Game changers

THE Magazine for institutional investors

The companies that are changing their industries

Game changers

– Changing the industry through sustainability –

The Heart of the Matter Interview Anne Walraven

THREE CLIENT JOURNEYS

ESG integration a better measure of credit risk

Interview Prof. Robert Eccles

Country Sustainability Rankings getting the complete picture In cooporation with

Why we think SI is important for pension funds

holcim Leading the way towards sustainable construction

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Important Information This document has been issued by Robeco Institutional Asset Management B.V. (trade register number: 24123167), which has a license of the Netherlands Authority of the Financial Markets in Amsterdam, and RobecoSAM AG (trade register number: CH-020.3.025.346-2), which has a license of the Swiss Financial Market Supervisory Authority FINMA in Berne. Robeco’s engagement process starts with thematic research by an external consultant focusing on companies within a specific sector. Chinese walls exist between Robeco’s engagement activities and RobecoSAM’s activities related to the RobecoSAM questionnaire. These Chinese walls ensure that confidential information from the RobecoSAM questionnaire will not be used for Robeco’s engagement activities. The details given on this page do not constitute an offer. They are given for information purposes only. No liability is assumed for the correctness and accuracy of the details given.

Copyright © 2013 Robeco – all rights reserved.

robeco Coolsingel 120, 3011 AG Rotterdam, The Netherlands www.robeco.com/gamechanger robecosam Josefstrasse 218, 8005 Zurich, Switzerland info@robecosam.com www.robecosam.com

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AP3

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contents Foreword ......................................................................................................... 4 Demystifying Sustainability Investing (SI)

Introduction on game changers....................................... 5 Corporate Sustainability Assessment ....................... 6 RobecoSAM explains

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1875 Finance: a client journey .......................................... 8 1875 Finance and RobecoSAM partner to service pension funds

Client journey with AP3 .............................................................. 9 Sweden’s AP3 takes further steps towards sustainable investing

Environment Agency Active Pension Fund .... 10 Pioneer pension fund becomes both beacon and benchmark

Game changers: Holcim, Manila Water, DSM and Mead Johnson ........................................................ 12 Page 32

Interview ..................................................................................................... 16 with Prof. Robert G. Eccles

Game changers: Fibria and Unilever .................... 18 Interview

..................................................................................................... with Harry Smorenberg

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Game changers: Cepheid and ASML .................... 22 Interview .................................................................................................... 24 with Roger Urwin

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Game changers: Westpac and ABB ......................... 26 Banking study ....................................................................................... 28 ESG integration

Country Sustainability Rankings ................................. 30 Interview ..................................................................................................... 32 with Anne Walraven

How SI adds value for pension funds ................... 34 interview with Edith Siermann

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| Foreword

demystifying sustainability Investing

roderick munsters, CEO Robeco Group

michael baldinger, CEO RobecoSAM

| by Roderick Munsters & Michael Baldinger

a financial analysis is incomplete if it ignores financially material esG criteria. sustainability issues can have a major effect on profitability, and therefore on valuations and the riskadjusted return of investments.

Incorporating esG criteria in investment decisions is therefore in the interest of our clients. robeco systematically incorporates an analysis of esG factors into its investment activities. more than eUr 100 bn of aum at robeco have esG information integrated in some way or another – that makes us one of the leading sI providers worldwide. we are convinced that taking esG criteria into account results in better-informed investment decisions. sustainability Investing (sI) can also help investors to achieve their non-financial objectives, such as meeting their fiduciary duty, maximizing socio-economic impact, minimizing reputational risks or creating value for stakeholders. esG-inclusive approaches can also help to align the objectives of institutional investors with those of society at large. our mission is to drive sustainability thinking and for this we use the financial markets as the most powerful transmission mechanism to promote sustainable business practices. This

is not just an ethical crusade: our market-led approach uses the lifeblood of capitalism to create better outcomes for investors and other stakeholders. however, many clients still ask: what is sI? as we explore in this magazine, it is a long-term investment strategy with many definitions and approaches, and a consensus on what it really means has not yet been reached. we aim to demystify sI, showing institutional investors the many sophisticated ways in which sI can be applied, embraced and implemented across all asset classes. as a result, we think that in the years to come, three things will happen. sI will become mainstream. There will be no more excuses for not integrating sI. and the question of why should a client adopt it will no longer need asking. our magazine features thought leadership and incisive insight from some of the biggest proponents of sI in the world today. we hope you enjoy reading it.

| Game changers

Introduction on game changers The drive to a more sustainable future relies partly on companies taking innovative steps to produce the products and services of the future. Changing the game literally means changing manufacturing methods or service

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| Introduction

delivery systems, a large commitment to research and development, and a corporate will to make a difference. The following 10 visionary companies have amply demonstra­ted why they are ahead of the pack.

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1 Holcim Leading the way towards sustainable construction. — Page 12

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Manila Water

DSM

Mead Johnson

Catching every drop. — Page 13

Using green chemistry as a strategic business driver. — Page 14

Leading the world in baby milk formulas. — Page 15

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Fibria

Unilever

Cepheid

Developing the business of renewable forests. — Page 18

Putting sustainability at the heart of its business. — Page 19

Pushing the boundaries of molecular diagnostics. — Page 22

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ASML

Westpac

ABB

Leading the way in lithography. — Page 23

Banking on sustainability. — Page 26

Charting new ground in data center energy savings. — Page 27

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| RobecoSAM’s

| Corporate Sustainability Assessment

RobecoSAM’s Corporate Sustainability Assessment research foundation for better-informed investment decisions The corporate sustainability assessment (csa) is robecosam’s main tool for identifying the winners of tomorrow – companies that are likely to achieve competitive advantages as a result of their commitment to sustainability best practices. Launched in 1999, the csa forms the basis of one of the world’s largest databases for corporate sustainability as well as the renowned dow Jones sustainability Indices.

Sustainability issues dramatically change the competitive environment in which companies operate. Companies that ignore the impact of sustainability challenges and opportunities on their business will fall behind, while companies with wellmanaged sustainability strategies can achieve competitive advantages and increase their ability to create value.

Building on the conviction that considering economic, environmental and social criteria leads to better informed investment decisions, RobecoSAM’s CSA offers a structured process to identify the companies that are best equipped to recognize and respond to the emerging opportunities and risks presented by global trends.

sector-specific issues Through the CSA, RobecoSAM regularly assesses the sustainability credentials of more than 2,000 of the world’s largest companies.

The annual assessment consists of an online questionnaire supported by extensive company documentation. Thorough analysis of companyspecific information is complemented by an additional examination of media coverage, stakeholder commentaries and other publicly available sources. The process is subject to independent annual audits.

The CSA questionnaire features about 100 questions with a focus on sector-specific sustainability issues that can have a material impact on companies’ long-term financial performance. The economic dimension covers aspects such as corporate governance, risk and crisis management, innovation and customer relationships. The environmental dimension addresses factors including a company’s climate strategy, product stewardship or environmental management systems. The social dimension, in turn, rates companies on issues such as human resources development, occupational health & safety, and stakeholder engagement.

Based on the information submitted through the CSA, each company receives a Total Sustainability Score and is ranked against

| RobecoSAM’s

other companies in its industry. The top 10 percent of companies in each sector are included in the Dow Jones Sustainability World Index, the global gold standard for corporate sustainability. always ahead of the curve The assessment builds on RobecoSAM’s foresight of critical economic, environmental and social trends as well as its insight into material but under-researched sustainability opportunities and risks that are specific to

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| Corporate Sustainability Assessment

certain sectors and can impact companies’ future business success.

Going beyond basic ESG metrics, many aspects of the CSA consider future-oriented sustainability issues such as innovation, urbanization or demographic change, or alert companies about potentially significant business risks they may have overlooked.

These include issues such as the availability of a reliable water source, or risks related to the globalization and growing complexity of

companies’ international supply chains.

As a dynamic and continually evolving process, the assessment is continuously refined and updated. About 10-20 percent of the questions are modified from one year to the next to reflect new sustainability issues and industry best practices, while those criteria that have been widely adopted by most companies are removed. As a result, the CSA research process constantly raises the sustainability bar.

Identifying the pace-setters robecosam’s unique approach robecosam uses the csa to identify potential long-term winners – the most dynamic companies within their industries; companies that have superior sustainability performance; and/or disruptive business models that put competitive pressure on their peers.

The csa evaluates the extent to which companies’ business models are strategically aligned to the key sustainability trends impacting their respective industry, and helps the analysts identify which companies are ahead, and which are behind. a company’s responses to the csa reveal how its intangible assets (such as brands, reputation, customer loyalty and innovation potential) are managed, and whether these sources of competitive advantage are sustained or eroded over time.

The results enhance traditional fundamental analysis by focusing on intangible or externalized value drivers that are typically under-researched elsewhere. by unveiling factors that often lie in investors’ blind spots and are therefore not yet priced in by the market, the csa provides for a more comprehensive view of a company’s performance – and thus gives an important information edge.

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| Client journey

| 1875 Finance

ESG integration is key Following a period of in-depth discussions 1875 Finance decided to integrate ESG criteria into its entire investment portfolio, including global equity, bond and balanced mandates. In June 2013, 1875 Finance and RobecoSAM signed a regionally defined partnership agreement limited to the French-speaking region of Switzerland. Mr. Crestin-Billet and his team are now able to provide equity and bond selection for pension funds integrating ESG.

1875 Finance and RobecoSAM partner to service pension funds in the French speaking part of Switzerland In June 2013, 1875 Finance and RobecoSAM signed an exclusive, regionally defined partnership agreement. 1875 Finance is now the first to offer equity and bond selection for pension fund strategies integrating ESG in the French-speaking part of Switzerland.

This client journey began late in 2012 when 1875 Finance – one of Geneva's major independent financial institutions – initiated talks with RobecoSAM to provide ESG-compliant investment services. 1875 Finance stands out through its innovative business model built around an ‘open architecture’ to ensure independent advice. Rated 21st in Bloomberg’s 2012 global rankings of top family offices – and first by per-family assets – 1875 Finance has become a frontrunner in both multi-family office services and private banking. 1875 Finance has three business lines: private clients, multi-family offices and – from 1 January 2013 – institutional asset management, the latter being headed by Edouard Crestin-Billet.

