Sustainability - the essence of value RobecoSAM - setting the standard for sustainability investing
Sustainability - the essence of value 06/2013 RobecoSAM AG www.robecosam.com
Sustainability is a company’s capacity to prosper in a hypercompetitive and changing global business environment. Companies that anticipate and manage current and future economic, environmental and social opportunities and risks by focusing on quality, innovation and productivity will emerge as leaders that are more likely to create a competitive advantage and long-term stakeholder value.
Sustainability - the essence of value • 1
Sustainability the essence of value
“Since our inception in 1995, RobecoSAM has been at the forefront of recognizing the importance of identifying material, non-financial factors that drive business success. Sustainability is our DNA: It is our foundation, conviction and purpose.”
Michael Baldinger CEO, RobecoSAM
Our entire range of Sustainability Investing offerings is based on two guiding principles: • Sustainable business practices are critical to the creation of long-term stakeholder value in an increasingly resource-constrained world • Sustainability factors represent opportunities and risks that competitive companies must address We passionately believe that the integration of sustainability criteria into traditional financial analysis helps us to evaluate companies’ quality of management and future performance potential. This in turn enables us to identify attractive investment opportunities that can generate long lasting value for our clients. In short, a focus on sustainability leads to better informed investment decisions. Sustainability has become the defining challenge of our time. Sustainability-related megatrends are changing our world – and are
2 • Sustainability - the essence of value
having a measurable impact on companies’ top and bottom lines. Long-term challenges such as resource scarcity, demographic shifts and climate change are redefining societal expectations, public policies, regulatory frameworks, and hence business environments and investment outcomes. Such challenges create new opportunities and risks that companies must address today to remain competitive tomorrow. Companies that successfully translate these challenges to their advantage can expect to outperform their peers in the future. Traditional investment frameworks that rely exclusively on conventional financial analysis may fail to account for material non-financial factors arising from global sustainability challenges. Yet mainstream investors still underestimate the impact of long-term sustainability trends on companies’ ability to succeed in the long term. This can lead to
market inefficiencies that investors who focus on sustainability factors can exploit.
About RobecoSAM Our focus on how businesses adapt to global developments and megatrends is powered by a dedicated team of investment specialists who share a genuine commitment to sustainability and are driven by an analytical and inquisitive mindset. Our corporate culture values diversity and fosters creativity and collaboration, encouraging all employees to challenge consensus views, innovate and actively contribute to the realization of longterm value for our stakeholders. Motivated by these values and convictions, we continuously promote the benefits of Sustainability Investing in order to bridge the gap between the sustainability champions in the boardrooms and corporate offices and the investment professionals who are just beginning to recognize that a focus on sustainability creates value.
Founded as one of the first asset managers focused exclusively on Sustainability Investing, RobecoSAM (formerly SAM) was acquired by Robeco Group in 2007 in line with Robeco’s strategic ambition to further develop into the thought leader in the field. With Robeco’s global presence, RobecoSAM has grown into one of the world’s most prominent Sustainability Investing groups. With approximately 110 specialist staff located in Zurich and Rotterdam, RobecoSAM offers clients 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. RobecoSAM’s long-standing experience in assessing companies and developing and managing successful sustainable investment strategies and Robeco’s more than 80-year history of serving institutional investors and private investors with investment solutions across a broad range of asset classes are ideally complementary. Leveraging Robeco’s global network of sales, service and investment professionals, our Sustainability Investing products and services are represented in over 20 countries.
Sustainability - the essence of value • 3
The Complete Picture
Asset owners and asset managers around the world are beginning to recognize the importance of sustainability and are exploring ways to integrate environmental, social and governance (ESG) factors into their investment decisions. However, definitions, the degree of implementation and the motivations driving sustainable investment practices vary widely. We have identified four primary investor motivations for integrating sustainability into their investment strategies – financial, communication, ethical and impact. For most
4 • Sustainability - the essence of value
investors, such sustainability objectives must fit within their established investment framework consisting of, among others, strategic investment policies, asset allocation targets and risk management guidelines. These four motivating considerations for adopting sustainability investment strategies – though independent – are not mutually exclusive. Just as the interlocking pieces of a puzzle, each can be combined to form the complete picture that reflects the intentions of the fiduciary.
Financial Times/IFC “Sustainable Investor of the Year” 2012 “The winners of this year’s awards should be congratulated as they stand out from a very strong group of financial institutions that are leading the way on making environmental and social considerations a major part of their business.” Martin Dickson, Deputy Editor of the Financial Times and co-chair of the awards judging panel
Financial
Investors may implement sustainability strategies to foster transparency and communication with stakeholders, to meet, UNPRI commitments, to respond to the needs and demands of their beneficiaries or the public community, or to assume greater social responsibility as a shareholder.
