Advance magazine Q1 2015

PUTTING NUMBERS ON SUSTAINABILITY P.5

INVESTING IN THE SUSTAINABILITY OF ASIA’S GROWTH P.6 NO SMOKE WITHOUT FIRE: INTERVIEW WITH MARK GLAZENER P.8

ADVANCE SUSTAINABILITY INVESTING IN FOCUS | MAY 2015

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HIGHLIGHT

RI Europe conference 2015 Lead-sponsored by RobecoSAM, this year’s Responsible Investor (RI) Europe conference will be held in London on 2 and 3 June.

RI Europe is a network of over 100 asset owners and 500 delegates.

Attendees at RI Europe 2014 were responsible for over EUR 27 trillion in assets under management.

This year’s theme is strategic, risk-aware investing in a rapidly changing world. Michael Baldinger, CEO of RobecoSAM, will kick off the event, making a case for forceful stewardship. Other topics vary from environmental investing to dealing with external pressure from major campaigns such as fossil fuel divestment and social rights issues.

100 asset owners representing EUR 27 trillion in assets

David Pitt-Watson, Executive Fellow at London Business School and Chair of the UN Environment Programme Finance Initiative (UNEP FI), will discuss what the EU is doing to support long-term, sustainable institutional investment. We feature an interview with Mr Pitt-Watson on page 11 of this Advance.

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CO N T EN TS

COLUMN

In this edition of Advance: Willem Schramade urges us to quantify the impact of sustainability investing, Asia Climate Partners invests in companies that help keep Asia’s growth sustainable and Mark Glazener explains why excluding cigarette companies is not the answer.

4 Highlights The right ingredients for sustainable diets, and how car engines can cut CO2 emissions.

5 Show me the impact Sustainability needs to be quantified in order to really integrate it into the investment process.

6 Cover story: Investing in the sustainability of Asia’s growth Private equity joint venture Asia Climate Partners invests in companies offering solutions to Asia’s challenges.

8 Interview: No smoke without fire Mark Glazener explains why he prefers an active dialogue with cigarette companies to simply excluding them.

10 ESG integration is a form of prudent risk management How to integrate ESG data into quantitative equity strategies.

11 External perspective David Pitt-Watson argues that investors can use their muscle to bring about climate change.

14 Engagement case study As various scandals have exposed the risks of data privacy, Danielle Essink explains how she engages with internet and telecom companies on the issue.

15 The French connection to sustainable credits How ESG is being implemented in European corporate bonds.

Staying at the forefront Ten years ago, Robeco became an active owner and started to vote and engage its investee companies. Back then, we were a true pioneer, and we have continued to be at the forefront ever since.

Right from the start our active ownership activities were not driven by mere legal or compliance considerations. Instead, we had a fundamental conviction that Robeco should be a responsible steward for the assets entrusted to us. We undertake our active ownership activities from an investor’s perspective, aiming to add value to companies, on behalf of clients and for our own portfolio managers.

Over the years this approach has become more and more refined, and our engagement activities have been fully integrated into Robeco’s Sustainability Investing (SI) proposition, together with RobecoSAM’s SI research and the financial analysis of Robeco’s and RobecoSAM’s portfolio managers. Some of the results of the past decade were getting independent members elected on boards, and convincing senior executives of the need to incorporate issues such as carbon management, obesity and diversity into their business practices. To push for results, we were involved in many meetings and visits throughout the world, including to oil wells in Nigeria and coal mines in India. Last year, the icing on the cake was that the UN-supported Principles for Responsible Investment awarded Robeco top scores for its approach to active ownership. Over the years we have continued to evolve. The last step in this evolution is that our engagement findings are now integrated into our financial analysts’ new investment cases, both in equity and fixed income. In the last ten years we have been able to set up one of the leading active ownership teams in the industry, and I’m looking forward to seeing what we can achieve in the next ten years.