à About 1875 Finance With roots dating back to the nineteenth century, 1875 Finance is one of Geneva’s well-established independent financial institutions. It provides a full array of wealth-management services, ranging from asset management and legal and tax advisory services, to client reporting. With a focus on portfolio optimization, securities selection has been outsourced.

He sees ESG-related investing gaining momentum. “Without ESG integration, portfolios are no longer optimal,” he says.

“ESG factors are having a future impact on the evolution of a company in terms of client strategy, pricing, cash flow and cost of capital.

Asset managers will therefore need to integrate ESG criteria to be able to give a good company valuation.”

Joint investment framework 1875 Finance and RobecoSAM jointly established an ESG investment framework to meet institutional client needs in different situations – “a framework that can be adjusted going forward”. Mr. Crestin-Billet considers the necessity for such a framework to be paramount to anchor ESG investment efforts. “We have agreed to use and benefit from external expertise whereas the majority of asset managers are relying on their own in-house expertise,” he says. The fruits of the partnership are emerging. By tapping into RobecoSAM’s resources, 1875 Finance has raised its expertise and public profile in sustainability investing. With approximately 130 specialist staff located in Zurich and Rotterdam, RobecoSAM provides a comprehensive range of differentiated and complementary Sustainability Investing solutions including indices, actively managed diversified and thematic equities, private equity, active ownership and corporate sustainability benchmarking services.

Long- versus short-term Switzerland is currently seeing a gradual transition towards ESG investing. The Swiss Federal Council set out its main policy focus areas in its ‘Sustainable Development Strategy 2012-2015’. Mr. Crestin-Billet says: “Pension funds have become aware that in the long term they need to implement ESG in order to be able to add value to their investment performance. Yet they are not willing to accept underperformance.” He explains how pension funds are grappling to balance long-term sustainable performance with short-termism caused by quarterly reporting. “Performance is key. We therefore demonstrate to our institutional clients in the French-speaking part of Switzerland how we are integrating ESG factors while managing market risks,” he says.

“By using overlays customized to client-specific parameters, we are able to be much more long-term oriented in terms of bond and stock selection.”

‘ Without ESG integration, portfolios are no longer optimal.’

The partnership RobecoSAM was selected for its reputation as a pioneer and market leader in sustainability investing as well as its access to ESG infor­mation. Another reason was its expertise in implementing financial and non-financial data and intangible values into the fundamen­tal analysis and valuation process. “RobecoSAM is one of the few asset managers that are able to quantify ESG factors for all the asset classes,” Mr. Crestin-Billet says. He is enthusiastic about its potential, and so are clients and prospects.

“In discussions we are transparent about our exclusive partnership with RobecoSAM – and we’re proud of it,” he says. The journey continues, the course is set and ambitions are high. The division aims to have CHF 3-5 billion of assets under management by 2018.

Further reading Website: www.1875.ch

| Client journey

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| AP3

‘ Sustainability investing is a process – and the challenge is to get the process going at an acceptable pace.’ both passive and active management styles and uses both internal and external managers.

Resources, expertise, time and cost are factors that impact the process of integration.”

AP3

Sweden’s AP3 takes further steps towards sustainable investing AP3, the Third Swedish National Pension Fund, is one of five so-called buffer funds in the national pension system. AP3 selected RobecoSAM as its discussion partner to evaluate the possibilities of integrating ESG strategies in AP3’s investment portfolios.

At the end of June 2013, AP3 announced that it had initiated a relationship with Generation Investment Management and invested USD 50 million in the group’s new Global Credit Fund. The fund seeks to build relationships with companies that are embracing sustainability challenges and opportunities, including the transfer to a low-carbon economy. Previously, AP3 invested in World Bank Green Bonds.

Anne-Charlotte Hormgard, Senior Manager, Asset Management at AP3, believes that today’s stakeholders – ranging from consumers to regulators – increasingly demand the adoption of sustainability as a general principle.

Reasons to integrate ESG “There are multiple reasons to integrate ESG into investment strategies, processes and decisions,” she says. “AP3 signed up to the United Nations Principles of Responsible

Investment (UNPRI) in 2006 and now strives to implement the principles where relevant and possible. As sustainability is a strategic matter for us, we see the need to integrate ESG in investment decisions and the whole organization.”

Better-informed investment decisions AP3 believes there is a connection between good governance, corporate, social and environmental responsibility, and the capacity of enterprises to deliver long-term shareholder value. “Put simply, we believe that wellgoverned companies are better long-term investments,” Ms. Hormgard says. ESG can be regarded as both a risk and an opportunity.

“To a large extent, ESG integration can be considered as part of risk management to handle both business and reputational risks.

On the opportunity side, we believe that well-managed companies over time provide better long-term investment returns that AP3, as a long-term investor, can benefit from.

ESG integration – and thus an enhanced pre-investment analysis should lead to betterinformed investment decisions.”

Integrating sustainability The Third Swedish National Pension Fund is now in the process of efficiently integrating sustainability into its investment framework.

“Our ambition is to integrate sustainability investing across asset classes where it is relevant and possible,” Ms. Hormgard says.

“There is not just a single approach; there are different ones for different investments and different management styles. Our fund has

Benefits gained so far Ms. Hormgard considers the growing insight into the importance of sustainability, both for companies and society, to be the biggest benefit gained so far. “Another insight for us as investors is that sustainability is a risk factor among other risk factors, both financial and non-financial, to take into consideration,” she says. “Before anything else, it is necessary to fully grasp what sustainability is about and how it can impact the bottom line. Only then, can the quantifying and qualifying process start.”

‘Sustainability Investing will become mainstream’ The effectiveness and results of sustainability are sometimes questioned, ”but at the same time, there has been impressive and fast development in the availability of sustainability information and resources,” Ms Hormgard says.

“Sustainability investing is a process – and the challenge is to get the process going at an acceptable pace. Over time, sustainability investing will increasingly become mainstream because it will be required by more and more people.”

Further reading Company website: www.ap3.se

à About AP3 AP3 is mandated by the Swedish parliament to generate the maximum possible benefit for the pension system by managing its fund capital to deliver strong investment returns at a low level of risk. AP3 manages a diversified global portfolio of listed equities, fixed-income assets and alternative investments. Currently, AP3 investments in sustainable fixed income total SEK 2.1 billion (USD 300 million).

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| Client journey

| Environment Agency Active Pension Fund (EAPF)

‘ EAPF has turned into both a beacon and a benchmark.’

Pioneer pension fund becomes both beacon and benchmark In the pre-sustainability days, the Environment Agency Active Pension Fund (EAPF) decided to sail into uncharted territory.

EAPF wanted to improve its investment performance and integrate the agency’s core philosophy firmly into its pension fund.

Robeco was appointed to run a unique “sustainable private equity” mandate in 2005.

à About EAPF With assets of GBP 2.1 billion and 43,000 members, EAPF is one of the top 100 pension funds in the UK. The active fund is open to all of its employees while the closed fund provides benefits to those members of the former Water Authorities Superannuation Fund who were either pensioners or deferred members on the 1989 privatisation of the water industry. In 2006, EAPF signed up to the United Nations Principles of Responsible Investment (UNPRI) and became the first UK scheme to produce a Responsible Investment Review. The most recent edition, published in 2012, was recognized in the inaugural Responsible Investor Reporting Awards, winning its category (funds below USD 25 billion) for excellence in responsible investment reporting.

The Environment Agency is the national public body responsible for overseeing environmental concerns in England – handling everything from waste management to the Thames Barrier. The aim of its pension fund, a Local Government Pension Scheme (LGPS), is “to be one of the leading public sector pension funds in respect of the implementation of financially robust and environmentally responsible investment policies”.

Leading by example In 2004, EAPF’s new investment strategy was to take account of the relationship between good ESG management and long-term sustainable business profitability. The fund also wanted a proactive ESG engagement approach as a social license to operate while demonstrating thought leadership. At the time, the concept of sustainable (or responsible) investing was still in its infancy. Yet that very year another pioneer in responsible investing – Robeco – launched the world’s first sustainable private equity fund of funds, Robeco Sustainable Private Equity.

The fund was developed in cooperation with the Rabobank Sustainability Department and invested in both clean-tech and mainstream funds with an active ESG engagement overlay. Robeco was selected by EAPF to run a “sustainable private equity” mandate, probably the first large mandate in private equity with strong ESG requirements.

Responsible Entrepreneurship Strategy The private equity funds, which were primarily selected on the basis of financial performance criteria, were provided with the means to allow their portfolio companies to manage risks and use the opportunities deriving from ESG developments (Robeco’s ‘Responsible Entrepreneurship Strategy’). The underlying premise was Robeco’s conviction that sound governance, accountability, transparency and proper relationships with stakeholders are core to the capacity, performance, value and also the risk profile of privately owned companies.

High quality reporting Robeco insisted on the funds signing up to Robeco’s Principles for Responsible Private Equity which required the funds to report back to Robeco and the pension fund on their ESG performance. And that's precisely what happened. Robeco entered into a legal contract with the selected funds making compliance with the Principles mandatory. The efforts of the funds are monitored and their ESG credentials assessed each year. Fund managers receive a benchmark profile that shows their ESG performance over time and in comparison with peers. The annual survey and feedback sessions have proved to be an effective way to help funds design and implement their ESG strategy as well as integrate sustainability policies into the operations of their portfolio companies.

Beacon and benchmark EAPF has turned into both a beacon and a benchmark. More private equity fund managers are including ESG analysis in their investment processes, reporting on their efforts and supporting the responsible investment initiatives of various investor and industry associations. As a leader in responsible private equity, EAPF has drawn attention from analysts, investors and competitors alike. Since 2009, the pension fund has returned a total of 16.1%, beating most other local government pension schemes. EAPF is now shifting to making an even bigger allocation to sustainable investments. Its ambition is to invest a quarter of its assets in sustainable assets by 2015.