Investment policy Communication
Financial Alpha Lower volatility Less drawdown Better return/risk profile
Ethical
Impact
Avoid single “black sheep“ Avoid controversial industries Avoid negative headlines Avoid reputational risk
Ethical Investors may choose to implement sustainability strategies to avoid controversial holdings, negative headlines and reputational risk, or to ensure that their investments are consistent with their ethical principles.
Fulfill fiduciary duty Produce ESG report Meet UNPRI commitments Assume responsibility as shareholder
Promote sustainability themes Quantify/demonstrate ESG impact
Asset allocation
Communication
The four motivations for adopting sustainability investment strategies
Risk management & reporting
For RobecoSAM, the financial motivation is the most important piece of the puzzle as it forms the foundation upon which all other activities can thrive. Sustainability Investing enables investors to generate superior risk/ return characteristics. An integrated approach to company valuation considers both financial and non-financial criteria and leads to better informed investment decisions. For any investor, solid performance is the key to longterm success.
Proxy voting Dialogue and engagement
Manager procurement & monitoring
Impact Some investors may use their investments to achieve a positive socio-economic impact without compromising financial returns, and will want to quantify and communicate this impact to their beneficiaries and stakeholders. The intended impact can be further enhanced through focused engagement with selected companies on specific sustainability issues.
These motivations serve as the foundation for a comprehensive range of products and services that can be combined to create value for clients across all of our business areas, from asset management and private equity to indices, sustainability services and active ownership.
Sustainability - the essence of value • 5
Focus on Investors
Helping investors achieve their Sustainability Investing objectives Forward looking investors have a fiduciary responsibility to invest across generations while preserving capital and potential benefits without depleting socioeconomic and environmental resources. By factoring ESG-related risks and opportunities – which are long-term in nature – into asset allocation, manager selection and strategy implementation decisions, investors can meet these goals. At RobecoSAM, we pursue a structured approach to help investors integrate Sustainability Investing into their investment process and meet their investment objectives in line with their fiduciary responsibility. We achieve this by combining the various pieces that make up the Sustainability Investing ‘puzzle’ including measurement as part of risk management and reporting to all stakeholders.
6 • Sustainability - the essence of value
In partnership with our clients, we help them explore and articulate their primary motivation for integrating sustainability into their investment decisions. Following this evaluation phase, we work with them to identify and implement Sustainability Investing solutions tailored to their particular investment philosophy, asset allocations and objectives. In addition, we discuss how they can enhance their Sustainability Investing goals through our proxy voting and engagement services, and how they can benefit from comprehensive reporting, which helps them communicate the outcomes of their Sustainability Investing strategy to their beneficiaries and stakeholders.
Sustainability Investing by RobecoSAM Building on the puzzle framework, we offer investors Sustainability Investing as a means to add value to existing asset allocations through strategies that integrate material, non-financial criteria into traditional financial analysis. Rooted in the combination of our sustainability and financial expertise, we leverage our…: • Foresight into critical economic, environmental and social trends. • Insight into material but under-researched
sustainability opportunities and risks that have an impact on companies’ future business success. • Translation and integration of this sustainability information into our valuation model to obtain a comprehensive view of companies’ long-term value creation potential. … to develop a comprehensive range of products and services to meet our clients’ financial and non-financial Sustainability Investing objectives.
Our products and services meet financial and non-financial client objectives
Objectives • Investment opportunities • Risk management • Fiduciary duty • Non-financial objectives (communication, ethical, environmental & social impact)
Products & Services • Investment solutions • Theme strategies • Equity strategies • Fixed income strategies • Private equity • Engagement services • Benchmarking services • Impact analysis • Indices
Activities • Megatrends analysis • Corporate Sustainability Assessment • ESG integration • Exclusion policy • Active ownership • Voting • Impact measurement • Benchmarking
Sustainability - the essence of value • 7
Asset Management Strategies “Financial performance tells us what a company has already done. Non-financial performance tells us what it is likely to do.” Rainer Baumann, CFA Head of Public Equity and Member of Executive Committee
Sustainability Theme Equity strategies
RobecoSAM’s sustainability foresight and insight are fully integrated into our complete range of asset management solutions ranging from diversified listed equities, thematic equity and private equity portfolios.