CAROLA VAN LAMOEN HEAD GOVERNANCE & ACTIVE OWNERSHIP

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HIGHLIGHTS

Car engines are key to cutting CO2 emissions

Car engine innovation is key to CO2 reduction, and those manufacturers that produce the best new ideas may become the best investments, says Evert Giesen, an analyst within Robeco’s credit team.

“As the car industry is one of the largest sources of man-made CO2 emissions,

car manufacturers who can deal with this challenge in an innovative way, can be attractive for us as investors,” he says. “However, the higher R&D spending required will have a negative impact on the industry’s profitability and this needs to be compensated for by higher spreads.”

“Global car sales have risen substantially over the past decade, driven by emerging markets, with

China leading the pack. So the only way to reduce or stabilize CO2 emission is to reduce emission per vehicle.” Evert says ways in which innovation can help include the development of more efficient combustion engines, including the growing use of systems that turn off the engine when the car is stopped in traffic. He also highlights hybrid cars, where the combustion engine is supported by an electrical engine, or in some cases the car drives fully electrically over short distances. This has proven to be workable since Toyota introduced the Prius in 1997.

And don’t rule out greater use of ‘fuel cell powertrains’, which use hydrogen to generate power for electric cars.

Toyota along with Hyundai and BMW have introduced, or are working on this,” he says.

The right ingredients for sustainable diets Ingredient companies hold the key to improving health and well-being through better-quality food, says Robeco equities analyst Vera Krückel.

As obesity becomes more of a problem, and diet-related illnesses put more of a strain on health services, a drive to make food ingredients less fattening would help enormously, she says.

“Health & wellness considerations gain increasing importance in a world where salt, sugar and fat make up the

majority of various packaged foods,” says Krückel. “Some cereals targeted at kids, for example, contain up to 60% sugar. Obesity and the resulting illnesses are becoming problems of epidemic proportions.”

Krückel recently joined forces with Robeco’s credit analyst and RobecoSAM’s sustainability analyst, visiting several companies in Switzerland to discuss especially health & wellness-related ESG considerations with food manufacturers.

60% the sugar content of some cereals, many of which are targeted at children

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COMME NTARY

Show me the impact - putting numbers on sustainability It’s easy to claim that sustainability is important. But it’s a lot harder to show it is, let alone quantify and monetize it. Willem Schramade, Sustainability and Valuation Specialist in Robeco’s Global Equity team, outlines the problems and the solutions to them.

WHY QUANTIFICATION IS DIFFICULT There are several issues with the quantification of sustainability. The first is measurement, and the lack of data. A lot of sustainability issues can hardly be measured, or not at all for individual companies, let alone for whole datasets or portfolios. This situation continues to improve though.

Then there is the confusion that surrounds the issue. What do people mean when they say ‘quantification’? Very often they mean ESG data that can be measured using past experience, such as a company’s reduction in greenhouse gas emission.

That is interesting in itself, but is not necessarily what we’re looking for when making decisions. For that, we need forward-looking and comparative numbers.

Finally, there seems to be a lack of courage in dealing with the problem. Many analysts are great at backward-looking precision, but they don’t dare to make assumptions beyond extrapolation of the past, or company guidance. Or they simply claim “It’s already in my model”, without producing any way of showing it.

There are several types of quantification: measuring Key Performance Indicators (KPIs); using ratings; measuring relevance to shareholder value; and measuring true price / societal value.

MEASURING KPIS Companies increasingly try to capture their sustainability performance in KPIs. This is very useful as it provides context and base rates for forward-looking analysis and target setting. On the negative side, there is no monetization, and a major risk lies in stopping there while ignoring what isn’t quantified in this way.

USING RATINGS Sustainability ratings score companies on hundreds of metrics. They have received plenty of criticism: they’re said to be too much of a black box, backward looking, failing to include materiality, and measuring transparency rather than performance.

To some extent that is true. But ratings are improving, and they have a very useful role to play: they are great for quantitative analysis and reporting.