Further reading Company Website: www.eapf.org.uk European Venture Capital Association: www.evca.eu

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| Game Changers

| Holcim — Leading the way towards sustainable construction

holcim Leading the way towards sustainable construction à about holcim Holcim is one of the world's leading suppliers of cement and aggregates (crushed stone, sand and gravel) and is also engaged in activities such as ready-mix concrete and asphalt services.

The group holds majority and minority interests in around 70 countries on all continents and employs 80,000 people. In 2012, Holcim recorded sales of over CHF 21 billion.

construction will always be a key aspect of societal development. In the future it will need to be responsible as well. switzerlandbased holcim is leading the way towards sustainable construction.

customers can make better-informed and more valuable decisions in their purchasing process.

new tools of the trade Sustainable construction poses massive challenges. The production of cement – a primary ingredient for construction activities – is extremely resource and energy intensive. And as buildings are responsible for around 35% of global energy consumption, increasing regulation has been introduced to improve the sustainability profile of construction standards and materials.

promoting sustainable construction Holcim’s focus on innovation strategy and thought leadership is demonstrated in the Holcim Foundation for Sustainable Construction, established back in 2003.

The foundation promotes sustainable construction techniques via initiatives including the Holcim Forums, an academic speaking series, and the Holcim Awards, a USD 2 million competition for sustainable construction that targets “zero fossil energy, zero emissions and zero waste”.

Energy efficiency and CO2 emission abatement are therefore critical aspects of improving the environmental footprint of cement-making processes. Currently, Holcim generates 77% of revenues from innovative cement qualities that incorporate recycled raw materials to achieve a lower carbon footprint. In addition, as a service provider, Holcim introduced the CalQ tool in the US to enable clients to achieve value-creating third-party LEED certification, the recognized standard for measuring building sustainability.

above-industry volume growth By reducing the resources used in cement production and minimizing waste, Holcim aims to be at the forefront of the drive towards a more sustainable construction industry.

Translating its insights into products will help Holcim in achieving above-industry volume growth, and hence control fixed costs and improve return on investment, a key metric for the asset-intensive building materials sector.

Holcim is not only changing the game, but also building the field on which it is played. »

Similarly, Holcim developed the Product Carbon Footprinting (PCF) tool that measures the embedded CO2 per ton of cement using the reputable third-party oversight of the British Carbon Trust. Using third-party criteria, end-

further reading Company website: www.holcim.com Holcim Foundation: www.holcimfoundation.org The Carbon Trust: www.carbontrust.com

à why is it a game-changing company?

Holcim was one of the first construction companies to adopt sustainability principles à how does sustainability add value?

Using third-party tools adds value for clients in the ordering process à why is it a potential of tomorrow?

Future building projects will need to include sustainability considerations before being approved à why is it relevant from an investing point of view?

Managing emissions and resources will help to control costs and margins

à external recognition Holcim's continuing commitment to sustainable development has been recognized externally at a local and global level. Among other achievements, the company has been included in the Dow Jones Sustainability Index for nine years running.

| Game Changers

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| Manila Water — Catching every drop

manila water Catching every drop

à about manila water Manila Water Company, Inc. is a subsidiary of Ayala Corporation. Manila Water, together with its subsidiaries, provides clean water and sewage facilities to over 9 million people in 23 cities and municipalities in greater Manila. The company was founded in 1997 and is based in Quezon City, the Philippines.

manila water took over responsibility for providing clean, reliable supplies to the city’s east zone in 1997, now serving about 9 million people, including 1.7 million on low incomes.

sustainability and engagement while still enjoying commercial success and ensuring it retains a license to operate until least until 2037.

reading the tides The value of water is realized only in its absence. Poor urban communities around the world know this only too well, and in 2011, the UN General Assembly added the right to water and sanitation to the list of human rights that nations have an obligation to protect. Yet, water can be a wasteful business. When Manila Water opened for business just 15 years ago, 67% of water was wasted through leaky pipes, theft or problems with meters. Improvements to infrastructure have cut the amount of water simply going down the drain to just 12%.

Aside from preventing the waste of a precious resource, this also means higher revenues for the company.

a bigger pond Today, Manila Water has a market capitalization of USD 2 billion. With an impressive track record, the utility has been able to secure more concessions and grow faster than its peers.

The company has leveraged this well-earned reputation to expand its water and wastewater services to areas outside of the east zone of Manila, with the possibility of future contracts to come. What’s more, Manila Water is positioning itself as a regional player, having recently established majority and minority stakes in related water businesses in Vietnam. »

Thinking in drips and drops Manila Water’s significant investment in infrastructure, leak detection and monitoring that massively reduced the level of its nonrevenue-generating, ‘lost’ water puts it on par with European peers. The company met ISO and process quality and GRI sustainability reporting standards early on and revised its pricing and delivery model, charging lower rates and introducing a flexible payments system for low-income customers. Manila Water has continued to focus on inclusion,

‘ Manila Water met ISO and water quality and GRI sustainability reporting standards early on.’ further reading Company website: www.manilawater.com UN Protect, Respect and Remedy Framework: www.unglobalcompact.org

à why is it a game-changing company?

Manila Water seeks to serve both customers and stakeholders with the same passion à how does sustainability add value?

Reducing leaks not only saves water – it goes straight onto the bottom line à why is it a potential of tomorrow?

The increasing scarcity of fresh water will make supply management more important à why is it relevant from an investing point of view?

The company’s success has won plaudits that open the door for future expansion

à external recognition In 2011, Manila Water became the first Filipino company to win the Asian Human Capital Award from the Singaporean Ministry of Manpower for harnessing its people in transforming from a struggling utility into a world class water and wastewater service provider. More recently, Manila Water was recognized as Conference Vote Winner in Achievement in the Inclusive Business category at the Financial Times/International Finance Corporation Sustainable Finance Awards 2013.

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| Game Changers

| DSM — Using green chemistry as a strategic business driver

dsm Using green chemistry as a strategic business driver à about dsm Royal DSM is a global science-based company active in health, nutrition and materials. DSM's 23,500 employees deliver annual net sales of around EUR 9 billion. The company is listed on NYSE Euronext.

In September 2010, a new strategy, ‘DSM in motion: driving focused growth’, marked a shift from a time of intensive portfolio transformation to a new era of maximizing sustainable and profitable growth.

for dsm, the netherlands-based global life sciences company, the use of green chemistry goes beyond a set of principles to become a strategic driver. making greener chemicals Green chemistry is based on a set of principles that range from using less hazardous raw materials to minimizing waste production and energy consumption. It promotes the adoption of renewable, non-fossil fuel based reagents and the development of products that have a more sustainable life cycle and easily degrade in the environment.

Many chemicals companies have already embraced various aspects of green chemistry in order to push their sustainability agenda forward, such as by introducing products that reduce carbon emissions during the entire lifecycle. strategic business approach Beyond a set of principles, green chemistry inspires the company’s innovation profile and its product stewardship practices. A very high percentage of products under development and almost half of DSM’s current product portfolio are qualified as ECO+. This means that these products can demonstrate a clear ecological benefit across their life cycle over competing products without compromising on performance. This supports a clear commitment to reduce product toxicity as well

as assisting customers to lower their carbon footprint.

Furthermore, the company is heavily engaged in replacing traditional production processes that use oil-based raw materials with production processes that yield chemical intermediates through the fermentation of renewable feedstock. Chemicals produced in this novel way are then used internally in both DSM’s materials and life science divisions.

By integrating the operations, the company is able to better manage its costs. a real game-changing approach While ensuring DSM’s social license to operate with customers and employees, embracing green chemistry principles as a business value driver constitutes a real game-changing approach. It will generate novel business opportunities and allow better cost control, as regulatory pressure becomes more stringent on the chemical industry. It will also help increase the company’s return on invested capital above that of its peers to create longterm sustainability-driven value and profitable growth. »

further reading Company website: www.dsm.com

à why is it a game-changing company?

The use of green chemistry is a strategic business driver and not just a guiding set of principles à how does sustainability add value?

Lowering the harmful effects of chemicals also lowers costs à why is it a potential of tomorrow?

Long-term sustainability is increasingly demanded by regulators and society à why is it relevant from an investing point of view?

Demand for green chemicals will grow faster than industry average and will not be subject to strict regulations

à external recognition DSM is among the leaders in the chemical industry sector in the Dow Jones Sustainability World Index. The company has ranked among the top leaders in the sector three times since 2004 and has held the worldwide sustainability leader position in the chemicals sector six times.

| Game Changers

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| Mead Johnson — Leading the world in baby milk formulas

mead Johnson Leading the world in baby milk formulas

à about mead Johnson Mead Johnson is a global leader in pediatric nutrition with more than 70 products sold in over 50 countries.

Its 2012 sales totaled USD 3.9 billion of which about USD 2.7 billion took place in Asia/Latin America, with the remaining USD 1.2 billion in the US/Europe.

for more than a century, mead Johnson has led the way in developing safe, high-quality, innovative pediatric nutrition products, led today by its enfamil brand of infant formula.

‘ The Chinese baby food market is expected to grow in the mid-teens annually to 2015.’ strong growth from emerging markets Mead Johnson derives about 70% of its sales from emerging markets including Asia and Latin America. The 2008 melamine scandal involving several local Chinese milk producers underlined the importance of infant food safety. This resulted in a consumer shift towards foreign manufacturers and premium brands.

The Chinese baby food market is expected to grow by a percentage in the mid-teens annually to 2015 while accounting for the majority of the total dollar growth in the global infant formula market. A premium player in China and Hong Kong with approximately 14% market share, Mead Johnson is well positioned in this large and growing market. In addition, the company has a strong presence in Latin America, where the company expects it can reach $1 billion in sales by 2015.

environmental performance Mead Johnson’s commitment to ESG goes beyond the development of safe, healthy products to include environmentally-friendly packaging. Its Enfamil reusable tub and refill system in the US offers the potential for a significant reduction in the carbon footprint of the packaging involved – using up to 35% less packaging materials and 60% less energy, with a 50% reduction in greenhouse gas emissions.

On a long-term basis, Mead Johnson is working towards zero waste to landfill.

