Practices of ESG Integration Swiss Sustainable Finance Event Zurich, February 27 th 2018 Rainer Baumann, CFA
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
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
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 40-80 stocks Active ownership (voting, engagement, exclusions) & impact reporting Source: RobecoSAM 4
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
Materiality Analysis - key performance driver from a sustainability perspective Example: Chemical industry Most financially material factors Source: RobecoSAM 6
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
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
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
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
1 5 9 13 17 21 25 29 33 37 41 45 49 53 57 61 65 69 73 77 81 85 89 93 97 101 105 109 113 117 121 125 129 133 137 141 145 149 153 157 161 165 169 173 177 181 185 189 193 197 201 205 209 213 217 221 225 229 233 237 241 245 249 253 257 261 265 269 273 277 281 285 289 293 297 301 305 309 313 317 321 325 329 333 337 341 345 349 353 357 361 365 369 373 377 381 385 389 393 397 401 405 409 413 417 421 425 429 433 437 441 445 449 453 457 461 465 469 473 477 481 485 489 493 497 501 505 509 513 517 521 525 529 533 537 541 545 549 553 557 561 565 569 573 577 581 585 589 593 597 601 605 609 613 617 621 625 629 633 637 641 645 649 653 657 661 665 669 673 677 681 685 689 693 697 701 705 709 713 717 721 725 729 733 737 741 745 749 753 757 761 765 769 773 777 781 785 789 793 797 801 805 809 813 817 821 825 829 833 837 841 845 849 853 857 861 865 869 873 877 881 885 889 893 897 901 905 909 913 917 921 925 929 933 937 941 945 949 953 957 961 965 969 973 977 981 985 989 993 997 1001 1005 1009 1013 1017 1021 1025 1029 1033 1037 1041 1045 1049 1053 1057 1061 1065 1069 1073 1077 1081 1085 1089 1093 1097 1101 1105 1109 1113 1117 1121 1125 1129 1133 1137 1141 1145 1149 1153 1157 1161 1165 1169 1173 1177 1181 1185 1189 1193 1197 1201 1205 1209 1213 1217 1221 1225 1229 1233 1237 1241 1245 1249 1253 1257 1261 1265 1269 1273 1277 1281 1285 1289 1293 1297 1301 1305 1309 1313 1317 1321 1325 1329 1333 1337 1341 1345 1349 1353 1357 1361 1365 1369 1373 1377 1381 1385 1389 1393 1397 1401 1405 1409 1413 1417 1421 1425 1429 1433 1437 1441 1445 1449 1453 1457 1461 1465 1469 1473 1477 1481 1485 1489 1493 1497 1501 1505 1509 1513 1517 1521 1525 1529 1533 1537 1541 1545 1549 1553 1557 1561 1565 1569 1573 1577 1581 1585 1589 1593 1597 1601 1605 1609 1613 1617 1621 1625 1629 1633 1637 1641 1645 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% 0.40 2% 0.1% National Australia Bank Ltd 100% 0.58-9% 3.5% Canadian National Railway Co 96% 0.20 11% 6.1% Swisscom AG 94% 0.28 6% 7.9% Koninklijke DSM NV 99% 0.50-8% 8.0% Campbell Soup Co 79% 0.10-13% 9.4% Akzo Nobel NV 97% 0.32 11% 15.8% TDC A/ S 73% 0.64 11% 16.5% S&P Global Inc 95% 0.03 10% 18.9% Bottom-ranked stocks CK Hutchison Holdings Ltd 5% 1.05-2% 80.0% Royal Dutch Shell PLC 15% 0.83-1% 83.2% United Parcel Service Inc 48% 0.01-7% 83.9% Zalando SE 29% 0.14-13% 89.4% Koninklijke Vopak NV 11% 0.52-4% 93.6% Singapore Telecommunications Ltd 6% 0.48-12% 97.6% Johnson & Johnson 1% 0.20 11% 97.1% Bombardier Inc 8% -1.36 2% 98.8% Central Japan Railway Co 0% 0.74-29% 99.3% Broad exposure: 750 stocks & 5% off-benchmark Small relative deviations for Enhanced Indexing: Region/country/sector upper limit: 0.5% Individual position: 20-30 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 0.40 0.20 0.00 Robeco Sustainable Enhanced Indexing portfolio: Relative positioning based on stock ranking & construction limits Threshold for overweights 60% Individual stock positions -0.20-0.40 Top-ranked 40% Threshold for underweights Bottom-ranked 11
Thank you for your attention! 12