SUSTAINABLE INVESTING EXPERTISE
SO YOU THINK SUSTAINABLE INVESTING IS EASY? THINK AGAIN
SIX. includes fourteen pages on impact and outcome • two big interviews • five eye-openers • our five engagement themes • a twenty-four/seven engagement specialist • ten messages in a bottle • one spy in the sky • eight times #mySDG • seventy-eight pages of thought leadership SUSTAINABLE INVESTING EXPERTISE
Colophon
SIX. is published by Robeco March 2020
Editor-in-chief Peter van Kleef
Editorial team John Coppock, Anna Heldring, Heather Lane, Erika van der Merwe, Yann Morell y Alcover, Clarinda Snel
Photography Sander Nagel, Getty Images
Art Design I.V.O., Culemborg
Printed by Damen Drukkers, Werkendam
Other Robeco and RobecoSAM contributors, in alphabetical order Chris Berkouwer, Laura Bosch, Cristina Cedillo, Alexandra Christie, Robert Dykstra, Peter Ferket, Holger Frey, Roland Hengerer, Cedric Hille, Erik Keller, Carola van Lamoen, Ronnie Lim, Jacob Messina, Guido Moret, Frank Onstwedde, Folmer Pietersma, Kenny Robertson, Rikkert Scholten, Anouk in ’t Veld, Sylvia van Waveren, Peter van der Werf, Masja Zandbergen, Machiel Zwanenburg
Special thanks to Natalie Fee, Megan Hewlett, Jo Morley (Refill UK), Karen Maas (Erasmus University), Robert-Jan van Ogtrop (Circle Economy) HIGHLIGHTS
It is now time for our industry to start making a real impact 5
Companies realize they are being held responsible by shareholders for their CO2 emissions, production of single-use plastics, tax morale, and so on 16 Will the world be a much safer place if we exclude a company that manufactures controversial weapons? 17 One million plastic bottles are purchased around the world every minute 24 Sadly that figure is predicted to rise by another 20% by 2021. More than 80% of these bottles are not reused 25 It is vital that we start considering the results of our investment strategies not only from a financial perspective but also in terms of their social and ecological effects 28 Over one year, in 2018, the companies in the strategy distributed 51.7 billion liters of clean drinking water, equivalent to that consumed by a total of 646,566 people 33 TWO percent. That’s how little labor costs sometimes account for the price of high street clothing 36 The calculations show that every USD 1,000 invested in the renewable energy green bond projects (...) generates a 500 kg reduction in CO2 emissions 37 Cutting carbon footprints in real estate is important, as the sector accounts for nearly 40% of the world’s energy consumption and over 30% of global greenhouse gas emissions 39 We believe that using the profit motive to effect major change is not a bad thing 44 Money speaks. If we start investing this money more towards the longer term and towards sustainable solutions, things can go very, very quickly 47 Because exclusion is effectively a transfer of ownership from concerned to less-concerned investors, it is anything but obvious how this is supposed to lead to changes for the better in society 51 Indonesia increased its palm oil production by 91% between 1989 and 2013, of which 53% was made possible by deforestation 58 Data centers now consume around 2% of the world’s electricity and have a carbon footprint equivalent to the entire airline industry 64 Just 8.6% of the entire economy is currently circular. Strikingly, this figure is lower than the 9.1% presented a year earlier. 71 EXHAUSTIVE ENGAGEMENT MEANS MORE ELECTRIC CARS
There is nothing like seeing the fruits of engagement when the company not only listens, but takes real action. The Transition Pathway Initiative’s engagement work achieved some breakthroughs earlier this year, as two major carmakers have set a long-term ambition of achieving net zero emissions by 2039 and 2040 respectively.
This is being done by switching from the internal combustion engine DECREASING to cleaner power systems, including hybrids. One of them has gone as far as to bet on a single drivetrain technology, focusing on battery- VALUE’S powered vehicles. It has committed substantial capital expenditure FOOTPRINT to this technology over the next few years, the only carmaker to have done so. One conundrum for value equity investors is that their portfolios tend to have large Passenger vehicles currently account for about 7% of global CO2 environmental footprints, as measured emissions (12% in the EU), and about 45% of world oil demand. in terms of greenhouse gas emissions, The TPI encourages carmakers to change their business models to water use, waste generation and energy make more carbon-neutral vehicles. Robeco is proud to be a funding consumption. This is mainly due to the partner of the TPI, which was founded by the UK Environment Agency structural tilt of conventional value and the Church of England. strategies towards asset-heavy sectors, such as energy, utilities and materials.
So, are value and sustainable investing irreconcilable? Not so fast! Robeco research shows that the environmental footprint of the value factor can be decreased without compromising on return and risk characteristics. That’s because only a limited number of companies with extreme environmental footprints tend to be responsible for a significant part of the overall footprint of a value portfolio.
It is therefore possible to reduce the footprint of a value portfolio by lowering its exposure to the most polluting companies. For that, Robeco has designed a methodology that adjusts the value score of stocks with a significant environmental footprint. In other words, if some cheap firms have significantly large footprints, we adjust their valuations and make them less attractive from a portfolio selection perspective. DIG IT! OR MAYBE DON’T
Spending one bitcoin consumes 654 kilowatt hours of electricity, equivalent to 776,000 Visa transactions. The energy needed to process the immensely complex blockchain algorithms necessary for one single transaction would power 22 US households for one day.
In 2019, the total energy consumption of the entire bitcoin network, including the ‘mining’ cost of making units of the cryptocurrency, was calculated to be 52.1 terawatt hours per year, or higher than the entire annual electricity consumption of Romania. COLUMN Put another way, that amounts to 0.34% of global energy consumption and 35.1 million tons of CO2, equivalent to what four Setting the pace million petrol-engine cars produce in a year.