Investing in r&d The company has a long-standing strategy of investing in pediatric nutrition R&D which has resulted in the company getting a prestigious Health Claim from the European Food and Safety Authority. To build on the vision of its founder, Edward Mead Johnson, the company has established the Mead Johnson Pediatric Nutrition Institute (MJPNI). MJPNI collaborates with research institutions around the world to conduct basic research and clinical studies related to the nutritional status of infants and children. »

further reading Company Website: www.meadjohnson.com www.meadjohnson.com/ResearchandInnovation/ Pages/Pediatric-Nutrition-Institute.aspx

à why is it a game-changing company?

Mead Johnson is a major innovator in infant nutrition à how does sustainability add value?

Safer and more nutritious products have strong growth prospects à why is it a potential of tomorrow?

Rising populations mean more mouths to feed à why is it relevant from an investing point of view?

The company is strongly positioned to gain market share particularly in emerging markets

à external recognition The company has a long-standing strategy of investing in pediatric nutrition R&D which has resulted in the company getting a prestigious Health Claim from the European Food and Safety Authority. Mead Johnson is currently included in the RobecoSAM Sustainable Healthy Living Fund.

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| Interview

| Prof. Robert G. Eccles

Interview with Prof. Robert G. Eccles

Research by Prof. Robert G. Eccles from the Harvard Business School has found that high-sustainability companies significantly outperform their counterparts over the long term, both in terms of financial performance and rate of return for investors. Here he explains why and how sustainability allows for better-informed investment decisions, what challenges need to be overcome and what the future of sustainability investing could look like.

Why and how do sustainable companies perform better than others?

The answers can be found both on the risk management and the opportunity side.

Sustainable companies are less likely to be blind-sighted by bad things that happen or by changes in social expectations. They’re also better at recognizing opportunities resulting from sustainability trends. The tricky bit on the investor side is to recognize the right companies. The outperformance was more noticeable in natural resources-intensive businesses and human capital intensivebusinesses, as well as in B2C businesses where brands are a big issue.

‘ The big wild card is the sovereign wealth funds … they are sort of in the background, but they’ve got lots of assets and a very long-term outlook.’

What are the key differentiating factors distinguishing high sustainability companies?

These include a wider range of non-financial and financial performance metrics that are measured internally, and higher degrees of transparency including things like integrated reporting. Sustainable companies tend to be more long-term oriented and much better at stakeholder engagement; sustainability is more likely to be a boardroom priority at these companies, and top executive incentives are more likely to be tied to long-term non-financial metrics. The key material ESG factors vary by sector. For example, banks’ carbon emissions are not material to their performance – how they’re managing risk, in turn, is really important.

Which is the more important contributor – risk avoidance or exploitation of opportunities?

I think it’s a little easier to do the risk avoidance. While that may not add value, it helps companies avoid losing value. I think there’s more upside in creating value for investors, but that’s a longer-term effort with accordingly long payback periods.

Does that mean that SI is by definition only relevant for investors with a long-term investment horizon?

Yes, I think so, and that’s one of the biggest challenges because, when investors are putting short-term pressure on companies, it’s hard for the companies to take a long-term view.

So are many investors still too focused on short payback periods?

In general, yes. Of course, there are exceptions.

Some major institutional investors like CalPERS or some Scandinavian pension funds are working hard to do ESG integration across asset classes and all signatories of the UNPRI are supposed to be doing it. But many of the CEOs we’ve talked to have told us that when they have calls with analysts and investors, nobody ever asks them about sustainability.

How well equipped are today’s investors to analyze what is going on behind the financial statements and make smart choices?

Not very. I think there’s a big infrastructure

| Interview

problem reflected in the lack of comparable data resulting from the fact that companies aren’t required to report on non-financial factors and that there are no standards. Just think about it: We wouldn’t have today’s capital markets without accounting standards and reporting requirements, but those didn’t exist in the US until the SEC was formed in 1933/34. Until then, some companies reported revenues, others didn’t; each accounting firm had its own accounting and auditing standards.

That’s kind of where we are with sustainability reporting right now.

How standardized can sustainability information become given the industryspecific sustainability issues and drivers?

I don’t think it can be standardized across the board. And in a sense, that doesn’t matter. Investors only start picking individual companies when they’ve made their broad asset allocation decisions as to the asset classes and sectors they want to invest in.

So as long as you have standards by sector I think you’re ok.

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| Prof. Robert G. Eccles

What are the key barriers to SI becoming mainstream?

Two things: the timeframe for returns is too short-term and there’s a lack of infrastructure – metrics, standards, reporting requirements, etc – and capabilities. Financial analysts and portfolio managers aren’t trained to consider sustainability factors. Many still don’t think they’re relevant.

Do you see that changing? Is the new generation of analysts who are being trained now starting from a different viewpoint?

No. There are exceptions, of course, but the big business schools are still doing next to nothing in this area. I would see a better chance of building the necessary investment management capabilities through groups like the CFA Institute.

Currently, the focus of SI is clearly on equities.

Can and should sustainability analysis be applied equally to all asset classes?

Yes, and big institutional investors like major country pension funds are trying to do just that.

Funds that are serious about Sustainability Investing are not just doing it for equities.

What will sustainability analysis and investing look like in 10 years?

I think there will be two classes of institutional investors. On the one hand, I expect to see increasing levels of sophistication on the part of long-term oriented players like the big pension funds accompanied by new regulations that will mandate or at least encourage more disclosure on sustainability metrics. On the other, I think there’ll be another class of investors who’ll still be focused on the short term, including a lot of hedge funds and mutual funds. The big wild card is the sovereign wealth funds. Right now, they are sort of in the background, but they’ve got lots of assets and a very long-term outlook.

So if they were to get on board, that could be really significant. But it’s difficult to predict. The sovereign wealth funds are the big question mark.

1 Sustainable companies are less likely to be blindsighted by bad things, or by changes in social expectations

2 One of the biggest challenges is when investors put shortterm pressure on companies, with no long-term view

3 Analysts and portfolio managers aren’t trained to consider sustainability factors ... many don’t think they’re relevant

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| Game Changers

| Fibria — Developing the business of renewable forests

fibria Developing the business of renewable forests

à about fibria Fibria Celulose SA operates three industrial units in Brazil with a total annual production capacity of 5.3 million tons of pulp. With eucalyptus plantations in six Brazilian states, Fibria has a total forest base of 970,000 hectares, of which 343,000 hectares are permanent preservation areas. Fibria was founded in September 1999 and is headquartered in São Paulo, Brazil.

fibria is the world’s largest producer of pulp, managing 1 million hectares of forest, of which a third is dedicated to environmental conservation.

Getting to the roots of sustainability Forests are an important and renewable resource for the pulp and paper industry. The sustainability challenge in using this resource lies in reducing its environmental footprint and social inclusion of people affected by the commercial use of forests. Fibria’s approach to the challenge is comprehensive. The company aims for instance to improve forest productivity by means of a traditional breeding program, where new generation clones use natural resources more efficiently, offering gains measured in terms of tons of pulp per hectare per year. Its projects focus on soil management, fertiliser optimisation, disease resistance and biological pest control.

Fibria’s pulp comes from 100% planted forests and therefore directly contributes to avoiding the use of natural forests for paper production. Fibria constantly seeks to improve the use of pulp in papermaking processes, optimising production processes while improving product properties.

Leveraging its expertise Fibria uses the proprietary Bio-Index software tool that enables a sustainable landscape management, while generating biodiversity indicators for all Fibria's areas. Fibria’s

Technology Center plays an important role in forest certification by the Forest Stewardship Council (FSC) among others. It operates two laboratories conducting research on the production of superior eucalyptus clones, the identification of advanced forest management techniques and the development of new products.

‘ Fibria constantly tries to improve the use of pulp in papermaking processes.’ engaging in dialogue Fibria has also successfully created an environment for dialogue, in which NGOs, companies, governments and local communities seek cooperation instead of confrontation. This has for instance led to the settlement of 1,200 families affiliated to the Landless Workers’ Movement (MST) in an area belonging to Fibria, as well as joint initiatives for generating income in several rural communities. MST is one of the largest social movements in Latin America with an estimated informal 1.5 million members in 23 of Brazil's 26 states. » further reading Company website: www.fibria.com.br Forest Stewardship Council: www.fsc.org

à why is it a game-changing company?

Fibria uses state of the art tools to make sure forests are sustainable à how does sustainability add value?

Greater care taken in resource management leads to higher revenues à why is it a potential of tomorrow?

It is laying down pillars for scientific advances and the avoidance of social conflict à why is it relevant from an investing point of view?

The company is able to diversify into energy-efficient businesses such as biofuels

à external recognition Fibria’s Technology Center plays an important role in the Forest Stewardship Council and the Brazilian Forest Certification Program. Fibria was listed as RobecoSAM Silver Class in the 2013 Sustainability Yearbook, Forestry & Paper.

| Game Changers

19

| Unilever — Putting sustainability at the heart of its business

Unilever Putting sustainability at the heart of its business

à about Unilever Unilever is one of the world's leading suppliers of food, home and personal care products with sales in over 190 countries. The company employs 173,000 people around the world and generated annual sales of EUR 51.3 billion in 2012.

Unilever has made major progress with compass, its strategy to double the size of the business while reducing its environmental footprint and increasing its positive social impact at the same time. sustainable Living plan Compass, launched in 2009, was strengthened in 2012 with higher targets and the integration of its sustainability strategy, the Unilever Sustainable Living Plan. The strategy set out how the company intended to deliver sustainable growth: by halving its environmental footprint by 2020; sourcing all of its agricultural raw materials sustainably, and improving the health and well-being of more than a billion people around the world.

Underpinning the plan are around 60 specific targets embedding this new thinking into the business.

Unilever clearly demonstrates how these efforts will help grow the top line while positively impacting the bottom line. In 2011, CEO Paul Polman said he expected savings of EUR 200 million by efficiently allocating scarce resources and developing new products with a more focused approach towards resources management. more collaboration is needed Unilever is making good progress. Between 2008 and 2012, greenhouse gas emissions from manufacturing sites have been cut by

nearly a third and waste has been halved. Over half of Unilever's 252 plants around the world now send zero non-hazardous waste to landfill, and the company has set itself a new target of extending this to all its factories by 2015. To reach its goals and achieve large-scale change, Unilever believes even more collaboration is needed between companies, governments, NGOs and consumers.