MEASURING RELEVANCE TO SHAREHOLDER VALUE As an investor you need to ask yourself how sustainability affects companies’ financial performance. To achieve that, we at Robeco Global Equity make the valuation impact explicit by identifying the factors we deem to be most material; analyzing the impact of those most material factors on a company’s competitive position; and expressing that competitive (dis)advantage in adjustments to our value driver assumptions (sales growth, margins, capital needs, and cost of capital).

MEASURING TRUE PRICE / SOCIETAL VALUE Unlike the previous three methods, true prices do aim to capture the costs of products to society, which can be substantially higher than market prices.

This is the most advanced form of quantification. Interest in the approach is clearly picking up and some companies have even started reporting on it. Unfortunately, it is hard to do even for insiders, as you need strong data and assumptions.

SO WHAT TO DO? There is a clear trend towards quantification, which is good as it will make our data and decisionmaking ability even better. However, one should always be mindful of the drawbacks. Remember what Einstein said: not everything that counts can be counted and not everything that can be counted counts.

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COVE R STORY

Investing in the sustainability of Asia’s growth Joint private equity initiative Asia Climate Partners1 invests in successful companies that offer solutions to Asia’s sustainability challenges.

Emerging Asia, especially China, India and Southeast Asia, has been marked by strong economic growth, urbanization and consumption.

However, sustainable growth in the region is compromised by soaring resource demand, environmental pollution and, in rural areas, low access to services.

SOLUTIONS To continue showing strong growth and ultimately catch up with western economies – emerging Asia has to address some very concrete challenges.

Over the next 20 years, energy demand is expected to grow three times faster than in the rest of the world. The region is increasingly dependent on coal 1

and oil imports and exposed to price volatility. India and Southeast Asia kept up unsustainable fossil fuel subsidies for years, providing little incentive to push for industrial or agricultural efficiencies.

Growing pollution of water, air and soil has an impact on industrial production but also on looming remediation and public health costs. And while increasingly wealthy urban citizens generate more consumption (and waste), hundreds of millions in rural areas do not have access to reliable electricity, water and sewage networks.

Thanks to innovation and scale, a number of cost-competitive solutions to these challenges now exist in the clean energy, resource efficiency and

environmental industries. Solar and wind power is economically viable in many regions, especially in rural and distributed applications. Energy efficient technologies are available for industrial processes, transportation or buildings.

And new business models utilizing big data or the sharing economy make their way to Asia. Governments in the region, many new like India’s or Indonesia’s, have set ambitious economic and environmental targets supporting the transition to sustainable growth. Much like with the rapid adoption of mobile communication, emerging Asia could leapfrog western economies into the adoption of renewable energy and resource efficiency technologies.

Any reference to Asia Climate Partners in this article refers to Asia Climate Partners General Partner Ltd. acting on behalf of Asia Climate Partners LP.

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COVE R STORY

industry sectors that have a positive environmental and social impact.

“These are large and fast-growing markets in Asia with a compelling longterm outlook and solid government and societal support,” says Roland Pfeuti, Managing Director in Asia Climate Partners’ advisory team in Hong Kong. “These sectors have already become sizeable markets in emerging Asia with the potential for continued strong future growth.

According to the International Energy Agency, the expected compound annual growth rates to 2020 are as high as 50% for solar electricity generation in China and India, for example.”

ASIA CLIMATE PARTNERS1 INVESTS IN THE SUSTAINABILITY OF ASIA’S GROWTH Last year, Robeco, the Asian Development Bank (ADB) and Japanese financial group ORIX set up Asia Climate Partners1 to undertake private equity investments in environmentally supportive, low-carbon transactions throughout emerging Asia.