Source: ‘Bitcoin Energy Consumption Index’, Digiconomist research, November 2019 Robeco is pushing forward at great speed. We started integrating ESG into our investment processes years ago, based on the firm conviction this would lead to better-informed investment decisions, and work hard every day to maintain our current leading position in sustainable investing (SI). Yet while better-informed decisions are a huge step forward, it’s now time for our ACTING ON industry as a whole to start making a real impact in this world we share. There is a clear need for socioeconomic CLIMATE CHANGE improvement, alongside competitive financial returns. Impact investing is one solution we embrace. Another The impact of climate change, if left unaddressed, will have serious long- way forward is active ownership. At Robeco, we have term consequences for society and the global economy. That’s why Robeco moved away from the confines of shareholdership towards accepts and embraces the responsibility that the asset management industry the broader remit of stakeholdership: we invest in real has in addressing climate change risks, through its investment decisions companies, not just in shares. and through contact with investee companies and other institutions. That philosophy comes with a responsibility – for We are acting now, as shown by the strategy which we have adopted. the employees of the companies we invest in, for all We commit to: parts of their supply chain, for their customers, for the shareholders, for society and for the natural world we 1. Decarbonizing assets under management and align with a global live in. This is the future of investing and that future 2°C emissions reduction pathway, where we have discretion over the is now. We may not be the biggest name in the asset investment approach; management industry, but we are leaders in SI. And 2. Analyzing climate-related investment risks and opportunities relating to we are glad to see other, bigger asset managers now our clients’ investment portfolios; following suit. Society and the planet will ultimately 3. Identifying new opportunities to offer climate-related products and benefit from this growing trend. And we will continue investment solutions; to innovate. This is not the time to be complacent. The 4. Raising awareness about climate change risks and engage through world around us is moving fast and we need to make dialogue with clients, investees and the public; sure it’s moving in the right direction. Asset managers 5. Tackling our own carbon footprint head-on. have an important role to play in this process. After all, money talks. The way we see it, escalating climate-related investment risks will increasingly force asset managers to include ESG considerations in their Carola van Lamoen investment strategies. As a consequence, integrating ESG factors into Head Active Ownership investment decisions will likely become more mainstream.
5 | SIX. ROBECO RANKS FIRST IN SI SURVEY OF GLOBAL ASSET MANAGERS
Robeco places great value on the external verification of our sustainable investing approach. That’s why we were delighted to be ranked first for sustainable investing in a THE $6 TRILLION COST OF survey of 75 asset managers by ShareAction. CYBERCRIME In an update to its 2017 ranking, the UK-based group reviewed the sustainable investment Think that the drugs trade or gun as the number of computers connected practices on governance, climate change, violence are the biggest form of crime to the internet is set to reach 50 billion human and labor rights, and biodiversity of the in the world today? Think again. devices this year. world’s largest asset managers. Cybercrime, the illegal manipulation of computer systems, is now estimated to So, how to combat it? Testing a Based on data collected through an extensive cost USD 6 trillion a year. company’s cybersecurity is now a survey aligned with the Task Force on Carbon- routine part of sustainability analysis related Financial Disclosures project, as well as It began as simple hacking to steal at Robeco, forming as much a normal publicly available information, the report gives users’ bank account information from part of analysis as looking at other an overview of global trends in the adoption of email addresses or fake ‘phishing’ links. risk factors such as vulnerability to bad SI within the asset management industry. Now it has morphed into the kind of weather or labor disputes. sophistication that requires expert-level It then ranks them based on disclosure and knowledge to both formulate and fight. A company without proper locks on management of ESG risks and impacts across its digital doors may not make it into their portfolios. And this year, Robeco came top. Analysis by the FBI shows that malware portfolios – that’s how seriously the Much larger firms did not fare so well: many of now affects more than 100,000 issue is now taken. The graph below the world’s biggest asset managers are among computers a day around the world shows what happens when you the worst performers on SI, ShareAction says. and involves USD 1 billion in ransom get hacked: it’s a risk that investors payments. It’s rich pickings for thieves including Robeco now routinely look for. “We are extremely proud to be recognized as a sector leader in ShareAction’s assessment,” says Carola van Lamoen, Head of Active Ownership. CLOSING SHARE PRICE OF A HACKED COMPANY, FEB 2017-FEB 2018 “Robeco’s place at the top of the leaderboard reflects our long-standing history in this field, 150 and our commitment to driving positive change Data breach announced 140 through rigorous stewardship and a focus on 130 ESG integration.” 120
“We acknowledge that in order to truly meet 110 the challenges in the natural and social world, 100 industry standards must be raised across the sector. We hope this ranking will inspire the 90 industry into taking more action as we continue 80 02-17 03-17 04-17 05-17 06-17 07-17 08-17 09-17 10-17 11-17 12-17 01-18 02-18 to play our role in educating and sharing best practices.” Source: Bloomberg
6 | SIX. The welcome rise in sustainability means more green·wash·ing | \ grēn- wo-shin\: investors are using ESG in their daily activities. Behavior or activities that make GREEN, people believe that a company However, many are claiming to be more is doing more to protect the sustainable when they are in fact only making environment than it really is – token gestures towards sustainability. This is GREENER, Cambridge Dictionary known as greenwashing, and sadly, it is also on the rise. GREENEST.
There are three aspects to greenwashing: REALLY?