Impact on the bottom line Unilever's commitment is paying off. Starting with only 10% of raw material sourced sustainably in 2010, the ratio grew to 24% in 2011 and 36% in 2012. Over the same period, company revenue increased by 10.5% and average annual organic sales growth in the past two years has been higher than before. Unilever also saw a positive impact on its bottom line with operating margins reaching over 13.5%, 100 basis points higher than the average of previous years. »

à why is it a game-changing company?

Unilever has set 60 specific targets for ESG improvements à how does sustainability add value?

The company aims to double in size while lowering its environmental footprint à why is it a potential of tomorrow?

Its sheer scale has the potential to improve the wellbeing of one billion people à why is it relevant from an investing point of view?

Unilever expects EUR 200 million in sustainable and responsible savings, bringing higher profits

à external recognition

further reading Company website: www.unilever.com

Unilever remained the top-scoring company in the Food Producers sector of the 2012 DJSI for the 14th consecutive year and was named the Food and Beverage super-sector leader. In 2013 Unilever retained its top ranking in the latest Sustainability Leaders survey from GlobeScan/SustainAbility for the third consecutive year.

20

| Interview

| Harry Smorenberg

Expert interview Harry Smorenberg

Harry Smorenberg is a financial services marketing and positioning strategist. He previously worked at Banque Paribas and ABN AMRO and was a director at two leading international strategic consultants.

Mr. Smorenberg is a leading contributor to innovation in both the retail and corporate payments and transaction spaces. He has also been actively involved in developing solutions for financial planning, international pensions and ‘social innovations’. His strength lies is in catalyzing institutions into developing visions and strategies, and in identifying and implementing client-centric solutions.

‘ ESG should be a commonly accepted and regulated standard to which all market parties should comply.’

How have you seen the SI market evolve over the past decade?

SI has developed rather slowly over the past 10 years – it has only really gained momentum in the last two to three years. In the initial period, proponents of SI experienced a more difficult time. They were faced with having to educate the market first and convince them of the benefits of SI. Without a level playing field, and amid fierce competition, this was quite a challenge. So it started really as 'an alternative positioning' and was driven by a strong belief to act as ‘a good and responsible corporate citizen’.

Since then, we have seen a dramatic growth in awareness among mainstream investors.

It is almost common practice to express ‘sustainability’ as an issue in investments and corporate practice. PGGM, the leading Dutch pension administrator with its roots in the healthcare and social work sector, turned away from investing in the tobacco industry. PMT and PME, the Dutch pension funds for the metal and electrical engineering industry, stepped away from Walmart because of complaints about working conditions. Rabobank, the world's leading food & agribusiness bank, will not finance companies involved in shale gas extraction, nor will it make loans to farmers who rent their land to shale gas producers. They have learned that environmental and social factors can be material to financial performance. This shows a clear shift from short-term towards longterm thinking. In my view, a key contribution was

the move made by large asset managers such as Allianz Global Investors to focus more on climate change risks in their portfolios.

The definition of ESG is very different throughout the industry. What is your understanding of ESG integration? What can be done to promote a more common understanding?

ESG covers a very broad spectrum of many (quite often related) issues. It is hard to communicate this because investors, market players and people in wider society have a different understanding of what it means and the priorities that need to be set. The definition of ESG is also developing as society evolves and new insights and lessons learned change current beliefs. This also will contribute to an already very long list of desired corporate and investor behavior. I believe that ESG should be a commonly accepted and regulated standard with which all market parties should comply. It should evolve into the ‘new norm’ and investors should feel they have a responsibility to contribute to a better world.

Have you seen more of a demand from clients for financial solutions that integrate ESG factors?

Client demands were initially driven by environmental issues. Global warming, oil spills and environmental disasters continuously keep us aware of our own conduct and desired behavior. I do see a clear shift of focus towards social issues.

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This means looking at working conditions for people such as iPhone factory workers in China, clothing industry workers in India, and the whole issue of child labor. Investigative journalists contribute to awareness by ‘monitoring’ the corporate citizenship credentials of foreign companies and investors in emerging markets.

Working conditions, education and healthcare are all taken more and more into consideration, thanks to effective media pressure. Top brands realize that a global buyers-strike could affect their position and have implications for their profitability. Apple experienced this when the working conditions of a third-party supplier in China were broadcast on TV worldwide. I expect we will see more and more efforts to set standards for proper working conditions when companies engage in outsourcing.

What is the main hurdle most investors face when deciding to integrate sustainability into their investment strategy?

It is the competitive environment. When asset managers do not consider SI they might be able to select asset classes with high returns but they

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| Harry Smorenberg

will also carry high reputational risks. These investments might have a better performance in the short term, but we believe that companies which systematically integrate social and environmental criteria into their decision-making are better long-term investments. Technologies that allow a more efficient use of energy present attractive growth and profit opportunities for businesses while benefiting the environment. A focus on energy efficiency can be seen as a source of alternative low-cost power. Unfortunately however, investing in traditional coal-fired power plants is likely to show better returns today.

How have you seen or helped investors to overcome this hurdle?

My recommendation is to create a rule book such as the one that pension funds use to monitor and deal with private equity companies. By agreeing on uniform conditions, a level playing field will eventually be created based upon a desired standard of SI. However, it will take time to motivate and ‘force’ market parties to accept these conditions. Of course, politicians and eventually government will step in as well, but

I would prefer the industry to take the lead and contribute to society as good corporate citizens.

What is your biggest frustration in the ESG sphere?

A lot has been done, but there are still companies and people who focus on short-term financial gain. ESG is perceived as a strategic intention today. We should embed this much more into a general accepted core value that is being monitored and controlled independently and officially.

Where do you see the most potential for SI? Of course you could highlight sectors such as energy. It would be essential to see where the effects of SI would really count and could be used as a catalyst for others. In the long term it is about rethinking the desired position of man and society in relation to all (natural) resources.

It is about societal behavioral change in order to create a new harmony with all aspects of life in order to secure our own survival.

1 Asset managers have learned that ESG factors can be material to financial performance

2 ESG can also help contribute to restoring the reputation of the financial services industry

3 Create a rule book such as the one by which pension funds monitor and deal with private equity companies

22

| Game Changers

| Cepheid — Pushing the boundaries of molecular diagnostics

cepheid Pushing the boundaries of molecular diagnostics à about cepheid Cepheid is a leading molecular diagnostics company that is dedicated to improving healthcare by developing, manufacturing, and marketing accurate yet easy-to-use molecular systems and tests. Through its strong molecular biology capabilities, the company is focusing on those applications where accurate, rapid, and actionable test results are needed most, such as managing infectious diseases and cancer.

exploding healthcare costs have put more emphasis on early diagnosis and prevention, requiring sophisticated detection methods. molecular testing and genetic analysis by cepheid forms part of this solution.

Innovative diagnostic systems Cepheid develops, manufactures and commercializes innovative, easy-to-use diagnostic systems and tests for genetic analysis. The California-based company focuses on applications where accurate, rapid and reliable tests are needed most, such as the management of infectious diseases and cancer.

Its systems enable the automation of highly complex and time-consuming manual genetic diagnostic tests. They have a modular, flexible configuration to allow institutions of any size to gain access to advanced genetic testing.

Moreover, their compact features allow for portability in the field, so that tests can be run anywhere, improving access to diagnosis in rural areas throughout the world. The GeneXpert System is a closed, self-contained, fully-integrated and automated platform that produces accurate results in a timely manner with a minimal risk of contamination. The system combines sample preparation with real-time amplification and detection of genetic information in single use cartridges. serious healthcare challenge Several tests developed by Cepheid allow the rapid detection of antibiotic-resistant

microorganisms. These are the main cause of hospital-associated infections which have become a serious problem for providers as they result in higher treatment costs, longer hospital stays and higher mortality. They are linked to 99,000 deaths per year in the US, where 5% of patients acquire hospital-associated infections, generating annual excess costs of USD 30 billion. results have driven demand Hospital adoption of Cepheid’s testing systems to perform infection surveillance and rapid patient screening has shown very positive results. Numerous clinics have substantially lowered infection rates and thus achieved an improvement in patient outcomes, along with a reduction of associated costs, boosting their top and bottom lines. These results have driven demand for Cepheid’s innovative systems that will help providers to address future key healthcare challenges. »

à why is it a game-changing company?

Cepheid’s technology focuses on early detection of diseases at the molecular level and allows rapid testing. à how does sustainability add value?

It can potentially save healthcare providers – and therefore wider society - millions à why is it a potential of tomorrow?

Cepheid’s systems are modular and easyto-use, allowing institutions of any size to gain access to advanced genetic testing. à why is it relevant from an investing point of view?

The potential for revenue growth and new customer gains is very high

à external recognition

further reading Company website: www.cepheid.com

Cepheid’s rapid tuberculosis test was endorsed by the World Health Organization in 2010. USAID awarded the public-private partnership formed by Cepheid, the University of Medicine and Dentistry of New Jersey, and the Foundation for Innovative New Diagnostics, for successful discovery of this assay.

| Game Changers

23

| ASML — Leading the way in lithography

asmL Leading the way in lithography à about asmL ASML is one of the world's leading providers of lithography systems for the semiconductor industry, manufacturing complex machines that are critical to the production of integrated circuits or chips.

Headquartered in Veldhoven in the Netherlands, ASML is traded on Euronext Amsterdam and NASDAQ. ASML has 8,500 employees serving chip manufacturers in more than 55 locations in 16 countries.

asmL’s excellence in innovation enables semiconductor manufacturers to ‘do moore with less’, following Intel co-founder Gordon moore’s maxim that the number of transistors on a microchip doubles every two years as their size decreases.

‘ Increasing demand for energy-efficient electronic devices will fuel demand for ASML’s advanced lithography tools.’ playing a pivotal role On the path to ever smaller and more efficient electronic chips, ASML plays a pivotal role. The Dutch company designs and manufactures very complex lithography systems which are used for the most critical stage in the production of semiconductor chips. For ASML an integrated innovation process is the core value of the company. Since margins of error for such lithography tools are so small, designing a tool solely in-house is almost impossible.

