The importance of integrating ESG from an investment perspective

2 | SUSTAINABILITY INVESTING

Introduction Sustainable investing (SI) is a source of added value and improves the risk-return profile of your portfolio. As pioneer and leader in the field of SI, we are convinced that companies that focus on sustainable development will have a competitive advantage in the long term. It is expected that this will lead to better market performance. However, we see that the market is still underestimating this factor and that many investors do not yet integrate sustainable investing and ESG criteria (environment, society and governance) into their investment strategies.

There are different approaches for SI: exclusion (mainly applied by Anglo-Saxon companies), integration of ESG criteria (in our opinion this is the best approach), or thematic investing aimed at companies that take certain sustainability issues into account in their production and services.

As front runner in the field of SI, Robeco manages a capital of EUR 86 billion in investments whereby ESG criteria are taken into account. We have been focusing on sustainability investing since the end of the 1990s and we established one of the first sustainability funds in the world in 1999. We have now gained the necessary experience to choose the best approach. We are a signatory of the United Nations Principles for Responsible Investment (UNPRI). After the acquisition of RobecoSAM - a specialist in SI - in 2006, we decided, in 2010, to integrate ESG criteria from then on in all our investment processes and categories.

We are convinced that taking ESG criteria into account provides for a better investment decision and is necessary for a better insight into the risks and opportunities that the companies in which we invest present.

It turns out that these criteria generate extra returns in addition to the existing sources of profit. Applying these criteria should not be regarded as a limitation, but as added value for the traditional financial analyses.

Sustainability is one of the spearheads of our investment policy.

Nick Shaw, Head of Global Financial Institutions at Robeco

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Leader in integrated sustainability Sustainability investing has long been in Robeco’s DNA, as one of the first asset managers to take it seriously in the end of the 1990s. Robeco has incorporated ESG criteria as part of the investment process since 2010, having earlier launched its first sustainability investment strategy in 1999. Over the past two decades we have become an industry leader in not only offering sustainable funds, but also in integrating sustainability information across our fixed income and equity strategies.

We firmly believe that considering financially material ESG factors strengthens our investment process and ultimately leads to betterinformed investment decisions. We also believe that sustainability is a long-term driver for change in markets, countries and companies, which in turn can impact future performance. This integrated approach to sustainable investing is now reflected in EUR 86 billion of assets under management.

Three key elements Our integrated sustainability approach is based on three key elements – access to leading research, ESG integration and active ownership.

Research is key in Robeco’s processes; our first CIO in 1929 stated that “every investment decision should be research-driven”.

Our sustainability investing specialist, RobecoSAM, provides ESG data and research through its Corporate Sustainability Assessment and Country Sustainability Ranking. These focus on company or country-specific issues that drive long-term growth and/or profitability. We incorporate these insights into our investment strategies in a tailored way to generate better risk-adjusted returns. It is a truly integrated sustainability approach that has proved successful in the years over which it has been progressively

developed. With our active ownership approach, we engage with companies to improve their performance on ESG. In short, we resolutely believe that: – Integrating ESG factors into investment analysis and decision-making processes improves risk/return ratios and leads to better-informed decisions – Considering ESG factors leads to more comprehensive assessments and valuations, resulting in the earlier discovery of investment opportunities – Exercising ownership rights through voting and engagement enables us to create additional long-term value, while also taking responsibility as an asset owner.

Focusing on the materiality of ESG One reason why we treat sustainability investing with such importance is our belief in the financial materiality of ESG. Sustainability has long moved on from the idea that it is an environmental crusade, or that it is ‘nice to have’ as part of the investment approach. Put simply, we believe that companies which already use ESG will have better riskadjusted returns in the long run. This feeds through into their asset prices, and means that asset managers make better returns for their clients.

“Materiality from an investment perspective means that the issue can change an investor’s investment decision, since it has a decent probability of seriously affecting the company’s value drivers and valuation,” says Willem Schramade, an ESG specialist within the Global Equities team at Robeco.

“Think, for example, of the drive to reduce greenhouse gas emissions, which hurts polluters and benefits producers of solutions like catalysts, and wind turbines. Although such material issues are often labelled ‘non-financial’, the label is misleading: they can have a significant financial impact.”

The 2016 article in the Accounting Review by Mozaffar Khan, George Serafeim and Aaron Yoon entitled ‘Corporate Sustainability: First

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Important information

The services to which this publication relate are intended for UK professional investors and this publication must not be relied or acted upon by any other persons. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.