1 2 3
Strategies that only apply simple A strategy can only really be Active ownership is important. To try to make things clearer, the exclusions and are still labeled as sustainable if it is also financially Truly sustainable investors will EU is in the process of defining an being ‘sustainable’ should be a sustainable. Integrated thinking is use voting and engagement to ecolabel, so that the public can thing of the past. There should be important. How do long-term ESG encourage companies to become trust what is said to be sustainable. more to sustainable investing than trends and external costs such as more sustainable. Passive funds, Other SRI labels can be misleading. just using a negative screen. climate change, loss of biodiversity for example, cannot do this – they Our advice? Look closely at what’s and rising inequality lead to simply scoop up the wheat with really on offer. If it doesn’t have changes in business models? This the chaff. ESG properly integrated, it’s means thinking hard about how greenwashing. sustainability affects companies and investment strategies.
7 | SIX. The global crisis continues to transform our society and economy. This means favoring innovative companies that take sustainability seriously should be every investor’s priority. It’s time to fight not just for recovery, but for one that lasts.
THE NUMBER 1 IN SUSTAINABLE INVESTING*
*Broadridge Market Analysis, 2019 RECOVERY
The Covid-19 crisis has shocked the world. It has changed the lives of millions, either through the direct effects of the disease itself, or owing to the lockdown measures taken to contain it. It has also accidentally made much of the world sustainable, as emissions-generating travel was brought to a standstill and companies learned to survive without offices. Now, as economies slowly emerge from the lockdowns and try to rebuild, it is clear there cannot be long-term recovery without sustainability.
In terms of ESG, much focus will be on the beneficial, social aspects that have become the ‘new normal’. Companies have empowered their staff to work from home and adopt more flexible working practices, so do we really want to go back to the resource-destroying rat race? Corporate governance will also be watched closely, particularly in seeing an end to poor capital management. And, of course, the environment has benefited from the lack of pollution – this is a chance to lower greenhouse gas emissions to meet global warming targets.
As pioneers of sustainable investing, we firmly believe only the most sustainable and innovative companies will be the winners of tomorrow. The post-coronavirus world will mean refusing to ‘return to normal’, putting well-being above focusing solely on metrics such as GDP, and valuing human capital much more than we did before. It’s time to move on in this brave new world. Those companies who embrace this as an opportunity rather than a setback, will be leading the pack when the pandemic is finally behind us.
10 | SIX. THE MOST IMPORTANT ESG ISSUE IN THE WAKE OF COVID-19 IS OUR RESPONSE Masja Zandbergen: Head of sustainability integration
This crisis reinforces the fact that sustainable development is the only viable way to approach our future. Our response to the crisis is critical.
We’ve learned a great deal amidst the tragedy and extreme disruption of Regarding financial prudence, the two most important issues from an the past few months. ESG perspective are capital management and remuneration. These are not new topics for sustainable investors; in this case, we will be assessing We saw that companies were willing, quite swiftly, to adopt measures that companies’ prudence with respect to dividend payouts and share they were reluctant to take in the past. Home working, flexible working buybacks, as well as remuneration proposals for board members. hours and virtual meetings instead of travel became the norm. It also became commonplace for businesses to take measures to serve society, When it comes to employees, we expect company responses to Covid-19 for example by changing production lines to produce healthcare products to be a proxy for their broader approach to human capital management. unrelated to their core business. Meanwhile, much-reduced air travel and When business operations resume fully, companies will benefit from the initial sharp declines in production resulted in clear waters and blue having retained a well-trained and committed workforce. skies. Leading for the benefit of all stakeholders These have been some of the positive environmental and social The statement on the Purpose of a Corporation, signed in August 2019 developments of the past few months. by 181 US CEOs, will be put to the test. In this statement, CEOs commit to leading their companies for the benefit of all stakeholders – customers, There have also been devastating societal and economic changes. The employees, suppliers, communities and shareholders. Now is the time to loss of human life has been tragic. And, lockdowns resulted in a dramatic show that they mean what they say. decline in the financial health of households and companies. The longer the standstill persists, the more profound its effects will be. Governments and central banks are doing everything they can to keep their economies afloat. This represents an opportunity for governments to Making decisions for the long term combine economic stimulus with social and environmental development. It will, at a minimum, hit companies’ ability to generate long-term value This is especially critical given that growing inequality is exposing for stakeholders. In the Investor Statement on Coronavirus Response, fundamental flaws in our economic system, and in light of the fact that signed by 195 investors around the globe, including Robeco, we asked CO2 emissions are rising again and are almost back to pre-crisis levels. companies to provide paid leave if necessary, prioritize health and safety, maintain employment, suppliers and customer relationships, and exhibit We live in extraordinary times. My hope is that we all stay safe and that, financial prudence. when we emerge from the crisis, our response will help create truly sustainable societies and economies.
11 | SIX. Gross Domestic Past-it – rethinking how we value our progress as a society
Jacob Messina is Senior Sustainable COLUMN Gross Domestic Product (GDP) has been the go-to metric for assessing countries’ Investing Strategist at RobecoSAM development trajectories for many years. But the metrics of yesterday will not work for a sustainable Jan Anton van Zanten is Strategist for the Sustainable Development Goals tomorrow. This is particularly true now that commentators around the world are philosophizing about at Robeco ‘what a sustainable Covid-19 recovery will look like’.
The inappropriateness of using GDP as the sole benchmark for a nation’s success is well noted. The Nobel Prize-winning economist Simon Kuznets, who is often credited as the inventor of the metric, warned that GDP was not a suitable measure of a country’s economic development or well-being.1 American politician Robert Kennedy summarized it well in his election speech in 1968 when he said “it [GDP] measures everything in short, except that which makes life worthwhile”.
The consequences of this focus on GDP are significant: if our metrics fail to capture a myriad of environmental and social costs and benefits, then our policies will fall short of creating inclusive and sustainable societies coming out of the Covid-19 crisis.
Following this logic through to the long-term impact on investors, if our accounting systems do not reward (or penalize) companies for these hitherto non-financial benefits (or damages), investors are not properly informed about companies’ true value creation potential. Ultimately our risk-adjusted returns, on which our performance is largely judged, does not show the whole picture.