Around 90% of the costs of an ASML machine are outsourced as the company only focuses on integrating the different components.

Consequently, in order to be able to deliver

machines of the highest quality, ASML entered into a very close cooperation agreement with many of its suppliers which allows them to share competences and processes. excellence in innovation Through its excellence in delivering on innovation, ASML creates long-term company value in two ways. First, ASML’s power to innovate is so strong that the company faces almost no competition in leading edge lithography technology. By providing ever more efficient tools, ASML makes an appealing value proposition to its customers which allows for steady price increases. Because of its ability to innovate the company is expected to grow considerably faster than the semiconductor industry, while margins should stay stable. cutting emissions per device Second, by keeping pace with Moore’s law, ASML enables the whole IT industry to produce electronic devices which are more energy-efficient and more powerful at the same time. This is especially relevant because already today the IT industry is responsible for about 2% of global CO2 emissions, about the same as the aviation industry. And on the back of social media, cloud computing and smart electronics, the demand for IT infrastructure will further grow. »

further reading Company website: www.asml.com

à why is it a game-changing company?

ASML has a close partnership with suppliers to share competencies and processes à how does sustainability add value?

Doing ‘Moore with less’ raises revenues while cutting global emissions à why is it a potential of tomorrow?

Through its excellence in innovation, ASML can create long-term value on all fronts à why is it relevant from an investing point of view?

The company faces almost no competition in leading edge lithography technology

à external recognition ASML was ranked 11th in the Global 100: World Leaders in Clean Capitalism in 2011.

The company has been included in the FTSE4Good Index since 2003. In 2012, ASML was again ranked by customers as one of the 10 best chip-making equipment suppliers in VLSIresearch’s annual customer satisfaction survey.

24

| Interview

| Roger Urwin

Expert interview Roger Urwin

Roger Urwin became the global head of investment content at Watson Wyatt (now Towers Watson) in July 2008, after serving as the global head of the Watson Wyatt investment practice from 1995 to 2008.

His current role includes work for some of the firm’s major investment clients both in the United Kingdom and internationally. Mr. Urwin is the author of a number of papers on asset allocation policy, manager selection, sustainability, and governance.

How have you been involved in SI over the past decade?

Sustainability Investing (SI) has come a long way in the last 10 years and I guess so has my understanding. In the early stages I was skeptical, then I invested some time to drill deeper into the subject, and then I found out that it was more complicated, more important and ultimately more interesting than I expected.

‘ The Holy Grail for SI is that it is fully integrated and moves from a side order to become the main meal.’

What makes you say ‘more complicated’?

If you think of SI – as many do – as a side dish to the main meal, you can make it a bit simpler – as if it’s just the vegetables. But when you start to take a more integrated view and understand both the importance of responsible investing, which is basically a values-driven concept, and the sustainable part of it, which is finance-driven, and you bring the two together, you’ll find it becomes more complicated.

That’s the core of how complex it seems to be because it does involve you combining two things – a clear sense of responsibility with a more sophisticated view of efficient finance.

In a sense, the Holy Grail for SI is that it is fully integrated and moves from a side order to become the main meal.

What can be done to promote a more common understanding of what SI means?

The SI field calls for people to move from our prior practices – ‘narrow lens finance’ – to better practices – ‘wider lens finance’. That’s

a paradigm shift and it will take time to promote a common understanding of what’s involved. Hence there is this frustrating period in which people do not use the same terms for the same things. But clearer language and thinking is emerging as we progress towards an integrated future.

You have been an interface between institutional investors and investment managers for many years: how have the demands of institutional investors changed over time?

Asset owners – and the pension funds of the world in particular – have in large numbers tried to postpone any deep engagement with the subject of SI. The basic way that asset owners use my support is by asking ‘how are our asset managers getting on with SI?’, thereby passing the responsibility to the asset manager. That is changing slowly over time, but I don’t want to exaggerate the trajectory of change. The vast majority of asset owners continue to treat the subject as important but not urgent, and given other pressures on their time, they don’t find the time for it. So in some respects the demand from the asset owners hasn’t yet fully emerged. Demands on the time of the asset managers by contrast have increased substantially. Asset managers have had to take responsibility for ESG integration by delegation and I think that has been quite a big factor over time – their

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thinking has changed quite a lot over the last 10 years.

What is the main hurdle that most investors face when deciding to integrate sustainability into their investment strategy?

Short-term performance pressure is one.

Asset owners are under pressure as fiduciaries of their respective funds and I think they’ve responded to that pressure by concentrating on recent results more than they should. It’s not easy to point to the impact from SI in the most recent period’s results. If they focused well into the future, and reflected deeply on how much transformational change is occurring in the world, and what it will do to their portfolios, I think they would reach a conclusion that they should be spending more time considering these issues. Another hurdle is that investors find it difficult to balance considerations that are seen as not directly financial. I don’t want to call them non-financial because many of these factors in ESG are certainly financial, but they seem to be indirectly financial, or financial with a lag.

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| Roger Urwin

What would be your advice to help them overcome such hurdles?

There’s no substitute for time and thought really. I advocate that funds spend more time on sustainability than they have in the past and be prepared to study the long-term factors at work and their impacts on their own investment processes. My advice is to spend more time strengthening their investment governance because that will act to help the analysis and processing of this complex area called SI. Do you have an inspiring client success story to share with us?

The California-based public fund CalPERS has been investing successfully with respect to ESG for some time. My client involvement is concerned with helping CalPERS to describe their investment beliefs to build a stronger foundation to the investment strategies that they are pursuing. In CalPERS’ case they were very keen that the beliefs should have clarity with respect to ESG and to stakeholder considerations. They were particularly keen

to tie together the impact of physical, human and financial capital. It is their philosophy that these three must be carefully managed in order to succeed. CalPERS is a fund that believes in being a leader in its field and it has shown real leadership quality in this process.

‘ The vast majority of asset owners continues to treat the subjects as important but not urgent.’

Further reading Website: www.towerswatson.com CalPERS: www.calpers.ca.gov

1 Demands on the time of the asset managers have risen substantially

2 Asset owners need to have a longer time horizon to be successful with sustainability

3 Funds have had difficulty balancing financial with nonfinancial factors

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| Game Changers

| Westpac — Banking on sustainability

westpac Banking on sustainability

à about westpac Westpac Banking Corporation, founded in 1817, was the first bank established in Australia.

Today, Westpac is one of Australia’s top 5 banks with global assets of AUD 677.5 billion. It employs about 36,000 people in Australia, New Zealand and around the world. Responsible investment funds increased from AUD 513 to AUD 981 million between 2008 and 2012.

australia’s westpac, a founding signatory of the equator principles, has built sustainability into its investment practices.

Thinking global Demographic, social and environmental trends are increasingly affecting risk profiles and potential returns within project finance, lending and investment. This makes banking one of the sectors most impacted by longterm social and environmental. Westpac has for many years been a leader in recognizing the importance of sustainability for its overall strategy. In 2003, the firm established a leading role within finance when it became one of ten signatories to the Equator Principles, a set of environmental and social guidelines for project finance.

In good company Building on this leadership role, Westpac sharpened its sustainability focus in 2010 when it implemented a group-wide ESG management framework and risk policy to integrate sustainability considerations in the credit approval process. This innovation requires regular reviews and documentation from customers to ensure the effective management of ESG risks. In addition, Westpac created its own set of principles for doing business to guide ethical policies related to human rights, financial crimes and environmental risks.

funding clean ventures Westpac plans to drive future growth by financing projects with an emphasis on environmental improvement – clean energy, clean technology and climate change advisory, in particular. This focus on “economic solutions to environmental challenges” dovetails with the Australian carbon pricing scheme introduced in 2012 as part of the Clean Energy Future campaign which targets an 80% reduction in domestic CO2 emissions (based on 2010 levels) by 2050.

Westpac is also promoting the growth of responsible investment assets via its subsidiary BT Financial Group, a signatory to the UN’s Principles of Responsible Investment, increasing the value of funds, on aggregate, from AUD 513 to AUD 981 million between 2008 and 2012. »

‘ Westpac plans to fund projects with an emphasis on environmental improvements.’ further reading Company website: www.westpac.com.au

à why is it a game-changing company?

Westpac has been at the forefront of funding ethical projects à how does sustainability add value?

This vision has been rewarded with a large increase in responsible funds under management à why is it a potential of tomorrow?

The bank's stance dovetails with Australian government's initiative to reduce CO 2 emissions à why is it relevant from an investing point of view?

Westpac can expect significant growth from funding clean energy and environmental projects

à external recognition The company has been included in the Dow Jones Sustainability Index every year since 2001, and it was named global sector leader from 2002-2007 and in 2011.

| Game Changers

27

| ABB — Charting new ground in data center energy savings

abb Charting new ground in data center energy savings à about abb ABB is a leader in power and automation technologies.

The company provides a range of products, systems, solutions and services for power transmission and distribution as well as automation solutions such as measurement, control, protection and process optimization applications. The ABB Group of companies operates in about 100 countries and employs about 145,000 people.

direct current technology pioneer abb came up with a ground-breaking answer to the issue of data center power supply, reducing energy losses by about 10%. savings from servers Data centers have become the backbone of our digital society, but they currently consume 2-5% of the world’s electricity, the carbon equivalent of the entire airline industry. With the addition of almost six million new servers every year, the associated emissions are projected to quadruple by 2020, requiring more efficient and reliable solutions.

Part of the energy-efficiency potential lies in improving the way that servers are powered.

Data centers receive electricity from the grid in the form of alternative current (AC). Individual servers, however, operate on direct current (DC) and so the AC power supplied by utilities needs to be transformed up to 5 times, equating to losses of about 20% in valuable electrical energy. ABB developed a revolutionary system that requires only one central conversion to DC before powering data center servers.

Impressive results The new system was piloted in a data center in Lupfig, Switzerland, in 2012, and produced impressive results: 10% direct energy savings from fewer conversion steps, and 15% savings on investment costs due to fewer components and a simpler set-up. It also cut the surface

area required by 25%, reducing the need for air conditioning, leading to additional indirect energy savings.

