Advance | Sustainability Investing in focus | August 2015

HOW GOOD ARE YOUR DIRECTORS? P.6

DOES SUSTAINABLE INVESTING DRIVE PERFORMANCE? P.5 SUSTAINABILITY AND FIXED INCOME: INTERVIEW WITH EDITH SIERMANN P.8

ADVANCE SUSTAINABILITY INVESTING IN FOCUS | AUGUST 2015

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HIGHLIGHT

Green bonds head into the mainstream The market for green bonds has grown from nothing five years ago to being well on their way to becoming a USD 100 billion market - and potentially an asset class in their own right.

Used primarily for funding environmental projects such as solar power infrastructure, they are increasingly being bought by investors looking to assist climate change initiatives while earning reliable yields, says leading exponent Sean Kidney, CEO of the Climate Bonds Initiative.

“The bulk of this market is investment grade where the issuers are simply promising to allocate the proceeds to certain projects or assets. So there are a lot of opportunities,” he says. “The market began

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The current size of the green bond market in billions of dollars out of a need to finance climate change solutions, which are primarily green infrastructure solutions in transport, energy, water and buildings. Green bonds are an ideal way of financing this.”

For more information, go to www.climatebonds.net

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CO N T EN TS

COLUMN

In this edition of Advance: the ICGN summer conference addresses the short-term pressure on board members; Edith Siermann explains how ESG integration in fixed income investments has helped her team make better investment decisions; and Peter van der Werf discusses the trials and tribulations of big pharma.

4 Highlights Why the EU is giving mixed signals about promoting sustainability investing, and why factory farming makes little economic sense.

5 Does SI drive performance?

Willem Schramade looks for answers to the 64,000 dollar question.

6 Cover story: just how good are your directors?

Having top quality board members who can take a long-term view is critical for strong corporate governance, leading business figures said at a recent ICGN conference.

8 Interview: sustainability and fixed income Edith Siermann’s team was one of the pioneers of ESG integration in income investments.

What has it brought them?

10 The economy is a sub-system of the biosphere Swedish financial markets minister Per Bolund explains why economic growth and a sustainable Earth are two sides of the same coin.

11 External perspective Denis Branche, CEO at PhiTrust Active Investors, has been successfully campaigning against double voting rights in France.

14 Engagement case study Peter van der Werf reveals how he is working to improve clinical trial transparency.

Top of the tree Robeco has a long heritage in sustainability investing, as one of the pioneers of the field way back in the 1990s. It’s now 20 years since we launched the first ‘Green Certificate’ savings product, and almost as long since we offered the first sustainability equities fund just before the turn of the millennium.

So you can imagine that we were delighted to receive the highest possible scores in the recent annual appraisal of asset managers and owners by the United Nations Principles for Responsible Investment (PRI). Robeco was rated as A+ across all sectors, even beating last year’s top scores, when we achieved A across the board, after PRI changed its methodology to add the A+ category.

PRI sends a detailed questionnaire to its members about their use of sustainability principles in their investment processes. Robeco got A+ for its overarching approach, listed equity, active ownership (voting & engagement), private equity, and both government and corporate bond funds.

Of course, nobody could blame us for basking in a bit of glory following all the work we have done in integrating ESG into portfolio management over the years. ESG factors are now applied across most of Robeco’s equity, fixed income and quantitative funds, along with specialist funds operated by RobecoSAM. In an industry that still has not yet embraced sustainability as a mainstream investment practice, sitting at the top of the tree is testament to the dedication of all my colleagues in promoting this campaign.

15 Leaving your mark without giving up returns

However, much work remains to be done in persuading the rest of our industry that sustainability investing is no longer a ‘green’ crusade, but a means of adding value. Quite simply, it makes money for investors. At Robeco, we look forward to making sustainability investing the A+ strategy for everyone in the years to come.

How can investors achieve a positive social or environmental impact without compromising financial returns?

RODERICK MUNSTERS CHIEF EXECUTIVE OFFICER, ROBECO

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HIGHLIGHTS

EU sends ‘mixed signals’ on sustainability “And in the Juncker Plan there is also no mention of any sustainability screen when funding long-term projects. So the Commission is sending mixed signals.” The Plan is named after Commission President Jean-Claude Juncker, who launched it in 2014.