The ‘cost’ of doing the right thing The principal problem with using GDP is its failure to capture a myriad of externalized costs and benefits, many of which mean the difference between life and death. For example, the production and consumption of cigarettes, sugary drinks and fast food all inflate GDP. However, the adverse health impacts they inflict on their consumers is insufficiently captured by the metric, and are thus easily ignored.
By the same reasoning, GDP measures the incomes (salaries, profits, taxes) reaped by providing essential services such as health and education, but fails to adequately measure all the societal benefits that these activities provide to students and patients in the long run. These shortcomings make investing in a sustainable future less attractive from a GDP perspective.
Environmental stewardship is a cost that reduces GDP, because it fails to recognize the value that nature provides. Healthy ecosystems and biodiversity provide numerous services, from pollination and clean drinking water to medicinal resources and recreation. Hence, nature provides the essentials for a high quality of life.
‘Low wage’ versus ‘low value’ The Covid-19 crisis has exposed problems with how we value human capital as well. We see that many jobs at the frontline of battling the pandemic – like nurses and social health workers – receive relatively low wages. While GDP only measures these professionals’ contribution to society by looking at their income, their
1. Kuznets S. National Income, 1929-32. societal impact is of course much greater: they protect people’s health and well-being. Similar arguments Letter from the Acting Secretary of can be made for many other jobs where salaries tend to be low (or non-existent) but societal impacts are Commerce to the US Senate. 1934. high (e.g., teachers, parents, warehouse workers, etc.). In other words, GDP calculations assume that 2. Mariana Mazzucato. ‘The Value of Everything’. 2018. price equates to value, when this is often not the case.2
12 | SIX. Beyond GDP – measuring a sustainable future Many have proposed concepts to replace GDP. One early contestant is the Genuine Progress Indicator, which was developed by economist Herman Daly and theologian John Cobb in 1989.3 This indicator includes some of the common measures of well-being, such as infant mortality, child poverty, life expectancy, insecurity, crime, pollution, water quality and resource depletion.4
More recently, Kate Raworth’s Doughnut Economics gained a lot of traction. This doughnut nicely describes a new paradigm, where 12 social dimensions are to be met within nine planetary boundaries.5 Not meeting the social dimensions means that there is a shortfall: people are left behind by not having access to basic needs and insufficient wellbeing.
But if we meet people’s basic needs by using THE DOUGHNUT OF SOCIAL AND PLANETARY BOUNDARIES more natural resources than our planet can generate, we’re overshooting planetary boundaries in areas such as biodiversity, climate and fresh water. This is a concept that originated in, and is now playing a central role in, sustainability science.6 Climate change
r Creating wealth and well-being ye I CA L C a O la LOG E I L I ci c e n CO N G d e Robeco measures the various impacts of n tio E ifi an o le ca z p t O e er Fo io its investments using economic, social d at od n W
FOUND and environmental indicators. Examples y IAL ATI H rg C O ea e O N l OVERSHOOT n S th include the number of clean gigawatts per E
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g n B i i & d However, standardization across the industry o G a d e e & n q n e o l iv u d ce e l o e a e a c g s is lacking. Robeco is working with others in s r e ti o u s r li s r r s t P u it it y j o y N h the industry to share knowledge and develop So al p cia litic s e l Po o qu ice h ity vo p impact standards. An example is the Natural
Capital Declaration, an initiative led by the r L ate co and hw ls nv Fres aw United Nations Environment Programme ersi hdr on wit Finance Initiative and the Global Canopy Program, that helps the financial sector to integrate natural capital considerations into Source: https://www.kateraworth.com/doughnut/ investment products, as well as in accounting, disclosure and reporting frameworks.
Developing better metrics and integrating these into investment processes is a journey that we embarked on, together with peers and research institutes, that requires continuous improvement and development. While we have not (yet) found the ‘holy grail’, we increasingly improve our assessment of the economic, social, and environmental impact of investments.
3. Daly, H, Cobb J. For the Common Good: Redirecting the Economy Toward Community, the Environment, and a Sustainable Future. 1989. 4. http://www.consultmcgregor.com/documents/resources/GDP_and_GPI.pdf 5. https://www.kateraworth.com/doughnut/ 6. Rockström, J., Steffen, W., Noone, K., Persson, Å., Chapin III, F. S., Lambin, E., ... & Nykvist, B. (2009). Planetary boundaries: exploring the safe operating space for humanity. Ecology and Society, 14(2).
13 | SIX. PIONEERS NEVER REST ON THEIR LAURELS
14 | SIX. It had to be taken, that one photo. On the roof. Her roof. Despite the objections of a photographer afraid of heights Masja Zandbergen, Head of ESG Integration, insisted that she be standing between the solar panels on the photo. Proudly. Because the house – her house – is clear proof that it’s possible: to make a difference. If you want to. If you have vision. And if you’re willing to invest.
15 | SIX. KNOWLEDGE IS NOT SUPPOSED TO BE A POOL OF STANDING WATER
Her climate-neutral home in the north of Rotterdam, built in 2017 on former football training grounds, is a shining example of how everyone can help to build a better, more sustainable future. For example, thanks to heat generated within the Earth, the groundwater – at 80 meters below ground level – stays between 13 and 15 degrees Celsius all year round. It is pumped towards the surface, compressed and circulated through the underfloor heating system. Geothermal heat, solar panels, smart use of natural light, and you’re there: a climate-neutral house, with no gas and very little electricity. “You have to dare to invest, but you recoup your costs within a few years. Our energy bill is now extremely low.”