Long-term megatrends such as demographic shifts, resource scarcity, pollution and climate change will have a strong impact on the future market environment, giving rise to new business opportunities in the areas of:
Sustainability Core Equity strategies Our actively managed Global and European Equity strategies invest in a diversified portfolio of attractively valued companies. The systematic integration of sustainability criteria in the investment process leads to better informed investment decisions as it allows for a holistic company analysis and valuation by combining material, non-financial information with traditional financial factors. Portfolio construction results in strategies with a superior sustainability profile in relation to the broad reference index.
• Agribusiness • Climate • Energy • Healthy Living • Materials • Water RobecoSAM identifies companies that provide solutions to these global challenges. The thematic strategies focus on future-oriented companies that are expected to experience above-average growth.
RobecoSAM Sustainable Global Equity Strategy: A superior sustainability profile Risk & Crisis Management (+20) 100 Operational Eco-Efficiency (+23)
Codes of Conduct/Compliance/ Corruption&Bribery (+14)
75 50
Climate Strategy (+13)
Labor Practice Indicators (+17)
25 0
Environmental Policy/ Management System (+27) The numbers in brackets indicate the absolute difference in score value of companies in the RobecoSAM Sustainable Global Equity Strategy compared to all companies assessed in the RobecoSAM Corporate Sustainability Assessment with reference to nine key non-financial criteria.
8 • Sustainability - the essence of value
Human Capital Development (+26)
Corporate Citizenship and Philanthropy (+24) Sustainable Global Equity Strategy
Stakeholder engagement (+11)
All Assessed Companies
“We primarily view ESG integration as a strategy to better manage risks and profit from opportunities such as favorable positioning of investments for potential exits.” Andrew Musters Head of Private Equity and Member of Executive Committee
Private equity The RobecoSAM Clean Growth Program invests globally in clean growth primary funds, secondary funds and co-investments with a focus on resource efficient technologies and environmental infrastructure development. Our programs allow a tailored risk/return profile by allowing customized commitments to these three investment types. We believe that clean growth is the most attractive risk adjusted global clean tech opportunity. Returns are driven by investing in established businesses, proven products and companies growing through operational improvements and organic growth while avoiding technology risk, overuse of leverage/ inexpensive debt and financial engineering. Implementing sound sustainable business practices early can lead to increased competitiveness and creation of long-term
value. Therefore, we assist fund managers and companies in shaping their approach to ESG implementation: • Engage early with fund managers and portfolio companies on material ESG issues and address and remedy severe issues in the pre-investment phase • Monitor the ESG performance of investments and provide detailed feedback and recommendations in areas of underperformance • Help establish ESG policies and standards in the private equity industry Ongoing development of the methodology and monitoring of ESG is done in collaboration with both RobecoSAM Research and the Corporate Social Responsibility department of Robeco.
ESG integration at Robeco – equity and fixed income funds RobecoSAM is the Sustainability Investing specialist within the Robeco Group. Sustainability has been on Robeco’s agenda since the late 1990’s when its first Sustainable Equities fund was launched. Alongside RobecoSAM’s Sustainability Investing offering, Robeco offers investors ESG integration strategies through its fundamental and quantitative equity strategies. In addition, Robeco was among the first asset managers to incorporate environmental, social and governance ESG signals into other asset classes, including fixed income and private equity investments. Robeco has begun to integrate RobecoSAM’s sustainability knowledge and data in a growing number of additional products and asset classes, such as sustainable credits and sovereign debt.
Sustainability - the essence of value • 9
RobecoSAM Corporate Sustainability Assessment “Companies’ long-term success is shaped by industry-specific sustainability opportunities and risks. This is why we focus on industry-specific assessment criteria.” Daniel Wild, PhD Head of Sustainability Investing Research & Development and Member of Executive Committee
Always ahead of the curve Launched in 1999, RobecoSAM’s Corporate Sustainability Assessment (CSA) forms the research backbone of the globally recognized Dow Jones Sustainability Indices. This has afforded us direct access to companies and their business practices, enabling us to build one of the world’s most extensive research databases on corporate sustainability. Based on a rigorous and rules-based methodology, the CSA has set the industry standard for identifying companies best equipped to recognize and respond to emerging opportunities and risks resulting from global sustainability trends. Each year, over 3,000 publicly traded companies, including 800 companies in the emerging markets, are invited to participate in the CSA: • Companies are evaluated based on a range of material non-financial criteria that have been and are developed over time. The industry-specific questionnaires feature between 80-120 questions focusing on economic, environmental and social factors that are relevant for the companies’ success and under-researched in conventional financial analysis. • RobecoSAM pursues a truly integrated approach to sustainability research: the CSA is designed, monitored and refined by an interdisciplinary team of analysts, with a focus on generating additional insights
10 • Sustainability - the essence of value
into the value creating and risk mitigating potential of companies, ensuring that that the assessment focuses on sustainability criteria that are financially material to corporate performance, valuation and security selection.