‘ ABB developed a ground-breaking energy-saving solution for DC power conversion.’ challenging established players According to ABB, the addressable data center market for power delivery equipment was about USD 29 billion in 2012 and is forecast to grow at a rate of 8-12% per year. With its disruptive DC technology, ABB is likely to emerge as a challenger to established market players’ offerings. Following last year’s pilot project, ABB has seen growing interest from global data center providers, indicating that the company is now well-positioned to capture a larger market share of this fast-growing sector. »

further reading Company website: www.abb.com

à why is it a game-changing company?

ABB produced a ground-breaking solution for powering data centers à how does sustainability add value?

Saving electricity benefits the environment and goes straight onto the bottom line à why is it a potential of tomorrow?

The future growth of data centers requires innovative solutions to save power à why is it relevant from an investing point of view?

ABB’s technologically superior offering is well positioned to capture market share

à external recognition In 2013, ABB won the Watt D’Or award, a prestigious energy-efficiency accolade from the Swiss government, for the scale of energy savings achieved through the pioneering use of DC technology. ABB Ltd was a runner up in the Sustainability Leaders 2013 ranking, Industrial Engineering sector, The Sustainability Yearbook 2013.

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| Banking Study

| ESG integration

ESG integration – a better measure of credit risk –

Sustainability Investing (SI) offers investors a dual advantage: it can enable them to identify future market outperformers at the forefront of reinventing their business and avoid long-term risks long before these are factored into valuations.

A new RobecoSAM study has explored the relationship between risk reduction and SI in terms of credit risk at banks – and produced another compelling rationale for ESG (Environmental Social Governance) integration.

‘ How much can sustainability data tell us about a bank’s future financial performance?’

A world experiencing acute economic, environmental and social pressure needs a financial system that can fund the solutions necessary to address long-term sustainability challenges. Banks require a sound basis for making lending and investment decisions – and they need to restore their credibility to effectively fulfill their economic and social responsibilities. According to the 2012 Edelman Trust Barometer, trust in banks dropped from 56 percent in 2008 to 40 percent in 2012.

“How much can sustainability data tell us about a bank’s future financial performance?” was a central question of the analysis. “A great deal” was the answer. “Highly sustainable” banks tend to record lower loan defaults over time, and this has correspondingly positive implications for a bank’s cost of capital and ability to create added value for its investors.

Banking on sustainability, adding value for investors

The study, ‘Using Sustainability Scores to Assess Credit Risk Factors in the Banking Sector’, draws on proprietary information submitted directly to RobecoSAM by the companies participating in its annual Corporate Sustainability Assessment (CSA). For the study, RobecoSAM’s analysts selected 10 CSA questions that focus on a set of sustainability factors that are linked to the quality of a bank’s credit portfolio and balance sheet and, as a result, can have an impact on a bank’s creditworthiness.

The questions examine banks’ screening and evaluation procedures for selecting potential clients and financing projects. The questions assess, for example, the degree to which a bank has integrated environmental risk criteria into

A new study conducted by RobecoSAM in collaboration with the Italian bank Monte dei Paschi indicates that the integration of sustainability factors into a bank’s lending and investment decisions can help a bank lower its cost of capital, regain trust and add greater value for investors over the long term. The study puts sustainability data to the financial materiality test by exploring the relationship between selected sustainability criteria and credit risk in the banking sector as measured by the percentage of non-performing loans held by banks and credit default swap (CDS) spreads.

Focus on financial and reputational risk factors

| Banking Study

29

| ESG integration

à sTUdY meThodoLoGY The study, ‘Using Sustainability Scores to Assess Credit Risk Factors in the Banking Sector’, draws on data from 2007-2011 that were collected as part of RobecoSAM’s annual CSA. This assessment consists of approximately 80 to 120 questions that examine financially relevant economic, environmental and social factors. The study does not use the Total Sustainability Scores derived from the overall assessment but instead employs question-level scores for the criteria considered most relevant to assessing a bank’s credit risk.

‘ A bank’s sustainability risk score could be used to predict its future credit risk.’

3

The analysis focused on the strengths of the respective correlations between the combined scores and the two dependent variables – the percentage of non-performing loans and the level of CDS spreads. Such information is very helpful in terms of guiding analysts’ assumptions of long-term loan losses in their model but is also reflected in the respective bank’s risk profile as measured by the cost of capital.

2

The criteria used in the analysis cover the following sustainability topics:

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 Environmental risk management (1 question)  Intellectual capital management and innovation capabilities related to environmental risk management and climate change (2 questions)  Climate change governance and risk management (4 questions)  Policies and procedures for crime prevention (1 question)  Policies and implementation of guidelines governing exposure to controversial issues (2 questions)

its risk assessment, lending and investment policies. This is because the environmental performance of a bank’s clients also presents a range of potential risks, including a reduction in the value of collateralised property and the inability of a debtor to make payments as a result of fines or legal liability.

to determine the existence of specific policies or guidelines governing exposure to controversial issues. Such frameworks are essential because consumer activism in response to a company’s contentious activities can jeopardise the company’s ability to repay its loans as well as generate higher costs or lead to reputational damage – both for the client and for the bank.

climate change related impacts on clients Information edge through better insight The analysis also looked for evidence that a bank’s risk assessment, lending and pricing policies had taken into account climate change-related impacts on clients. These include both regulations and the potential costs associated with climate change mitigation and adaptation. Banks were examined in terms of policies, procedures, training and tools that minimise the risk of money laundering or terrorism-financing activities. After all, these can have a potentially severe financial and reputational impact. In addition, banks’ lending and financing activities were evaluated

The study identified a clear correlation between high sustainability scores and lower long-term loan defaults and credit default swap spreads, indicating that a bank’s sustainability risk score could be used to predict its future credit risk. When combined with traditional creditrisk-based models, sustainability data could, as a result, significantly enhance the predictive and explanatory power of traditional multi-factor risk and return models, giving investors an important edge when considering an investment in bank stocks or debt.

30

| RobecoSAM’s

| Country Sustainability Rankings

Country Sustainability Rankings Getting the complete picture The global financial crisis has fueled a vigorous debate about financial ratings and their ability to forecast countries’ future economic viability. RobecoSAM has developed an approach that integrates sustainability data into sovereign credit ratings – for a sounder assessment of countries’ creditworthiness and therefore better informed investment decisions.

The Greek disaster could have been foreseen even by conventional standards.

But what about the deficit woes in France or Japan? France was receiving poor scores in RobecoSAM’s sustainability ranking long before conventional rating agencies downgraded the country for its unsustainable government finances. Japan, for its part, has scored much better in the sustainability ranking than its credit ratings would indicate, signaling potential for a future rerating. These are just two examples highlighting the complexity of individual country assessments and the added value that sustainability rankings can bring to the table.

Unveiling the underlying drivers of change Just like corporate sustainability assessments, country sustainability rankings complement traditional financial analysis – by focusing on key factors that have long-term financial and economic impacts but may not be reflected in short-term credit assessments. These factors

can range from a country’s investments in modern infrastructure to its energy mix and social stability.

A country that invests in education, promotes research into renewable energies and energy efficiency and practices good governance, for example, is laying the foundation for positive future economic development. The ability to enforce necessary but painful reforms thanks to a strong social climate is another factor that has a positive impact on a country’s long-term performance – and thus also on its creditworthiness. Conversely, a country that fails to account for natural resources and social externalities consumes its own capacity to succeed in the future.

A country sustainability analysis that considers these factors can serve as a valuable additional source of information for investors and financial service providers seeking to measure a country’s real long-term potential.

A structured approach In an effort to integrate sustainability considerations into a growing range of asset classes, and prompted by the onset of the financial crisis, Robeco began to conduct internal research on country-level sustainability as early as 2008. Combining Robeco’s own experience in managing government debt strategies with RobecoSAM’s long-standing expertise in sustainability assessments,

the company’s experts in Rotterdam and Zurich developed an approach to evaluating countries’ sustainability profiles based on key social, environmental, economic and governance factors (see table).

This analysis covers a total of 59 individual countries including OECD members and the major emerging markets. It is medium to long term in scope and primarily focuses on factors with an indirect impact on a government’s ability to repay its debt or raise capital.

The bottom-up analysis is based on data obtained from credible external sources such as the World Bank, United Nations or the World Economic Forum. Data must be available for a broad range of countries and must plausibly impact the medium-term development of countries’ creditworthiness. Where necessary, absolute data are converted into rankings to ensure methodological consistency with credit ratings, which are in effect rankings in themselves. Based on individual indicators’ likely impact on changes in a country’s credit quality, the scheme used to weight sustainability indicators is reviewed twice a year.

Information edge for sovereign bond investors Following a long period of relatively stable credit default swap (CDS) spreads, a regression

| RobecoSAM’s

| Country Sustainability Rankings

dIGGInG deeper – Two eXampLes A glimpse at two country case studies shows that country sustainability rankings can add value by alerting investors to medium- to long-term risks and opportunities not reflected in conventional credit ratings.

 downsIde candIdaTe: france France is a good example of a country where RobecoSAM’s country sustainability ranking would alert investors to risks not reflected in the country’s current S&P local currency rating of AA+. A perennial over-spender, France has run a deficit since the 1970s and had the secondhighest public spending ratio among OECD countries in 2011. The country’s extremely high ratio of public-sector employment and the resulting high level of taxes create distortions that exert a drag on the economy. RobecoSAM’s sustainability analysis highlights three pain points: weak indicators related to public governance; enormous and continuously rising deficits in the country’s pension and healthcare systems as well as the costs of its very large labor force; and doubts over the current government’s willingness and ability to enforce needed cutbacks in pensions and healthcare and to reduce the number of public sector employees.

 UpsIde candIdaTe: Japan

analysis performed by RobecoSAM revealed a negative correlation between country sustainability scores and CDS spreads during the past few years of increased risk aversion.

In other words: the higher the sustainability score, the lower the country’s risk insurance premium in this risk-averse environment. This initial evidence confirms that a combination of traditional creditworthiness ratings with the information from country sustainability rankings represents a powerful tool for enhancing sovereign risk analysis.