And investing – to reap the rewards later – is what it’s all about, also in her role at Robeco. But the willingness to invest in sustainability only emerges once people become aware of the need, or the opportunities. And that awareness, Zandbergen notes, has really gone into high gear in recent years. At the start of her career, in 1997, Zandbergen – who didn’t like to invest in companies that used child labor or had poor working conditions – was met with resistance from portfolio managers when she talked about sustainability considerations.
Now, analyzing both the risks and opportunities of sustainability has become an essential aspect of every financial analysis. “Everyone is more aware of it, society is changing and you see global unrest about the climate, but also about wage inequality, for instance. Companies realize they are being held responsible by shareholders for their CO2 emissions, production of single-use plastics, tax morale, and so on.”
But increased awareness is not enough. Not by a long shot. “There is still a significant lack of knowledge and understanding in relation to sustainability,” says Zandbergen. “And for the asset management industry, we have a long way to go when it comes to effectively implementing
16 | SIX. sustainability in portfolios. There’s much more to it than taking part in a “Will the world be a much safer place if we exclude a company that race to be the first to offer a trendy new fund just because it will attract manufactures controversial weapons? If we exclude, will the investment new clients.” The industry has to take steps, and that’s causing a different then be made by investors who care less? And if we lower the carbon kind of conflict. You’re competing with your peers, you want to be the best, footprint of a portfolio, how does this affect the real world?” There is still but at the same time you need everyone to move in the right direction. little research available to answer these questions. Clients want fewer Because working together is the only way to get change on the agenda. risks in their portfolios, including fewer climate risks. From a stewardship And Robeco is leading the pack, she says. perspective, they also want to invest responsibly. For now, non-financial impacts are difficult to measure. With Northern Europe leading the pack, “Our internal research is second to none, thanks to RobecoSAM, our Swiss the financial industry is working on finding solutions to measure this non- affiliate; our portfolio managers understand the importance of that financial impact. “Some elements can’t be included in financial analysis research. They know how to implement the data, and also why it is crucial yet," says Zandbergen. “You can include CO2 risks in your valuations, but in the analysis of future risks and opportunities.” And that knowledge is this would be a lot easier if there were a unit price for carbon.” not a pool of standing water: it’s constantly moving. “Our quantitative researchers have succeeded in developing a ‘decarbonized value’ Can the financial industry give the world a push in the right direction? Is it, methodology. There was a lot of pressure to do so, because clients wanted perhaps, even its responsibility to do so, as an owner or manager of large a value portfolio with a smaller footprint, in other words, lower CO2 risk. sums of capitals? It’s no wonder the industry is in soul-searching mode. Many traditional value companies are part of old, polluting industries. The And, in a sense, the same applies to Zandbergen. “The question is: where researchers have now developed a model that enables them to continue does the responsibility begin and where does it end? If a government exploiting the value factor, yet substantially reduce their footprint.” decides to build coal plants, should we exclude it? This is one of the many dilemmas the industry is struggling with. And we also have to deal with But don’t think for a second that Zandbergen’s resting on her laurels now, competitors, NGOs and other players, as well as the question of how because despite the daily progress, much remains to be done. We are certain, big decisions would have an impact on our investment universe.” still at the very early stages of being able to measure impact. “We’ve got a long road ahead. I want to keep moving forward. We are building risk The palm oil industry presents such a dilemma. Palm oil production poses models, factor models that incorporate ESG criteria in their calculations. a threat to the Earth’s rainforests. “We have a strict lower threshold: half We have developed ESG scores for companies. We hold dialogues with the production must be sustainable. If companies are nowhere near this many companies. But at the end of the day, you want to know – be able to limit, we can discuss it until the cows come home, but they’ll never get measure! – what you have achieved in the real world. And it’s there that there. We exclude such companies. For other companies, we make it very our impact is difficult to measure, because we don’t create or produce clear that we expect them to meet this requirement. And in these cases, anything.” we can have a real influence.”
In a recent study entitled ‘Can Sustainable into investments based on ESG scores – does the meta study mentioned earlier shows that Investing Save the World?'1, the authors have a positive influence. The evidence shows investors can have the greatest influence distinguish between three mechanisms of that screening approaches affect asset prices, on the ESG behavior of companies through investor impact: shareholder engagement, although the extent to which they do so is not engagement. This is consistent with our capital allocation and indirect impacts. The latter consistent. A recent ECB working paper2 sheds own findings based on two studies of our includes stigmatization: naming and shaming. some light on this. It finds that for given levels engagement database, with data going back Impact in this study is defined as “change in of economic and financial development, carbon to 2005. We found that the companies with a specific social or environmental parameter emissions per capita are significantly lower which we have engaged successfully have shown that is caused by an activity.” It states that the in economies where equity financing is more significant improvements in ESG scores. concept of investor impact is only beginning to important relative to bank lending. The paper take root in the financial industry, and concludes concludes that stock markets tend to reallocate 1. Kölbel, J.F., Heeb, F., Falko, P. and Busch, T., 2019. “Can Sustainable Investing Save the World? Reviewing the by saying that ‘simple’ exclusionary or best- investments to more carbon-efficient sectors Mechanisms of Investor Impact”, MIT Sloan, University of in-class strategies are a static approach that and also facilitate the adoption of cleaner Zurich, Department of Banking and Finance, Center for ignore the fact that, fundamentally, impact is technologies in polluting industries. Sustainable Finance and Private Wealth (CSP), University of Hamburg. about change. After reviewing 64 studies, the 2. De Haas, R. and Popov, A.A., 2019. “Finance and carbon authors conclude that there is no evidence to In their paper ‘Is Exclusion Effective’3, Robeco’s emissions”, ECB Working Paper No. 2318. Available at SSRN: support the effectiveness of indirect impact. Laurens Swinkels and David Blitz argue the https://ssrn.com/abstract=3459987 . 3. Blitz, D. and Swinkels, L., 2010. , ‘Is Exclusion Effective?” But there is some evidence to support the opposite and favor engagement over exclusions The Journal of Portfolio Management Ethical Investing fact capital allocation – exiting and entering as a mechanism for change. And, indeed, 2020, 46 (3) 42-48.