Raising the bar Each year, the questions are reviewed and refined to reflect new sustainability issues, taking into account the latest academic research as well as new economic, political and social developments. Companies value the CSA as a learning and management tool that allows them to identify weaknesses and strengths, as well as measure their progress in embedding sustainability best practices into their corporate strategy.
The foundation of RobecoSAM’s offering The insights derived from the CSA are fully integrated into our asset management, private equity, indexing and sustainability benchmarking activities. Data from the CSA also form the basis of the ESG information that our parent company Robeco integrates in its mainstream fundamental and quantitative investment activities.
Funds Europe “European Thought Leader” 2012 “RobecoSAM won the award for the innovative nature of their research, in particular looking at non-standard subjects that affect investment decisions in the environmental and sustainable investment fields. It was the choice and depth of these subject areas that, in the opinion of the judges, differentiated RobecoSAM from other nominees.” Funds Europe award judging panel
Sustainability - the essence of value • 11
Dow Jones Sustainability Indices A globally recognized family of benchmarks and effective engagement platform Established in 1999, as the first ever family of global sustainability benchmarks, the Dow Jones Sustainability Indices (DJSI) have become a reference point in Sustainability Investing. Launched as a collaboration between S&P Dow Jones Indices and RobecoSAM, the DJSI combine the experience of an established index provider with the expertise of a specialist in Sustainability Investing to provide investors with objective benchmarks for managing their sustainability investment portfolios. Anchored by the results of RobecoSAM annual Corporate Sustainability Assessment (CSA), the DJSI comprise global and regional benchmarks as well as subsets that allow investors to exclude certain industries or create customized indices.
12 • Sustainability - the essence of value
Best-in-class approach The DJSI family uses a best-in-class approach to select sustainability leaders from across all industries based on pre-defined sustainability criteria embedded in the CSA. Best-in-class means that: • no industry is excluded from the indices, with the most sustainable companies in each industry selected for index membership • companies receive a Total Sustainability Score between 0 – 100 and are ranked against other companies in their industry • only the top 10 % of companies from each industry, based on their sustainability score, are included in the Dow Jones Sustainability World Index Therefore, companies must continually intensify their sustainability initiatives to be included or remain in the index. A growing number of companies define inclusion in the DJSI as a corporate goal as it publicly endorses their approach to addressing key sustainability issues on the basis of a structured and objective comparative analysis. As a result, the DJSI have evolved into an effective engagement platform by creating vibrant competition for index membership among companies within the same industry.
The gold standard in determining the world’s sustainability leaders, the DJSI have become an invaluable market tool for those seeking to support companies that make and abide by commitments to pursue sustainable business practices.
Sustainability - the essence of value • 13
Adding Value through Active Ownership
RobecoSAM’s Sustainability Investing offering is complemented by a range of customized engagement services aligned with clients’ specific investment strategies and objectives. Asset owners, managers and advisers can draw on these services to implement proprietary ESG integration strategies and comply with the UN Principles for Responsible Investment (UN PRI). All our engagement services have one goal: to add value to clients’ portfolios through active ownership.
Active ownership Our parent company, Robeco, has been encouraging the management teams of companies in which it invests to implement good corporate governance and responsible policies since 2005. Issues such as corporate structure, controlling rights, profit distribution, social policy, and the environment can all be covered in our discussions with these companies.
Proxy voting Robeco has been voting on behalf of institutional clients since 1998. Today, we vote on behalf of of our institutional funds, including the delivery of voting reports for our investors in these funds. These reports are customized to meet the requirements of institutional investors, who can use the information they provide in their own reporting.
Exclusions We believe in exerting influence to improve ESG issues through active ownership and therefore advocate dialogue, collaborative initiatives and proxy voting policy rather than exclusion.
14 • Sustainability - the essence of value
Excluding a company from our investment universe represents our action of last resort, only to be used after all other dialogue-based methods have been exhausted. If a company persists with a highly controversial behavior despite our best efforts to persuade it to improve its practices, we will exclude it from our universe.
Impact measurement In response to growing demand from asset owners for greater transparency and proof of the impact of Sustainability Investing, RobecoSAM developed the Sustainability Portfolio Analysis tool (see page 8). This tool measures the client portfolio’s sustainability profile against a selected benchmark based on a set of sustainability criteria. RobecoSAM is currently developing additional analysis and reporting tools that will provide key information on non-financial results for investors. This new impact analysis will include quantitative impact data on issues such as CO2 emission reduction, new job creation or positive social impacts on local communities.