The EU is sending mixed signals over sustainability investing and must adopt a more coordinated approach, says the head of the European Sustainable Investment Forum (Eurosif).

Neither the new European Long-Term Investment Funds being rolled out in 2015, nor the wider EUR 315 billion Juncker Plan for reindustrialization include sustainability criteria, says

François Passant, executive director of Eurosif.

“While the EU has made a lot of progress with sustainability – you can see that in the Shareholder Rights Directive, for example – there are still some missed opportunities,” Passant told the Responsible Investor 2015 conference. “The European Long-Term Investment Fund is one, as nowhere in the regulation for this is ESG or sustainability mentioned. It just isn’t one of the criteria.”

Passant says the EU needs to think collectively, rather than as a collection of independent interests, and stop moving the goalposts. “The Commission is organized in silos and it’s difficult to try to get these silos to be consistent,” he says. “The Juncker Plan is a good example of a disconnect with the energy sector – no connection is being made of their eligibility for the projects that the plan is supposed to finance.”

“We need to make clear to the people in Brussels that they must stop changing the rules of the game after the game has started. We need common sense measures.”

Factory farming figures don’t add up Factory farming is usually seen as an emotive issue about animal welfare, but it makes little economic sense when you examine the data behind it, says a leading private equity investor.

Jeremy Coller, CEO of Coller Capital, says it takes 6 kilos of plant protein to feed enough livestock to produce 1 kilo of animal protein, and 4 kilos of wild fish to make 1 kilo of salmon. It also takes 1,000 liters of fresh water to get 100 calories from a cow, compared to 58 liters needed for the same calories

from rice, or 38 liters from potatoes.

And factory farming is responsible for producing 39% of global methane emissions – particularly from cattle – which is higher than the muchmaligned energy or transport sectors.

Coller, who believes that private equity is the “purest form of active ownership” and that “ESG can save the world” has launched the Farm Animal Investment Risk and Return (FAIRR) service to advise investors on the issue.

39% The proportion of greenhouse gases produced by farming

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COMME NTARY

Does SI drive performance?

Academia’s answers The USD 64,000 question in sustainable investing (SI) is whether it improves investment performance or not. The answer from academia is a cautious ‘yes’.

Material ESG issues seem to correlate with corporate financial performance and stock returns.

But whether this results in outperformance by SI funds (including ESG-integrated mainstream funds) depends both on the type of strategy and on a rigorous focus on materiality, says Willem Schramade, Sustainability and Valuation Specialist in Robeco’s Global Equity team.

THE TYPE OF SI STRATEGY MATTERS: PROFIT ORIENTATION OUTPERFORMS VALUES ORIENTATION Hong and Kacperczyk (2009) document the outperformance of ’sin’ stocks, companies involved in alcohol, tobacco and gaming. The corollary is that SI funds that exclude those companies are likely to underperform, which in turn has led people to think that SI strategies underperform in general. This is a fallacy, however, as the overall record of SI strategies is found to be neutral. As Derwall et al. (2011) point out, performance very much depends on the type of SI strategy.

They distinguish ethical or values-oriented strategies, which indeed tend to underperform, and profit-oriented SI strategies. The latter use ESG information for better decision making, and in fact outperform mainstream strategies.

SUSTAINABILITY IS A WIDE CONCEPT: WHAT ARE WE LOOKING FOR EXACTLY? Another confusing issue is the wideness of the concept of sustainability. One typically distinguishes E (environmental), S (social) and G (governance) issues, along with multiple subdivisions within E, S and G. Some of these have been documented while others haven’t. For example, within S, Edmans (2011) finds that companies with higher employee satisfaction levels tend to have better stock returns, higher valuations and more positive earnings surprises. The G is particularly well documented. In a well-known paper, Gompers et al. (2004) find that companies with strong shareholder rights have higher firm value, higher sales growth, higher profitability, and lower capex, and they make fewer acquisitions.

What also matters is the quality of reporting: Dhaliwal et al. (2011) find that firms

performing strongly on ESG enjoy a reduction in their cost of capital when they start reporting on sustainability.

