As a global leader in sustainable investing, we see it as our duty to share our passion and expertise with those who have yet to fully embrace it, so that together we can rise to one of the greatest challenges facing humanity: the climate crisis.”

Read the Survey.

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Masja Zandbergen

Digital data has expanded beyond imagination, and can create some serious issues for privacy and human rights, especially when it comes to the sensitive health data now being used in the battle against Covid-19. The amount of data in the world will reach about 40 trillion gigabytes in 2020, or more than 5,000 gigabytes for every person on the planet. That’s five times the capacity of the average personal computer… and much of it is about YOU.

As with all rapidly developing trends, the lack of a decent regulatory framework leads to new risks and new opportunities for all the stakeholders involved. At Robeco, we recognized many years ago that data privacy posed a material business risk for internet and telecom companies. Some business models are completely built around gathering, using or selling consumer data. Cybersecurity and the social risks of artificial intelligence (AI) are subsequently issues that we focus our attention on when it comes to digital human rights.

Covid-19 response tests digital human rights

In the Covid-19 crisis – as with many other material ESG topics, by the way – digital human rights are being put to the test. On the one hand, apps to track down infected people can save lives and help unlock societies, in turn helping the economy. On the other hand, if it is not done carefully, people’s privacy is at risk.

Some people might argue that privacy should be sacrificed for this purpose. However, AccessNow, a leading not-for-profit organization in this space, claims that strong digital rights can actually help improve public health.

We fully support that notion. If digital rights are not properly protected, the voluntary uptake of apps to track down infected people will be refused, and they will then only be successful if they are made mandatory. In many countries this will not be accepted, and it would leave governments unable to successfully implement digital health tools.

Issues around digital rights

But there are also other, less obvious issues. Health data is one of the most sensitive types of data that exists. Data protection is paramount. Tracking health data can be necessary for authorities to respond to a fast-moving outbreak. However, mismanagement of this data can lead to mistrust and the lower use of digital health tools.

Another relevant topic is surveillance. Governments may use this crisis to implement surveillance tools on a wide scale that could be considered controversial. Facial recognition, for example, is already playing a role in the surveillance, monitoring and control of people’s movements in the coronavirus outbreak. China is using it to track infected individuals and identify those not wearing masks.

In Moscow, Russian authorities are reportedly using surveillance cameras, facial recognition systems and geolocation to enforce its quarantine regime and track infected individuals and their family members.  Even though we understand that individualism is valued more in Western countries than elsewhere, we are of the opinion that these practices run the risk of severely violating the basic human right to privacy without a clear benefit to the people.

Censorship and disinformation

ICT companies face an increasing number of orders from governments around the world that seek to restrict access to services and to disrupt networks. The consequences of disruptions include restricting internationally recognized rights to free expression, preventing access to vital emergency, payment and health services, and disrupting contact with family members and friends.

In some cases, these mandates pose an additional risk of human rights breaches when they restrict the free flow of information in the run-up to elections, or are used to target particular regions, districts or ethnic groups. In this crisis we have seen authorities in China, Iran and even the US trying to control the information that was shared on social media by journalists and health officials.

On the other hand we have seen a lot of misinformation being published, ranging from holding your breath to all kinds of medicines being hailed as the solution to this pandemic. In response to this, large platforms such as Facebook, Google and Twitter are pointing consumers proactively to reliable sources like health authorities.

What can companies do?

In the absence of a good regulatory framework, we see digital human rights as presenting risks to the companies we invest in. Exposure to issues such as data privacy, cybersecurity or social impacts of AI can badly impact their business, so good management of them can set companies apart.

Therefore, in our fundamental investment processes, we systematically analyze how companies are managing these issues. To assess these risks, we examine not only the strength of the editorial and information security policies, but also the processes and outcomes when it comes to breaches and fines. Some companies are also more transparent on these outcomes than others.

Combining this analysis with the other material issues such as corporate governance and human capital management, we assess the impact on the value drivers of the companies in these sectors. Data privacy, cybersecurity or social risks in artificial intelligence are often difficult to quantify in terms of revenue or cost drivers. So, we mostly adjust our figure for the company’s cost of capital based on our analysis as an estimate for reputational, legal and business risks.

The tip of the iceberg

In our investment analysis and engagement efforts, we focus on imminent risks or challenges, such as algorithm bias leading to discrimination or breaches of privacy. We also look at the effectiveness of corporate governance around digital human rights, their implications for human capital, and also the opportunities that AI offers. All these issues are financially material to a company’s business.

We ask companies to build knowledge at board level, and to implement robust policies and processes that will respect human rights in this increasingly digitized world. We also ask them to be transparent if they encounter issues or breaches. And let’s be clear, of course an app that could help track down and contain Covid-19 is a good idea, but its success will depend on how well human rights are protected.

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Protecting digital human rights in the post-COVID-19 era was authored by Robeco’s head of sustainability integration, Masja Zandbergen.