Sustainability Services “The annual Corporate Sustainability Assessments conducted by RobecoSAM are an important benchmark for us to review our efforts and achievements in managing our business in a responsible and sustainable way. RobecoSAM’s assessment method helps us to identify strengths and challenges in our programs and provides us with further guidance for performance improvements. The results of RobecoSAM’s Corporate Sustainability Assessment have become an important indicator for our stakeholders to track the Adidas Group’s sustainability performance.” Herbert Hainer, CEO of Adidas
Corporate Benchmarking Building on RobecoSAM’s expertise in measuring corporate sustainability, our Sustainability Services Team offers a range of services that allow companies to evaluate their sustainability performance. Using the results of the Corporate Sustainability Assessment, we provide companies with more comprehensive analysis on how their corporate sustainability performance compares to that of their industry’s average and to that of the sustainability leaders within their industry. Companies can also receive detailed analysis of their strengths and weaknesses with respect to each sustainability criterion as well as best practice examples and an explanation of RobecoSAM’s methodology. Companies not eligible for inclusion in the Dow Jones Sustainability Indices and companies wishing to be evaluated outside the usual evaluation period can also benefit from the Corporate Sustainability Assessment.
Sustainability - the essence of value • 15
Collaborative Initiatives and Memberships
As a reflection of RobecoSAM’s own commitment to advocating sustainable investment practices throughout the financial industry, we are members of the most important global organizations promoting Sustainability Investing.
Within this framework, RobecoSAM focuses on extensive collaboration with and sponsorship of selected academic institutions. In all research initiatives, RobecoSAM assumes an active role in designing, leading and actively supervising these projects.
Our key memberships include:
Over the past year, RobecoSAM has been involved in research collaborations with the following academic institutions:
• UN PRI • Eurosif • ASrIA • Ceres
Academic Activities RobecoSAM has implemented a proactive approach to developing its research partnerships with academic institutions. The purpose of these research collaborations is to strengthen RobecoSAM’s position as a thought leader within the Sustainability Finance industry, capitalize on the value of RobecoSAM’s proprietary database and further develop its cutting edge methodology for integrating sustainability into the investment process.
• Harvard Business School, Organizational Behavior Unit (Cambridge, MA, USA) • School of Management, University of St. Andrews (Scotland, UK), • University of Cologne (Germany) • Warwick Business School, University of Warwick (England, UK) In addition, given their academic network, industry-related or practical experience, many of our research analysts are members of industry associations relevant to the industries they cover.
RobecoSAM Library As evidence of our ambition to be a thought leader in the area of sustainability, our analysts leverage the wealth of information collected in our sustainability database to conduct empirical research into the impact of various sustainability factors on companies’ financial performance. We regularly publish white papers, studies and articles highlighting the results of our latest sustainability research and insights. www.robecosam.com/library
16 • Sustainability - the essence of value
No warranty This publication is derived from sources believed to be accurate and reliable, but neither its accuracy nor completeness is guaranteed. The material and information in this publication are provided “as is” and without warranties of any kind, either expressed or implied. RobecoSAM AG and its related, affiliated and subsidiary companies disclaim all warranties, expressed or implied, including, but not limited to, implied warranties of merchantability and fitness for a particular purpose. Any opinions and views in this publication reflect the current judgment of the authors and may change without notice. It is each reader’s responsibility to evaluate the accuracy, completeness and usefulness of any opinions, advice, services or other information provided in this publication. Limitation of liability All information contained in this publication is distributed with the understanding that the authors, publishers and distributors are not rendering legal, accounting or other professional advice or opinions on specific facts or matters and accordingly assume no liability whatsoever in connection with its use. In no event shall RobecoSAM AG and its related, affiliated and subsidiary companies be liable for any direct, indirect, special, incidental or consequential damages arising out of the use of any opinion or information expressly or implicitly contained in this publication. Copyright Unless otherwise noted, text, images and layout of this publication are the exclusive property of RobecoSAM AG and/or its related, affiliated and subsidiary companies and may not be copied or distributed, in whole or in part, without the express written consent of RobecoSAM AG or its related, affiliated and subsidiary companies. No Offer The information and opinions contained in this publication constitutes neither a solicitation, nor a recommendation, nor an offer to buy or sell investment instruments or other services, or to engage in any other kind of transaction. The information described in this publication is not directed to persons in any jurisdiction where the provision of such information would run counter to local laws and regulation.
CarbonNeutral® publication The unavoidable CO2 generated by the printing and distribution of this report have been reduced to net zero through verified carbon off set projects.
RobecoSAM Josefstrasse 218 8005 Zurich Switzerland +41 44 653 10 10 info@robecosam.com www.robecosam.com