On active ownership, Dimson et al. (2014) find that successful engagements are followed by positive abnormal returns, improved accounting performance, better governance, and increased institutional ownership.

Moreover, unsuccessful ones do not result in in negative returns. In sum, the overview paper by Clark and Viehs (2015, recommended further reading!) concludes that there is a positive relation between ESG factors, corporate financial performance and stock performance, but that it is partly obscured by authors typically studying individual factors in isolation.

Moreover, the relevance of individual ESG issues may also depend on the type of company.

FOCUS ON MATERIAL ISSUES IS KEY Practitioners might say their intuition and experience tells them that for any company only a limited number of ESG issues is really material to its business model and stock returns. And in fact, a recent Harvard Business School paper (Khan et al., 2015) documents the outperformance of companies that perform well on the most material ESG issues. Conversely, firms that score well on immaterial issues actually underperform - perhaps because they set the wrong priorities. This implies that analysts should also focus on the most material ESG issues in their company analyses and investment decisions. But it’s unclear to what extent they really do so, and how. Alas, more questions need to be asked.

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COVE R STORY

JUST HOW GOOD ARE YOUR DIRECTORS? Having top quality board members who can take a long-term view is critical for strong corporate governance, say leading business figures.

Sustainability investors often bang the drum for longer-term thinking.

But how realistic is this, given that all directors – and fund managers – must preside over quarterly reporting? Many board members also have tenures that may last only a few years, and most portfolio managers have mandates that are reviewed annually. The issue was hotly debated at the International Corporate Governance Network’s 2015 summer conference.

“I think the biggest issue we face is the whole long-termism versus shorttermism issue,” says Wendy Lane, a director of the US insurer Willis Group Holdings. “Clearly there has been a big rise in short-termism, particularly in the US, and even long-term investors have short-term reporting pressures of their

own. The biggest help for directors facing this issue is to ask themselves: is what you are doing in the long-term best interests of the company?”

She said that while she was a director of a US healthcare company during a boom period, “all we heard from shareholders was ‘you’ve got to repurchase shares, leverage up … we want cash back’. But we wanted to keep our powder dry.” The company eventually used its spare cash to buy a competitor and its share price went up. “We say to shareholders: we hear you, we see your pressures for value creation; but if you know what your long-term responsibility is, you can balance things out pretty well.”

Annell Bay, a director of US oil and

gas group Apache, says the short-term pressures can outrank the longer-term vision if the company goes through a bad patch. “If you have consistently poor results, quarter after quarter, something’s got to change. You have to show what you have laid out that’s going to show the shareholders you can achieve long-term success, and you’ve got to reconcile that.”

Michael Harland, Assistant Comptroller for ESG for New York City, says director tenure offers a classic example of mismatched timespans. “The management driving the ship has at most a three or five-year time horizon.

If they’re making an investment that may actually save the company 10 or 20 years down the road, then the current management is not going

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COVE R STORY

says Simon Walker, Director General of the UK Institute of Directors. “It starts with the chairman, who needs to demonstrate the highest standards of integrity and probity and set clear expectations about the company’s culture, values and behavior,” he says.

“That then needs to permeate through the company as a whole. One thing we saw in the financial crisis was how that had not applied at banks; it was a profound cultural problem.”

One senior investment banker who navigated the financial crisis agrees over culture. James Bardrick, Chief Executive of Citigroup Global Markets, says he changed the meaning of the CCO acronym which describes his job as Chief Country Officer for the UK to read as Chief Culture Officer. “We can’t regulate for a lot of things. We can’t regulate for conduct, we can’t regulate for behavior – only against the consequences of it,” he says. “So how do we get the outcomes to be better?

If the culture at both a personal level and an institutional level is incorrect, then it doesn’t matter how good your governance or planning is; the outcomes won’t be right.”

to be paid for that, so where’s the incentive? Nor are they going to be held accountable if their decisions which are focused on the short term end up blowing up further down the road, because they’re long gone.”

And investors have the same problem.

“What’s material over your 50-year time horizon may not be in five,” says Donna Anderson, Head of Global Corporate Governance at US asset manager T. Rowe Price. “Climate change for us, with our 2 to10-year time horizon in a typical fund, is much harder to get our arms around, and much harder to provide expertise on.”