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Masja Zandbergen

The most important ESG issue in the coronavirus crisis is our response

• Companies should act prudently to protect longer-term business
• Investors will look critically at future remuneration and buybacks
• Governments should consider ‘green’ stimulus packages

As soon as the coronavirus crisis hit our society and financial markets, we received many questions on how this relates to sustainable investing and ESG. Will sustainable investing become more important? Or will it become less important? Are sustainable funds doing better than regular strategies? Will the coronavirus be added as a topic to sustainability research?

Of course, links can be made to long-term trends such as a growing and aging population and the loss of biodiversity (through which people could get exposed to unknown viruses ). However, those long-term trends are still exactly the same as they were before this crisis. Nothing new under the sun. If anything, this crisis reinforces the fact that sustainable development is the only way forward. And it is our response to this crisis that is most important now.

The current situation, with less air travel and less production, shows us what the world can look like. Clear waters, blue skies. With respect to the S in ESG, we find that solidarity is important, and that companies can have a social face. We see companies that are changing production lines to make hand sanitizer or ventilators for hospitals, and some are even giving away input for these products for free, as it is small in light of their business, but can make a huge difference to the hospitals that receive it.

Becoming accidentally sustainable

We also see that companies are quick to adapt to taking measures that they were reluctant to take in the past, such as the ability for their workers to work from home, have flexible hours, and have meetings via conference calls rather than taking trips. This is accidently all good for equality, diversity and the environment.

A blessing in disguise? No. First and foremost of course because of the tragic human consequences of the deadly viral outbreak, but also because this crisis and the lockdowns have led to a complete economic standstill and substantial market declines. The long-term effects of this standstill will only be known afterwards. However, the longer it takes, the more profound the effects will be.

It will, at a minimum, hit companies’ abilities to generate long-term value, not only for shareholders, but more importantly for all stakeholders, including their employees and the communities in which they operate. In the Investor Statement on Coronavirus Response signed by 195 investors around the globe, including Robeco, we ask companies to provide paid leave if necessary, prioritize health and safety, maintain employment, suppliers and customer relationships, and exhibit financial prudence.

Capital management and remuneration

The two most important issues from an ESG perspective when it comes to financial prudence are capital management and remuneration. Again, these are not new topics for sustainable investors. However, in this situation we will be assessing on a case by case basis the prudence of companies when it comes to dividend payouts and share buybacks. 

We will also be critical of remuneration proposals for board members. As our proxy advisor Glass Lewis puts it: “Companies with strong pay structures will be challenged to abide by them, and firms with less robust programs will be forced to choose between lying in the bed they’ve made, or changing arrangements and all but guaranteeing shareholder ire.” We have already come across the first companies that are floating the idea of topping up pay packages to keep executives incentivized this year. We will be very critical of this kind of behavior, especially where employees face hardship, or where shareholders expect far lower returns.

When it comes to employees, we expect company responses to the coronavirus to be a proxy for their broader approach to human capital management. In the Investor Statement on Coronavirus Response, we noted that the board of directors is accountable for the long-term human capital management strategy of their companies. Companies with good human capital management have invested in their employees and will be well served by having retained a well-trained and committed workforce when business operations are able to resume, we believe.

The statement on the Purpose of a Corporation signed in August 2019 by 181 CEOs in the US will be put to the test. In this statement, the CEOs commit to leading their companies for the benefit of all stakeholders – customers, employees, suppliers, communities and shareholders. Now is the time to show that they mean what they say.

Keeping economies afloat

Looking at the financial markets and the broader economy, we see that governments and central banks are doing everything they can to keep their economies afloat as much as possible. Their monetary and fiscal responses are both unprecedented in size. They are aimed at mitigating the standstill. The USD 2 trillion coronavirus relief bill in the US, for example, includes one-time payments to individuals, strengthened unemployment insurance, additional health care funding and loans and grants to businesses to deter layoffs.

Longer term, however, more stimulus is probably needed to aid economic recovery. This represents an opportunity for governments to combine economic stimulus with social and environmental development. This is especially needed now, as the low oil price will potentially hurt investments in renewable energy. Although it’s already cheaper in some parts of the world to generate energy from the wind and sun, falling oil prices might make people more inclined to use coal, oil and gas. This would have a negative impact on the further development and consumption of green energy.

Green project stimulus

In the US, experts on climate and social policy in academia and civil society drafted a menu for green stimulus to rebuild the economy. It combines social and environmental development. Some of the ideas presented are helping to create green jobs in clean energy expansion, building retrofits and sustainable homebuilding. Others are aimed at creating local food economies, or assisting with public transit maintenance and operations, electric appliance and vehicle manufacturing. Their ideas also promote green infrastructure construction and management, local and sustainable textiles and apparel, and partnering with existing pre-approved apprenticeship programs to bring more low-income and workers of color into good unionized jobs.

In Europe, stimulus to make green investments might help to adhere to the carbon targets that European countries have committed to. Going a step further, public and private sectors could work together to contribute to achieving the Sustainable Development Goals. Issuing green and social bonds might provide an opportunity to finance these investments. Green bonds currently comprise less than 0.1% of total sovereign debt, according to S&P Global. So there is plenty of room to finance social and environmental stimuli!

By Masja Zandbergen

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