Asia Climate Partners’ activities are supported by a team of experienced private equity professionals in Hong Kong, including specialists from Robeco and ADB. It will be dedicated to investing in renewable energy, resource efficiency and environmental

GOVERNMENTS AND CONSUMERS Various Asian governments have adopted a wide range of policies and regulations to promote clean energy, resource efficiency and environmental protection. In addition, increasingly wealthy consumers are putting pressure on governments to create the framework for a clean environment.

“China has become a leader in the establishment of such policies,” Pfeuti explains. “The Chinese Five-YearPlans include a growing number of environmental targets, such as new air quality standards. According to the Chinese National Bureau of Statistics, in 2014 over 90% of the 161 cities in China monitored for air quality exceeded the annual limit imposed by national air quality standards.”

Asia Climate Partners aims to invest in established businesses with positive earnings. “Such companies already have economically viable solutions and an established client base,” says Pfeuti. “However, their next phase of growth may require an external trigger. Especially family- or founderowned businesses can offer plenty of opportunities for us to optimize their profitability, and introduce best business practices and compliance with international standards. Examples are renewable energy (wind, solar, biomass) generation platforms, and providers of waste and water treatment services.”

POTENTIAL FOR HUGE GROWTH Asia Climate Partners believes that the immense demand for environmental solutions, combined with emerging Asia’s strength in manufacturing and industrial companies, will provide attractive investment opportunities.

Private equity investments can help these companies grow into regional and international leaders by contributing capital and skills.

“Currently few private equity funds are active in this space,” says Pfeuti.

“Investment in renewable energy and resource efficiency has the potential to grow at 2-3 times Asia’s economic growth over the next decades.”

NOTICE TO READERS “This document has been prepared by Asia Climate Partners General Partner Ltd. (“ACP”) supported by Robeco Hong Kong Limited, ORIX Corporation (“ORIX”) and Asia Development Bank (“ADB”). Without further explanation this presentation cannot be considered complete. This document is furnished for informational purposes only and is not, and may not be relied on in any manner as, legal, tax, investment, accounting or other advice or as an offer to sell or a solicitation of an offer to buy an interest in Asia Climate Partners, L.P. (the “Fund”). A private offering of interests in the Fund will be made only pursuant to (i) a confidential private placement memorandum (together with any supplements thereto, the “Memorandum”), (ii) the limited partnership agreement of the Fund (the “Partnership Agreement”) and (iii) the Fund’s subscription documents (such documents under (i) through (iii) together, the “Fund Documents”), which will be furnished to professional and other qualified investors on a confidential basis for their consideration in connection with such offering.

Certain information contained in this document has been obtained from published and non-published sources prepared by other parties, which in certain cases have not been updated through the date hereof. While such information is believed to be reliable for the purpose used in this document, ACP does not assume any responsibility for the accuracy or the completeness of such information, and such information has not been independently verified by ACP. Except where otherwise indicated herein, the information provided in this document is based on matters as they exist as of the date of preparation and not as of any future date, and will not be updated or otherwise revised to reflect information that subsequently becomes available after the date hereof.”

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INTE RVIE W

No smoke without fire – why excluding cigarette companies won’t work MARK GLAZENER, portfolio manager with Robeco Global Equities

Reconciling profits from ‘sin stocks’ with an asset manager’s other duty to make money for investors in a responsible way remains a gray area. And exclusion isn’t always the answer, says Mark Glazener, portfolio

manager with Robeco Global Equities. He says the much-maligned tobacco industry is a prime example of the dilemma facing sustainability investors.

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INTE RVIE W

Why do we invest in tobacco stocks when cigarettes are a health risk?

“Investors and wider society certainly agree that smoking is bad for your health, and has become the single most preventable cause of premature death for millions of people. The problem for investors is that excluding cigarettes companies would directly impact relative returns. Not only do they make strong profits – due largely to customers who are literally addicted to the product – they have also consistently outperformed markets.

Recent research showed that US tobacco company shares have returned 14.6% a year since 1900, or 5% more than the rest of the stock market. For investors, such outperformance is hard to resist given the fiduciary duty to make decent returns to pay pensions.”