17 | SIX. 18 | SIX. I HAVE AN ANALYTICAL MIND. I WANT TO SEE EVIDENCE. SCIENTIFIC STUDIES.
But sustainability goes far beyond areas such as deforestation and global creating a hype when it comes to sustainable investing. Every asset manager warming. The social aspects – the S in ESG – also feature daily in the is claiming to be sustainable and have sustainability in their DNA these days. media. And these apply to many more industries and sectors than climate That’s why I always try to direct our thinking towards concrete results. Are we issues do. “In our financial analysis of companies, it is fairly easy to include really contributing to a sustainable future, with everything we’re doing?” corporate governance. The social issues are slightly more difficult and often have slightly less impact on financial analysis. Business ethics, decent She sighs deeply. “I have an analytical mind. I want to see evidence. wages, access to medicines – that type of thing.” Scientific studies. Sustainability is on many people’s lips. Awareness is growing. But what impact have we made? The EU’s new green taxonomy So, is it a question of picking your battles? As far as Zandbergen is concerned, is a good initiative, but will that bring about the change we need? I don’t you’re asking the wrong person. “No,” she says emphatically. “We want know. I do know that we have to do all we can and as responsibly as to tackle everything. Where you place the emphasis just depends on the possible. And there’s so little being taught about sustainable investing, even sector or region. Wage inequality is now increasing in the West, too, with at universities. We have to reach the point where we can analyze a company social unrest in various places as a consequence.” It is these social issues and say: ‘They make X amount of profit, but have Y negative impact on (for that touch Zandbergen, mother of two teenagers, the most. It’s a theme example) biodiversity, and Z impact on climate change. At the moment, that also resonates with young people the world over, with social unrest though, we can’t put a price tag on Y and Z. But we’re working on it.” fragmented across the world as a result. Yet it’s not them, with their climate change school strikes, who will save the planet overnight. Fast forward to 2030, the year in which the UN’s 17 SDGs have to be met. “We have to have achieved many of the SDGs by then. Is that possible? “Every generation in the past 60 years has taken to the streets. Let’s hope that Yes. People are often too cynical. The regulators and asset management in 30 years, the world will have succeeded in making everything reusable and industry have woken up. We can do it. But we really need to roll up our recyclable, and that we have managed to bring global warming to a halt.” Until sleeves, instead of writing 400-page taxonomies. While these help, our then, Zandbergen has another concern. “I sometimes wonder whether we are work shouldn’t stop there.”
Another area of research that might help in taken into account in our cases and valuations by internalized at another. These developments assessing actual impact is integrated thinking. raising the cost of capital in our model. Although can, of course, also offer competitive advantages At Robeco, we systematically integrate material the direction was clear, knowing how much to or open new markets for companies. The ESG issues into every investment case. We use raise the cost of capital is more of an art than flipside of every ESG risk is that it may constitute a very clear framework that is different for each a science, and relies on the experience of the an opportunity for another company. One strategy. The process of quantifying external analyst. attempt to quantify these external factors is the factors is becoming clearer, as our analysts work integrated profit and loss (P&L) methodology. with sustainability information which often gives We still have very little evidence on how much This takes into account not only the financial better insight into companies’ behavior and these external factors influence value drivers value created by businesses but also other practices. In the past, we have seen examples and thus company valuations. Integrating ESG sources of value created. of this: for many years the fundamental right issues means assessing how long-term ESG of data protection was not deemed to be an trends and external costs – like climate change, A few companies have dared to come up with issue by the market, until problems started to loss of biodiversity and rising inequality – lead an integrated P&L. Many assumptions underly occur. By taking a long-term external view, our to changes in business models or have an their analysis, however it should give companies ESG analysis had already addressed this issue as impact on company valuations. Costs that may and eventually investors more insight into the a risk for internet and IT companies and it was seem external at one moment in time may be external costs or value they are creating.
19 | SIX. HATE PLASTIC? CHANGE PLASTICS.
Single-use plastics are polluting our planet and should be banned. But not all plastic is bad. It depends how we use it. It can be recycled to build sustainable robots, wind turbines, and even lighter cars. Sustainable investing starts with an understanding of sustainability.
THE NUMBER 1 IN SUSTAINABLE INVESTING*
*Broadridge Market Analysis, 2019 PLASTICS
Plastic waste is possibly the biggest environmental threat facing the world after global warming and deforestation. The statistics behind the plastics industry are staggering – one million single-use plastic bottles are produced every minute and up to 70% of them are never recycled. Most end up in landfill or the ocean, creating a plastic tsunami that is destroying marine life. Unless this is stopped, experts predict that by 2050 there will be more plastic in the ocean than fish.
But it isn’t all bad news. Plastic as a product is indispensable. Modern shopping without plastic for packaging would be impossible, and it has uses that go far beyond packaging. The strength and lightweight nature of plastic means it can be found in sustainable products such as wind turbines, electric cars and weather-proof building materials. Banning plastic is neither possible, nor desirable.
Instead, we simply need to change the way we use plastics. Investors are flexing their financial muscle to support the development of new kinds of chemical recycling, where the plastic polymer is reduced into its individual monomers, which can then be reused for plastic production.
Plastic shopping bags are now being made stronger so that they are easier to reuse. And for the plastic products that have limited reuse, such as food wrapping, companies are working to make them biodegradable when they go to landfill.
Meanwhile, if we are willing to change our habits, single-use plastic bottles can be phased out. Robeco has been proud to support the Refill campaign, which encourages people to fill up their reusable bottles with free tap water instead of purchasing water in disposable bottles. This has already stopped 100 million bottles from entering the waste stream in the UK alone.