QUALITY OF THE CHAIRMAN Good governance comes down from the top, so a good chairman is key,

YOU’RE FIRED! CHANGING OF THE GUARD Sometimes it may be necessary to fire directors, Bay says. “Every member of the board forms part of the culture, so if you refresh the board and bring new people in those new people will change the culture of the board, because someone with fresh eyes has the right to say: why are we doing it this way?”

Boards that cannot keep up with rapidly changing events present another problem, says lawyer Holly Gregory, Chair of the American Bar Association’s Committee on Corporate Governance. “It’s always struck me as strange that the pace of business change is remarkably rapid, but the pace of board turnover is very, very slow,” she says. “It seems to me that if a business is changing fast, you have to be looking every year to see whether the skills sets on the board are keeping up with the direction in which

the company is going. It’s hard to ask someone to leave a board, but maybe that’s part of the culture we need to change.”

Women on boards do improve returns Does having more women on boards actually generate higher returns?

Research conducted in April in a unique collaboration between Robeco’s Governance and Active Ownership team, its Quantitative Equity team, RobecoSAM and Tilburg University, suggested that it does.

“The results are promising: although we require more research to confirm the results, the data do show a positive link between board diversity and stock performance,” says Wilma de Groot, portfolio manager of Robeco Quantitative Equity and co-author of the research.

The objective of the white paper was to find out whether there is a link between gender diversity and stock returns, and to find an explanation for any correlation. RobecoSAM’s extensive database using information from questionnaires completed for over 3,000 companies measured how diverse the board was, and compared this with profitability.

“Portfolios of companies with higher board diversity were shown to outperform those with lower board diversity,” says De Groot. “This outperformance started in 2009, which corresponds with separate findings

by Credit Suisse which also found an outperformance of the high board diversity portfolio from 2009 onwards.

The outperformance is robust across markets.”

Robeco strongly believes that diversity in the organization based on gender and other factors is an important part of its sustainability strategy. Two of the five members of the company’s management board are women, including Leni Boeren, the director responsible for RobecoSAM.

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INTE RVIE W

Sustainability and fixed income: an integrated approach

EDITH SIERMANN, CIO Fixed Income & Manager SI

ESG integration has been applied for years in equity investments, but it has only recently started to gain widespread interest in fixed income. Edith Siermann, CIO Fixed Income and Manager of SI at Robeco,

and her team were one of the pioneers of ESG integration over six years ago. ESG information is now systematically analyzed in all stages of Robeco’s fixed income investment processes.

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INTE RVIE W

ESG integration in fixed income is not as common as in equities. Do you expect this to change?

“Yes, absolutely. In 2009, we started integrating sustainability information into our analysis of both government bonds and credits. This is a process, and even today it is still evolving.

Sustainability is now fully integrated in our fixed income investment processes and we can clearly monitor how it impacts our investment decisions. It has helped us to make better-informed investment decisions.”

Do you mainly use ESG to limit downside risk?

“Not necessarily. In our government bond strategies, for example, we can use ESG information to limit risks but certainly also to detect opportunities early on. In our top-down analysis, we use our in-house developed RobecoSAM Country Sustainability Ranking. Since 2009, our fixed income funds have used this ranking as an integral part of their investment processes. It is based on an extensive database for which we have selected ESG data that in our opinion are relevant for investment decisions.

Updated twice a year, it acts as an early-warning system which helps us to spot problems as well as opportunities in countries well before they are reflected in spreads, or are picked up by the rating agencies.

An example of an investment opportunity the ranking helped us to identify is Ireland. Its ESG profile has improved markedly, for example in the quality of bureaucracy and transparency of policymaking. This broad-based improvement has brought the ESG score back to the level of before the financial crises and close to that of a country like Germany. This partly drove our decision to increase investments in this market in spite of

‘In 30% of our investment cases for credits, ESG had a material impact on our view’

other risks like a lower liquidity in such a relatively small market.

A good example of a case in which an ESG score prevented us from investing in a country was Greece. The Greek bond market performed well in the first months of 2014 and a bond issuance in April and July was heavily oversubscribed. We did not participate, based on the lack of improvement in the Greek ESG profile. We steered clear of Greece well before the current crisis in this country.”

