Practices of ESG Integration

Transcription

1 Practices of ESG Integration Swiss Sustainable Finance Event Zurich, February 27 th 2018 Rainer Baumann, CFA

2 What is Corporate Sustainability? A company s capacity to prosper in a hypercompetitive and changing global business environment by anticipating and managing current and future economic, environmental and social opportunities and risks + focusing on quality, innovation and productivity to create competitive advantage and long-term value Sustainability Investing leads to better informed decisions and therefore value creation for clients 2

3 Different views on Sustainability Investing Impact Investing Creating socioeconomic impact as an objective alongside financial returns ESG Integration Using financially material ESG information to improve the risk/return profile Exclusions / negative screening Avoiding investments in areas of controversial business practices or against ethical beliefs. Source: RobecoSAM 3

4 Fundamental Equities a holistic approach of ESG integration Eligible universe Idea generation Investment recommendation Portfolio construction Starting universe Min requirements (e.g.market cap, liquidity) Proprietary fundamental screening (e.g. Profitability, Quality, Valuation) In-depth fundamental due diligence Stock selection and weights Risk/return characteristics Universe exclusions Minimum Smart ESG score Initial sustainability assessment Analysis of financially material ESG criteria Monitoring of risk and sustainability characteristics ~1 500 stocks ~500 stocks ~200 stocks stocks Active ownership (voting, engagement, exclusions) & impact reporting Source: RobecoSAM 4

5 RobecoSAM Corporate Sustainability Assessment (CSA) Assessment: >3800 Companies annually (60 sectors) Per company: 3 dimensions / 20 criteria / 120 questions 600 data points More than 50% industry-specific criteria Sources: Web based Questionnaire, Company Documents, Media & Stakeholder Analysis Environmental Dimension Social Dimension Product Stewardship Talent Attraction & Retention Water-related Risks Human Capital Development Climate Strategy Occupational Health & Safety Environmental Management System Environmental Performance E S Stakeholder Engagement Human Rights G Governance/Economic Dimension Corporate Governance Code of Conduct, Compliance E S Risk & Crisis Management Customer Relationship Management Innovation Management G Source: RobecoSAM 5

6 Materiality Analysis - key performance driver from a sustainability perspective Example: Chemical industry Most financially material factors Source: RobecoSAM 6

7 Consideration of ESG factors in the valuation model Economic Criteria Corporate governance Risk & crisis management Brand management etc. Environmental Criteria Operational eco-efficiency Climate strategy Environmental reporting etc. Social Criteria Human capital development Stakeholder engagement Supply chain management etc. Revenues Costs Investments Capital Structure Cost of Capital Earnings Invested Capital Return on Invested Capital Weighted Avg. Cost of Capital RobecoSAM Intrinsic Value Source: RobecoSAM 7

8 More information lead to better estimate of the Fair Value 100% 90% 20.2% 6.2% 3.1% 1.6% 6.6% 100.0% Upside 80% 70% 60% 62% 50% 40% Market price 30% 20% 10% 0% FV Industry Returns Innovation Management Management remuneration Renewable sourcing Other SI factors Financial Factors FV Company Returns Illustration Fair Value integrating proprietary sustainability and fundamental analysis Fair Value with average industry returns Financial Impact of identified most material SI Factors Financial Impact of fundamental analysis (e.g. pricing power, business mix, management) Source: RobecoSAM 8

9 How ESG can destruct a potential investment case The treemap visualizes a portfolio's strengths and weaknesses relative to its benchmark and the relevance of dimensions and criteria on total score level. The box color reflects the distance of the portfolio score from the benchmark. Dark pink reflects the strongest underperformance, dark green the strongest outperformance. The box size reflects t he relative weights of dimensions and criteria within the total score. 9

10 Portfolio strategy & process ESG integration in quantitative investing (example of Enhanced Indexing) Addressing a broad set of sustainability objectives while also considering financial objectives Earnings Profitability Book values Price Credits Analyst revisions Value SUSTAINABILITY Social Robeco Sustainable Enhanced Indexing Momentum ALPHA FACTORS Governance Environmental 10

11 Relative positioning (%) Portfolio strategy & process Sustainable Enhanced Indexing: From stock ranking to enhanced index Ranking model Construction methodology Sustainability Valuation Momentum Model Selection of variables E S G Smart ESG Book/Price Price-Momentum Rank 0-100% Top-ranked stocks Koninklijke Philips NV 98% % 0.1% National Australia Bank Ltd 100% % 3.5% Canadian National Railway Co 96% % 6.1% Swisscom AG 94% % 7.9% Koninklijke DSM NV 99% % 8.0% Campbell Soup Co 79% % 9.4% Akzo Nobel NV 97% % 15.8% TDC A/ S 73% % 16.5% S&P Global Inc 95% % 18.9% Bottom-ranked stocks CK Hutchison Holdings Ltd 5% % 80.0% Royal Dutch Shell PLC 15% % 83.2% United Parcel Service Inc 48% % 83.9% Zalando SE 29% % 89.4% Koninklijke Vopak NV 11% % 93.6% Singapore Telecommunications Ltd 6% % 97.6% Johnson & Johnson 1% % 97.1% Bombardier Inc 8% % 98.8% Central Japan Railway Co 0% % 99.3% Broad exposure: 750 stocks & 5% off-benchmark Small relative deviations for Enhanced Indexing: Region/country/sector upper limit: 0.5% Individual position: bp. Manage sustainability: Expected ESG score improvement of at least 30% No investments in controversial companies Portfolio has a 20% better environmental footprint Underweight Enhanced Engagement stocks Robeco Sustainable Enhanced Indexing portfolio: Relative positioning based on stock ranking & construction limits Threshold for overweights 60% Individual stock positions Top-ranked 40% Threshold for underweights Bottom-ranked 11

12 Thank you for your attention! 12