On the surface, Japan’s situation seems to endorse its current S&P local currency rating of AA-: After two severe shocks – the global financial crisis and the Tohoku earthquake – Japan has fallen into recession for the third time in five years. Having risen steadily for two decades, the public debt ratio now exceeds 200 percent of GDP. RobecoSAM’s sustainability analysis, however, paints a somewhat brighter picture based on a singular asset that makes Japan stand out in comparison to other countries: the international competitiveness of its private sector and the high work ethic of its labor force. This may indicate some potential for a future rerating. However, ongoing analysis is needed to ensure that the Japanese government addresses its financial problems without stifling the competitiveness of its private sector, for example by massively raising taxes.

dImensIon LeveL

IndIcaTor LeveL

sUb-IndIcaTor LeveL

Environmental

General environmental data, energy, environmental risk Energy Environmental risk

Atmosphere, water and land resources, biodiversity Use and trade of energy and renewable energies in particular Exposure to environmental/natural risks and countries’ ability to mitigate or adapt to risks

Social

Social indicators Human Development Index Strikes and lockouts

Education, welfare, world and equality parameters UN data on such measures as GDP per capita, life expectancy, education and literacy rates

Governance

Governance – quality Competitiveness Political risk Governance – structure Aging Monetary policy

Political rights, civil liberties, quality parameters on governance Institutions, infrastructure, market efficiencies, innovation Stability, conflicts and corruption Rule of law and accountability Aging, demographic policies and cost Monetary institutions, policies and additional structural issues

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32

| The Heart of the Matter

| Interview — Anne Walraven

Anne Walraven

The Heart of the Matter At only 27 years old, Anne Walraven has built a reputation on her unique ability to gain access to global thought leaders and CEOs and make them talk.

In Haida Gwaii, a small island off the coast of Canada, Anne Walraven witnessed miles upon miles of abandoned timber that had washed ashore and been left to rot. This unsettling vision left the young student with an ultimate question: “Can anyone please explain how this world works?” As the founder of FutureFuel.nu, she has asked that question, and 300 more, to gather 14 hours of recorded answers from today’s leading influencers, in politics, academia and business, including Thomas Friedman and Jane Goodall.

We understand that you are motivated by your experiences as a student researcher.

Tell us more.

I met a NASA researcher exploring the Green­land ice sheet. He showed that the sheet is melting much faster than anyone believed. Several months later, I also heard the president of the Maldives talking about his group of islands submerging in rising sea levels caused by global warming. When I was born in 1986, our planet was already using more of its natural resources than it could sustainably produce. Why?!

| The Heart of the Matter

33

| Interview — Anne Walraven

‘ Economic growth as we know it has come to an end. Our generation needs a new narrative, a shared new vision to work from. New circular initiatives need to align with the business case, otherwise my generation won’t buy it.’

A lot of people have these realizations, but few do anything about it. How did you make the leap from thinking to doing?

It took four more years to realize that academia wasn’t going to provide the answers, so I had to go out and find my own and it began on one average weekday in February 2012. My grandmother thought I had gone crazy: I had no budget, no plan, no journalistic experience and no professional network. However, what I did have was the trust that things were going to work out well. So I made up a list of 15 people who inspired me. I come and ask for wisdom. To my surprise, everyone has said yes.

You’ve met half of the list and filmed the interviews. What is the wisdom that you have found?

The Stockholm Resilience Centre has mapped nine planetary boundaries that we cannot afford to cross. We’ve already gone too far with two. Economic growth as we know it has come to an end. A real challenge is the critical shortage of raw materials, which makes sustainability an everyday reality for corporations.

So how do we act on this?

New circular initiatives need to align with the business case, otherwise my generation won’t buy it. We’re moving from traditional thinking to a decentralised world with new initiatives and start-ups that are reinventing the economy in a sustainable way. New values such as sharing, co-creation and connecting are imperative for this new circular model. This is the new reality, not competition and ranking.

Environmentalist Julia Hill says that the key question to answer is, “Are you in sync with the planet and the values attached to it?”

What is your advice to investment managers in understanding the new circular model?

You must connect with the undercurrent: go out and see how sustainability thinking is being implemented in today’s new businesses that are shaping the future. “Otherwise you’re going to be left behind,” as environmentalist Severn Cullis-Suzuki says. One example, Floow2 is a business to business marketplace where equipment can be shared. The community is at the core of a business model based on mutual trust. Another example is Puma’s cradle-tocradle Out of the Box project. This is not about

doomsday scenarios. This is where opportunity knocks!

Links www.futurefuel.nu/en www.stockholmresilience.org www.floow2.com www.youtube.com (Enter ‘Puma Clever Little Bag’) www.juliabutterfly.com

à CALLOUT The Nine Planetary Boundaries In 2009, a group of scientists identified and quantified nine critical planetary boundaries. Working within these boundaries, humanity can continue to develop and thrive for generations. However, crossing these boundaries will trigger abrupt and/ or irreversible environmental and economic changes. For more, see “Tipping Toward the Unknown” at stockholmresilience.org

34

| Interview

| Edith Siermann

How SI adds value for pension funds Some institutional investors in Europe are still shying away from integrating Sustainability Investing (SI) and integrating Environmental, Social and Governance (ESG) into their investment strategies as they struggle with a myriad of other pressures. The most common question asked by pension funds is “how much does this cost, and what impact will it have on my performance?” says Edith Siermann, CIO of Fixed Income Investments at Robeco and the executive responsible for the RobecoSAM Governance and Active Ownership unit in Rotterdam.

‘ SI in general has become part of society.’

At first glance it may not be clear for clients how SI adds value, but it is always worth making the journey with them, Edith says.

“Typically in people’s minds, SI is about exclusions and it’s a pity that this perception exists as SI is much broader than just avoiding reputational risk,” she says.

“It is often quite difficult to attach basis points to how much analyzing ESG and incorporating it into decision-making adds value to the portfolio. But it becomes clear to a client that by analyzing ESG factors investors will gain a better understanding of the opportunities and risks within a company. That is a way to

see how ESG can add value, as well as making a positive impact.”

Getting the ball rolling For those interested, it is important to get the ball rolling. “The first step is to identify the motivation of a client and to get a clear view of their reason for putting SI policies in place,” she says. “Is it an ethical motivation?

Or is it more financial, where their first role is as a fiduciary to invest in the best interests of clients and maximise returns?

“We then discuss SI with boards or trustees of pension funds and what ways there are to implement it, because sustainability is a term with many definitions,” Edith explains.

“So it helps to give decision makers a better idea of what it means in their own context.

We organise full-day workshops and go through every step with a client to discuss their philosophy and the current state of their SI policies, and where they can improve.

“When it comes to implementation it is a question of deciding what managers the client should select, and what investment policies meet their criteria, so that we can find the funds that can meet those requirements.

| Interview

35

| Edith Siermann

Step 1

Step 2

Step 3

Step 4

Goal setting

SI Framework

SI Policy

Implementation Planning

Objective explore the motivations and philosophy (ethical or financial) and theme (legislation)

Objective create a general description which roles sustainability should/could play in the various parts of the asset management & allocation process, manager selection etc.

Objective Define Investment Policy Statement

Objective Explore all actions necessary for implementation

Spreading the word So far, so good, for those pension funds that have taken their first steps. But some still need reaching out to. “Of course we also have an active stance in contacting new parties to ask if they have an interest in sustainability,” Edith explains. “The proportion of clients who have already been introduced to SI varies regionally; in the Netherlands, it is already very well known among pension funds, but this is not the case in other parts of the world,” she says.

And the message for any unbelievers?

“SI in general has become part of society, and therefore we say if you don’t look at SI in your investment process, then you are missing out part of what is going on in the world,” Edith says.

‘ We believe that doing an analysis without looking at ESG factors is not good enough anymore.’

“We believe that members of society who are participants in pension funds will require their asset managers to have SI as part of their policies. Going forward, it will become a license to operate. It’s a bottom-up approach that emanates from pressure from clients and regulation is catching up with it.”

anymore, as you won’t get the total view on a company or country that you need in order to both reduce risk, and add the most value for investors,” she says. RobecoSAM’s Corporate Sustainability Assessment has set the industry standard for using ESG factors in analysis for better decision making. The argument that integrating ESG can reduce risk, can be illustrated when analyzing information on corporate supply chains. This aspect was made only too clear when a clothing factory supplying Western retailers collapsed in Bangladesh, killing more than 1,000 people in April.

How SI leads to better decision-making “We believe that doing an analysis without looking at ESG factors is not good enough

“The questionnaire reveals very detailed information that is less freely available than standard financial data, including many

ESG factors that have a direct financial impact,” Edith says.

“We select the themes that we feel have the most relevance for investors and go from there.

For countries, it is fair to say that the ‘G’ for governance is much more important that the ‘E’ or S’ for environmental or social factors.

Sustainability depends more on the long-term aspects of issues such as how a country is able to deal with the ageing problem, and whether governments can quickly take decisions to put policies in place.”

Choosing the right government bond starts with looking beneath the surface sUsTaInabILITY InvesTInG When we analyze countries we look at more than just macro-economic data. Asking the right questions generates sustainability insights that we integrate into all our investment processes. This allows us to make better risk assessments and better informed investment decisions. Our Country Sustainability Ranking, developed in close cooperation with our Sustainability Investing specialist RobecoSAM, is aimed speciďŹ cally at measuring country risk proďŹ les in both developed and emerging countries, and is applied to sovereign debt analysis. We work with hard data, but we are also interested in the story behind the numbers. For example, it is not only the number of strike days that is important, but also why social unrest exists in the ďŹ rst place.

Country Sustainability Ranking This year, we are publishing a special edition magazine to highlight the importance of integrating Sustainability into investment decisions. If you are interested in learning more about sustainability investing or in receiving a complimentary copy of our magazine go to www.robeco.com/gamechanger.

Important information Robeco Institutional Asset Management B.V. (trade register number: 24123167) has a license of the Netherlands Authority for the Financial Markets in Amsterdam.