How does sustainability affect your credit investments?

“For our credit investments the focus is more on limiting downside risk.

For credits avoiding losers is more important than picking every winner.

A good risk management system at a bank, for instance, does not lead to a strong improvement in credit quality, but a weak one can actually lead to the bank’s total collapse. Integrating ESG factors into our analysis strengthens our ability to assess the downside risk of our credit investments. Next to a company’s business position, corporate strategy, financial profile and corporate structure, ESG is one of the five variables we analyze for every issuer.

Let me give an example. In the car

industry, manufacturers need to reduce CO2 emissions, as cars are one of the main sources of man-made CO2 emission. Car manufacturers are investing in R&D to reduce the emissions of their cars. As the required R&D spending will have a negative impact on the industry’s profitability, this ESG risk needs to be an integral part of our financial analysis.”

How important is ESG really?

“It has quite an impact. In our credit investments, for example, we currently find that in 20% of the investment cases, ESG information had a financially material negative impact and in 10% of the cases a positive impact on our fundamental view.

The way we systematically include ESG information in both our credit and government bond investment decisionmaking was recently acknowledged by the UN-supported Principles for Responsible Investment (PRI), which awarded us the highest scores for our approach to active ownership and for the integration in fixed income in each of the asset classes. For integration in both government bond and corporate bond investments our A+ score was significantly higher than the vast majority of the fixed income asset managers involved in the study.”

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COMME NTARY

The economy is a sub-system of the biosphere The economy and a sustainable Earth are the same thing, because one cannot exist without the other. That was the keynote speech of Per Bolund, Swedish Minister for Financial Markets and Consumer Affairs and a professional biologist, at a recent Responsible Investor conference. Here he outlines the challenges that remain in limiting global warming to two degrees before climate change truly damages the economy.

The image that there is a conflict between profits and sustainability is something that we need to leave behind us. We have to see that we’re in a new world where the two are

combinable, and if you don’t take sustainability into account when making investment decisions, you will lose out on profits in the future.

This has been a problem for the financial sector for some time. But to quote Bob Dylan: ‘The times they are a-changing’. We’re in a new era where we’re approaching a consensus that sustainability boost profits rather than subtracts from them.

THE ECONOMY IS A SUB-SET OF THE BIOSPHERE We are dependent on the climate of the planet on which we live – nobody disagrees with that. The economy is actually a sub-system of the biosphere, which provides us with the resources that the economy depends on. There are planetary boundaries that we cannot surpass if we are to have a sustainable economic and financial system. Research shows that there are nine of these boundaries and we have already crossed two of them: in loss of nutrients in the Earth, and in biodiversity.

For climate change we are surpassing another boundary. If we follow our current path it will be very bad for the economic prospects of the future. If we move to a world which heats up by 4 degrees Celsius, it will be quite hard to see how companies can make profits and how retired people of the future can get their pensions. We’ll have self-reinforcing cycles where the climate runs out of our hands and we can no longer retract the effects. If the Arctic ice melts it will heat up the oceans, release methane gas and lead to an extreme situation.

But we still have the possibility of moving towards a world in which global warming is limited to 2 degrees.

This requires us to act fast. We also have to have a strong policy, and this has been one of the main priorities of the Swedish government. We’re issuing a framework for climate change in Sweden that will set goals for the decades ahead, and be evaluated annually to make sure we stay on track.

CLIMATE CHANGE IS A GLOBAL SECURITY THREAT Climate change is a global security threat and the most serious challenge of our time. We need to stop investing in what is destroying our planet; investment in a better environment creates jobs and brighter prospects for the future. In the future it will be increasingly clear that the companies and those funds that haven’t done solid ESG work will be the ones that are likely to lose out to the competition and will not be able to provide profits to their investors. So we need to disconnect this image that there is a conflict between profits and sustainability.

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EX T ERNAL PE RSPECTIVE

‘Double voting rights are not the way to promote a long-term view’ DENIS BRANCHE Partner and Managing Director of PhiTrust You organized a shareholder initiative against double voting rights in France.