Is exclusion not then appropriate in this case?

“No. Excluding certain sectors limits your possibilities as a fund manager to engage with these companies, or vote against them. When you engage in an active dialogue with them, you can encourage them to become more responsible, for example, in their marketing strategies. When you exclude them, you don’t have any influence whatsoever. So we only do that as a last resort, or when it is required by law, like with cluster bomb makers. Instead, we apply a bestin-class principle to the fund which contains tobacco stocks. And as long as these shares continue to perform above average, many investors will continue to buy them. The industry has survived billions of dollars in claims, the ban on smoking in public places, shocking messages on cigarette packs and even a ban in Australia on printing brand names on packets. But these shares have proven pretty much immune to every type of headwind.”

‘Excluding certain sectors limits your possibilities as a fund manager to engage with these companies, or vote against them’

Can cigarettes companies remain profitable when there are campaigns to make them extinct?

“Tobacco manufacturers have the opportunity to increase their margins each time the excise duties are raised.

One major irony of the tobacco industry is that it is in itself highly sustainable. While millions of people have quit smoking, particularly in the more health-conscious West, the demographics still support the tobacco industry. About 20% of the Western population regularly smokes cigarettes – a market share that is shrinking only very slightly – but the amount of smokers in more populous (and less health conscious) emerging markets is higher. Meanwhile, the total world population is rising, and therefore the number of users also continues to rise.”

Can this success continue if governments make life harder for tobacco companies?

“Basically, volumes are falling slightly worldwide – but this is more than made up for by the margins. In

addition, the production costs rarely increase, and tobacco manufacturers are not allowed to advertise – saving them millions each year. Unilever invests 11% of its budget in advertising.

The momentum in the tobacco industry can be maintained at least until 2020, thanks to the increasing prices that are compensating for the slight decline in volumes. But the prices of cigarettes cannot continue to rise without challenge, in particular because the majority of users are from low income groups. During the financial crisis, the turnover in Italy and Spain plummeted because smokers switched to imitation brands, bought via the illegal circuit.

Another tailwind is that there has been no major consolidation in the tobacco industry for decades. Barring a few specific players, there are but three big global names: British and American Tobacco, Philip Morris and Japan Tobacco. The competition from e-cigarettes doesn't pose much of a threat either.”

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COMME NTARY

ESG integration is a form of prudent risk management There is no one-size-fits-all for ESG integration. What is material varies per sector, emerging markets have other issues than developed markets, and fundamental strategies require a different approach than their quantitative counterparts.

Wilma de Groot, portfolio manager in Robeco’s Quantitative Equity team, explains how she integrates ESG data into quantitative strategies.

A key feature of our approach is that companies with a favorable ESG score have a higher chance of ending up in the portfolios, as we ensure that the portfolio’s ESG score is at least as strong as that of the benchmark or

reference index. This implies that we also positively screen stocks, contrary to an exclusion policy, which only allows for negative screening.

SUSTAINABILITY MEASURED BY ROBECOSAM SCORES To measure sustainability, we build on the experience of RobecoSAM. Every year since 1999, RobecoSAM obtains financially material information from a range of public sources and directly from companies by inviting them to the annual Corporate Sustainability Assessment (CSA) survey. RobecoSAM has one of the largest proprietary corporate sustainability databases containing over 3,000 companies.

Dedicated sustainability researchers integrate the latest sustainability insights into the survey and analyze the information obtained.

RobecoSAM follows a best-in-class approach. Companies receive a RobecoSAM score between 0 (lowest) and 100 (highest) on environmental,

social and corporate governance factors and are ranked against other companies in their industry. The growing attention for sustainability is reflected by year-on-year increases in the company participation rate.

RobecoSAM’s coverage has increased significantly in emerging markets, with around 75% of the companies in the MSCI Emerging Markets index now being covered. In terms of market capitalization this is more than 90% of the index. This allows for a consistent integration of sustainability into all quantitative products. The sustainability scores are further enhanced in-house to be most effective for our quantitative strategies.