The answer lies in changing use, changing habits and changing direction. Don’t hate plastics – change plastics.
22 | SIX. THERE’S A TIME TO BE SILENT AND A TIME TO SPEAK UP
23 | SIX. 20 thousand food-to-go MESSAGE locations IN A
The concept is expanding to cover more refill and reuse options such as hot drinks, soup or sandwiches across thousands of BOTTLE food-to-go businesses. The customer buys the product and puts it into an existing container, avoiding new single-use plastic packaging. Most of the biggest UK high street food-to-go chains have already signed up, along with thousands of independent businesses REFILL 100 million 30 CAMPAIGN plastic bottles thousand STUNNING saved outlets STATISTICS
Robeco is proud be an official partner of City to Sea as part of our long commitment to sustainable The campaign encourages There are now almost investing. Our unique partnership people to fill up their 30,000 Refill Stations has the power to reach, influence reusable water bottle along British high streets for free at Refill Stations and at transport hubs, and drive change in the corporate rather than using a where shops, cafes, sector to prevent plastic pollution single-use plastic bottle. restaurants and civic It is now on track to save offices allow the public at the source. We are committed to 100 million plastic water to access free tap water doing even more together in 2020 bottles from entering on their premises. Their the waste stream. locations are listed in the and beyond. app, with a sticker in the window to say they’re onside. People simply walk in, fill up, and walk out. Businesses like the spin-off advantage of Refillers often buying something as well!
24 | SIX. 70 million 101 views 1 airport million per fountains minute
The inaugural National Refill Day – a public awareness campaign to promote reuse over single-use – was held in the UK on 19 June 2019. Over 70 million people saw Airports present a problem it on social media, websites and through more traditional because any liquid container publicity methods such as media or posters in participating So, the Refill campaign is of more than 100 ml must be Refill Stations. This year, the campaign is going global! making a difference, but discarded before going through there is still a long way security. Heathrow Airport was to go. One million plastic the first to sign up to the Refill bottles are purchased campaign, installing 100 fountains around the world every across its five terminals. Robeco has 20 minute, a figure that is also sponsored a water fountain 270 predicted to rise by another at London City Airport to allow thousand 20% by 2021. Sadly, up to passengers to refill their bottles thousand 70% of these bottles are after going through security. students not reused, and much of it downloads ends up in the oceans. So download the Refill app and find out where to refill your 20 bottle for free! railway stations
City to Sea are also campaigning for Refill’s stations are listed ‘plastic-free periods’ on a location-based – targeting the plastic smartphone app that waste from single-use can be downloaded for menstrual products, free from either the App which are now the Store or Google Play. The fifth most commonly app was downloaded A new initiative is plastic-free found item on 100,000 times in 2018 travel, expanding the Refill European beaches. and surpassed the concept from the high street to An educational quarter-million mark railway stations. Network Rail program aims to in 2019. It will soon has installed water fountains at reach more than be available in other each of its 20 mainline stations 20,000 students languages, including across the UK, including the highlighting the Japanese, Spanish, major termini in Birmingham, alternatives, such French, German and Manchester, Edinburgh, as reusables. Arabic. Glasgow, and 11 in London.
25 | SIX. IT WASN’T A STRATEGIC APPROACH FOR US TO SAY, LET'S MAKE SURE WE DO ECUADOR
City to Sea stands at the forefront of ‘boots on the ground’ sustainability, taking direct action to cut plastic pollution. As the stunning statistics on the previous pages show, the award-winning Refill campaign is making a real impact on stopping plastic from entering the waste stream. Founder Natalie Fee explains why 2019 was so special, and what their plans are for this year.
“Last year was big for us in terms of growth – we started “We're also working with airports. Thanks to our the year with 20 people and now there are 32 of us. The partnership with Heathrow, there are now 100 fountains team has been going from strength to strength. This across the airport. The Robeco fountain at London City year, our work has been recognized with a number of Airport went live in January, so you can go through prestigious awards, and there has been massive progress security and fill up for free in the lounge there as well!” on our campaigns preventing plastic pollution at source.” “And we're also working with the hotel and hospitality “We’ve pretty much saturated the high street now, with industry to remove unnecessary plastic from hotel Refill Stations offering free drinking water on every high rooms and across their supply chains.” street in the UK, so we‘re now working on plans to expand beyond drinking water. Food-to-go packaging is one of Going global the worst offenders, with millions of coffee cups and “The Refill campaign has launched internationally, food wrappers ending up on our beaches across Europe.” with Refill schemes as far afield as South America, thanks to environmentally conscious groups that read Refill your lunchbox about Refill’s mission and wanted to do it in their own “We're now starting to expand the campaign so that countries.” people can use the app to avoid all single-use plastic. They’ll be able to find out where to fill up their reusable “We’ve now officially launched in Japan, Ecuador, coffee cup, lunchboxes, and even groceries. That’s Italy and Chile, and are about to launch in Australia. It going to be a really big shift and a focus for us as we wasn’t a strategic approach for us to say, ‘Let's make get into 2020.” sure we do Ecuador’ – they came to us.” The English- speaking countries are obviously easier for us, so it was “We want to change behavior, and create a new social a bit of a challenge when Japan came on board. It's norm so that people stop using single-use packaging, been fun though getting the app translated.” value their resources and start opting for reusables instead. We’re working with the food-to-go chains Flushed with success to make it easier and more attractive for consumers “We’re continuing to campaign on ‘Unflushables’ by offering discounts if someone comes in for a refill – items like wet wipes which are causing a huge rather than buying single-use plastic packaging.” environmental problem when they are flushed down the toilet, blocking sewers, causing flooding and Plastic-free traveling pollution, and even changing the shape of rivers.” “Another natural progression for Refill is within the travel sector – where many people are forced to “This year, we teamed up with Lord of the Rings purchase bottled water. We're now working with star Andy Serkis to create a tongue-in-cheek digital Network Rail, who have installed water fountains at all campaign to raise awareness of the issue and to of their stations across the UK, which has already saved encourage people not to flush wet wipes, which is more than two million bottles!” going live in cinemas across the UK this year.”