Why? We have been campaigning for French listed companies to opt out of the implementation of the French Florange law. As of 2016, this new legislation automatically grants double voting rights to investors that have held shares in a listed French company for more than two years, unless two-thirds of shareholders vote to overturn it. Supporters of this law say it rewards long-term shareholders. The assumption is that an investor with a two-year horizon evaluates companies differently from one who trades every few seconds.

Although we encourage long-term shareholding, we do not believe double-voting rights are the way to achieve this. In our view, a deviation from the ‘one-share one-vote’ system gives certain shareholders an amount of power that is disproportionate to their economic interests. In some cases it gives shareholders control of a company without them having to pay a premium (e.g. in the case of Vivendi). It also creates a new category of shareholders with specific rights.

The French market is characterized by state ownership of many companies.

Proposals approved by two-thirds of the votes become binding to the company.

Double voting rights will increase the power of block holders to successfully determine the outcome of voted resolutions. This will have significant consequences for the balance of power between block holders and minority holders.

What did you do to gain support for your campaign?

In October 2014, we organized a webinar for PRI signatories, explaining the issue and asking for their support.

In January 2015, we sent a letter to the chairmen of the boards of the 13 French CAC 40 companies that had not yet adopted a double voting rights structure. This letter was cosigned by 19 shareholders, together managing assets of over EUR 2,300 billion, including Robeco. We asked the companies to opt out of the implementation of the Florange law.

What did you achieve?

We engaged 13 companies in the CAC 40 index that did not have double voting rights before the Florange law was implemented. Ultimately, seven companies effectively refrained from implementing double voting rights, including cosmetics giant L’Oréal, property firm Unibail Rodamco, and construction firm Vinci. In addition, we filed two resolutions at the AGMs of Vivendi and Orange. Although they

Denis Branche is Partner and Managing Director of PhiTrust, a French asset manager that develops engagement strategies to promote good corporate governance. were not passed, mainly because of the opposition of large block holders, we got very good shareholder support.

All in all, we are very pleased with the results.

Why is this issue also relevant outside France?

It is likely that similar regulatory developments will take place in other European countries. The Florange law comes amid a wider European debate about the Shareholder Rights Directive.

This would potentially allow member states to deviate from the one-share one-vote structure. Some EU countries are already pursuing their own legislation on ‘loyalty’ shares. In June 2014 the Italian government adopted the so-called ‘Development Decree’, allowing listed Italian companies to issue shares with double voting rights.

This particularly benefits the holdings of the Italian government in stateand family-owned companies, which account for around 90% of Italian companies. This is not the way forward, in our view.

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IN THE PIC TURE

One man, one goal Ridding the ocean of its plastic pollution is too ambitious a goal? Boyan Slat (The Ocean Cleanup) disagrees. A single 100 km cleanup array, deployed for 10 years will remove 42% of the garbage - or 70,320,000 kg.

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Michel Porro / Contour by Getty Images

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EN GAGE ME NT CASE STUDY

The trials and tribulations of Big Pharma Half of all the results of clinical trials carried out on thousands of patients have never been made public, according to research by Sense About Science. The charitable trust runs the AllTrials campaign to try to disclose as many results as possible. Peter van der Werf, Engagement Specialist at RobecoSAM, is working with listed pharmaceutical companies to try to improve clinical trial transparency.

HOW IT WORKS We’re collaborating with BNP Paribas on clinical trial transparency based on knowledge from Sense About Science, and use that in our engagement with investee companies in our portfolios. We started in November 2014 in a collaborative engagement group that now contains 22 investors across the world.

For our engagement approach we developed an investor statement over two pages, really laying out the issues which we wanted companies we had asked to engage with to review. We then arranged to get these companies to join us in a conference call or meeting to discuss these issues. We looked at five different domains in clinical trials; the companies’ transparency policy; registration on these clinical trials; reporting the results; looking at specific clinical study reports, and finally how companies dealt with individual patient data.

SCORING COMPANIES Sense About Science developed company profiles based on 34 indicators relating to clinical trial disclosures, using publicly available information. We then went ahead and scored the 11 companies in our peer group and used the results to identify those companies with the best practices, and some which were below average. As an

50% Of the results of all clinical trials are not reported

600 Organizations have joined the AllTrials campaign

11 Companies are under engagement

investor we can take those best practice examples, show them to the laggards, and encourage them to improve.

At Robeco and RobecoSAM we have a working group consisting of five healthcare analysts from the equity, credits and SI research team all diving in. They are not just working on clinical trial transparency, but also on other issues in the healthcare sector, such as innovation management, business ethics, product quality management and access to medicine. We then put these findings forward to discuss with the companies during a conference call or company meeting.

So for us, clinical trial transparency is really a starting point for discussions that will take place over the next three years on all the other topics and we will feed that information back into the investment process.

ENGAGING IN A CONSTRUCTIVE DIALOGUE Eleven pharmaceutical companies are now under engagement. Of the bigger companies, GlaxoSmithKline has already signed up to the AllTrials campaign, while AstraZeneca, Johnson & Johnson and Roche have committed to a conference call to discuss the topics that we had put forward with our group of 22 investors, and we hope that this will help them to improve.

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COMME NTARY

Leaving your mark on the world without giving up returns Investors increasingly want to use their investments to achieve a positive social or environmental impact. Our ambition is to do this without compromising financial returns, says Daniel Wild, Head of SI Research & Development at RobecoSAM. “An increasing number of sustainable investors are moving on to the next stage: investments that do not only provide an attractive return on investment, but also generate measurable social or environmental impact,” says Wild. “This was already possible in private equity or microfinance, but increasing demand is now driving the creation of similar solutions in public equity and credits.”

HOW TO MANAGE YOUR IMPACT “The first thing you have to be able to do is measure the impact of your portfolio,” says Wild. Making the intended impact measurable is a typical feature required by impact investors. “At RobecoSAM we can help investors do this by using the RobecoSAM Environmental Impact Monitoring tool. Using quantitative indicators, we screen an investor’s

equity or credit portfolio to determine the aggregate environmental impacts of its holdings on four quantitative environmental indicators: greenhouse gas emissions, energy consumption, water use, and waste generation.

This gives investors an idea of their portfolio’s environmental impact per invested euro. They can use these insights to adjust their portfolio to maximize its positive impact, or limit its negative impact,” Wild explains.

NOT COMPROMISING RETURNS Investors may choose to simply invest in companies that sell products or services with a positive socioeconomic impact.

“That is certainly one way,” Wild says.

“At RobecoSAM many of our thematic funds invest in such companies. This is a very direct way of contributing and it can be a very profitable way as well.

However, not all investors are willing or allowed to make such a pronounced choice. They have to respect certain constraints and, for example, stay within a specific tracking error limit of a global equity index. For such investors we are developing strategies with significant impact and a relatively low tracking error against, for example, the MSCI World index. Such portfolios typically include firms across all sectors that apply best industry practices, resulting in improved resource efficiency and minimized emissions.”

“RobecoSAM and the Robeco Quant team are developing a quantitative environmental impact strategy, for example, which uses the MSCI World as a point of departure and only has a tracking error of 2% to 3% ,” Wild

continues. “This makes it suitable for many institutional investors.

In the first step of the process, the impact is achieved by taking the industry groups that are responsible for 80% of greenhouse DANIEL WILD gas emission, energy Head SI Research & Development consumption, water use and waste generation. By leaving out the 20% worst companies in only these industry groups, we already achieve a 20%45% relative reduction in the overall portfolio for the four indicators.” In a second step, the team builds the portfolio based on financial quant factors and the qualitative impact indicator. The qualitative indicator is the environmental score the company has in the RobecoSAM Corporate Sustainability Assessment (CSA), which includes key environmental and forward-looking management quality indicators for each company.”

Wild’s team is also working on social impact strategies focusing on single topics, such as gender diversity or children’s welfare. “These strategies have more concentrated portfolios and stocks are selected on the basis of the CSA and fundamental company valuation. Tracking errors are 3% to 5%,” Wild explains. “We expect them to go live in the course of this year.”

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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 © 2015 Robeco – all rights reserved.

Robeco Coolsingel 120, 3011 AG Rotterdam, The Netherlands editors-advance@robeco.nl, http://www.robeco.com/professionals/insights/ sustainability-investing/index.jsp