26 | SIX. MAKI
MAKING A A DIFFERENCE
DIFFE27 | SIX. MAKING A DIFFERENCE
LET'S TALK RESULTS
ustainable investing is finally gaining traction in the marketplace, possibly because the market has started to acknowledge the detrimental effect that issues such as S climate change, loss of biodiversity and inequality can have on our economies and companies. To prevent these effects from materializing, it is vital that we start considering the results of our investment strategies not only from a financial perspective but also in terms of their social and ecological effects. We tend to call this impact: a change in a specific social or environmental parameter that is caused by an activity. All our investments have both a financial and a non-financial impact.
It’s clear that the asset management industry is in the early stages of designing and fine-tuning this measurement process. In this section, we present and explain some of the work we have done towards measuring Robeco’s own impact as a sustainable investor.
The goals of applying ESG information and the types of impact we have as an investor vary depending on the strategy. We find that investors are increasingly aligned on their approach to sustainability, and so we have developed a framework around this. Our approach to sustainability is outlined in the graph. The majority of our investment strategies apply exclusions, ESG integration and engagement. These are grouped under the ‘Sustainability Inside’ label and do not have explicit, pre-set sustainability targets. This enables us to create portfolios for which material sustainability issues are taken into account, but are not the driving factors for investment.
Beside these strategies, we manage EUR 16.5 billion in assets for which we do have pre-set sustainability targets. This difference in approach is reflected in the average Morningstar globe rating, an independent measure of sustainability that
28 | SIX. MAKING A DIFFERENCE
OUR PRODUCT RANGE AND HOW WE RESEARCH IMPACT ranges from 1 globe (low score for sustainability compared to peers) to 5 globes (high score compared to peers). The Sustainability Inside average rating for our ‘Sustainability Inside’ funds is slightly The majority of Robeco strategies fall How ESG integration contributes P32 above average, while the average rating for our ‘Sustainability into this category, which entails full to alpha in global equity Focused’ and ‘Impact Investing’ ranges are higher. Based on the ESG integration based on proprietary Morningstar performance ratings, the sustainability fund range research, exclusions, and voting and Living Wage platform financials: P30 engagement. impact in the garment industry – Sustainability Focused and Impact Investing – certainly does not have a lower performance than the ‘Sustainability Inside’ – AuM: EUR 132 bln* Our approach to tackling P27 range. This supports our belief that we can achieve a positive – Average Morningstar globes 3.3 climate change socioeconomic impact alongside competitive financial returns.
Sustainability Focused In the pages that follow, we showcase results from our efforts In addition to ‘Sustainability Inside’, in determining our impact as investors, both financial and non- these strategies have an explicit financial, which support this belief. We set out findings on the sustainability policy, as well as targets for the ESG profile and extent to which integrating ESG information in our Global Equity environmental footprint that are strategy contributes to generating alpha, provide insight into the better than their benchmark. impact of our collaborative work on the Living Wage platform, and discuss our efforts to assess the footprint of our entire – AuM: EUR 8.2 bln* – Average Morningstar globes 4.1 investment portfolio.
Impact Investing In addition, we outline the findings of our attribution analysis, which shows the contribution of our SDG credit framework to In addition to ‘Sustainability Inside’, The performance attribution P29 these strategies aim to contribute to of Global SDG Credits the performance of the Global SDG Credit strategy. Furthermore, specific sustainability themes such as we highlight some of the impact measures calculated for the energy or mobility, and/or the UN’s Impact measurement by P24 RobecoSAM thematic strategies, which describe their contribution Sustainable Development Goals. RobecoSAM thematic funds to environmental and social development. – AuM: EUR 8.3 bln* Column by Karen Maas P34 – Average Morningstar globes 4.0 (From ‘investing with impact’ to We would like to express our thanks to Karen Maas – expert ‘impact investing’) on impact measurement, impact investing and CSR; Professor of Accounting and Sustainability at the Open University; and For a few strategies ESG integration Academic Director of Impact Centre Erasmus (ICE). She has and engagement is not relevant provided us with her views on what impact is, how it should (i.e. derivatives strategies). be measured and what work needs to be done to take impact – AuM: EUR 2.5 bln* * As of 31 December 2019 investing to the next level.
29 | SIX. MAKING A DIFFERENCE THE CHALLENGE OF MEASURING IMPACT
– Impact investment – and impact reporting – are here to stay, and we see a strong momentum on both the demand and the supply side that could eventually make impact reporting mandatory for certain types of investments.
– Impact reporting is still at a very early stage, with no good, standardized methodologies available yet. RobecoSAM has developed a systematic approach that solves many of the shortcomings. This is illustrated below using our Smart THE SDGS Energy strategy as an example. – Given the different ways of approaching the issue, there will never be a single solution for measuring impact. Therefore, the journey will always be more important than WILL MAKE the destination. Doing the calculations enables us to learn about the real impact that companies have, but – owing to the inherent limitations – there will always be challenges in IT EASIER comparing the final aggregated numbers.
A surge in impact investing TO ALIGN There has been a strong increase in impact investing over the past decade (see graph below), focusing on the impact of the products and services of companies. However, measurement of these INTERESTS impacts is often still lacking. BETWEEN GROWTH OF IMPACT INVESTING 108,575 6-YEAR 98,329 CAGR COMPANIES, 52% INVESTORS
AND 20,269 8,750