In the portfolio construction phase we ensure that the portfolio has a weighted sustainability score that is at least as high as that of the relevant benchmark or reference index.

This implies that companies with a favorable sustainability score have a higher chance of ending up in the portfolios, especially during moments when this is most needed, namely when the portfolio score is on the low side.

UNCHANGED RISK-RETURN CHARACTERISTICS Empirical analyses show that the improved sustainability profile can be achieved while maintaining the same attractive exposure to the quantitative model factors. Stocks with corporate governance issues or major litigation or regulatory risk may be excluded from the investable universe.

We consider the integration of sustainability factors to be a form of prudent risk management. Our form of ESG integration avoids the risk of being overexposed to less sustainable companies, and our empirical results show that this is associated with unchanged risk/return characteristics.

This is in line with our general risk management philosophy to avoid all risks which are not rewarded with higher returns.

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EX T ERNAL PE RSPECTIVE

‘You’re a player both as an investor, and in the influence you can bring to bear’ DAVID PITT-WATSON UNEPFI How is the UNEPFI making a difference?

We are trying to catalyze action; and there is lots going on within the finance industry. One example is the Principles for Sustainable Insurance, which is only three years old, but already has 13% of premium income in the world signed up to it. We are helping to push carbon monitoring of investment portfolios, and then carbon reduction. We are also trying to get financial regulators to take seriously the challenge from scientists that if they are trying to create a sustainable financial system, they need to consider environmental sustainability. For years, UNEPFI has been the champion of clarifying fiduciary duty. That is now moving on from asking whether it is in your fiduciary duty to address climate change issues, to saying ‘can you be a serious fiduciary if you don’t?’

Given that the UN faces enormous global problems, is sustainability investing taking a back seat?

Greece, Ukraine or anything else don’t stop you from reaching a climate deal. Some people absolutely wrongly think the addressing of green issues stifles economic growth when we have a lot of unemployed people and financial problems, but it just starts in completely the wrong position.

The mobilization of USD 225 trillion of assets that we have in financial markets to find USD 1 trillion dollars per year that will over 25 years give us a sustainable energy and transport system is a fantastic opportunity for investment. So when people say we have ‘bigger problems’ they are usually coming from the wrong starting point in believing that there is a net cost to doing this. In fact there is a net cost to not doing this.

What are your expectations from this year’s Climate Change Conference?

I would be really surprised if you see something that is a clear, crisp slamdunk agreement. It’s a very messy process that is making some sort of progress, but it’s not going to come in a clean way where regulation is put in place and then the financial markets respond to it. There is a lot of stuff going on now, such as US President Barack Obama’s initiative to reduce emissions from coal-fired power stations and the green credits policy in China. Many in the US Congress are still skeptical about climate change, and since they need to formally ratify a treaty, it makes little sense for climate negotiators to take that route. What we’re more likely to see is each country coming up with its own plan on how it is going to reduce its carbon emissions.

David Pitt-Watson is Executive Fellow of Finance at the London Business School, and chairman of the United Nations Environment Programme Finance Initiative.

What is the single-most important thing that policymakers can do to facilitate SI? Set a tax on carbon or specific carbon targets and then enforce them in every country. However, we don’t have a neat system of global governance, and so this won’t happen overnight. That is why investors become players rather than spectators; they can make a real difference and make a return on it. If investors really put an effort into saying the companies we own should stop lobbying against a climate deal being done, and saying they will vote against the directors of these companies who are doing this, it will make a huge difference. Plus you’ll get a bigger return on clean investments: you can do environmental and social good, and make a profit out of it, by doing the right thing. You’re a player both as an investor, and in the influence you can bring to bear. We can use our investment and governance powers to push the world in the right direction.

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IN THE PIC TURE

0

liters of fuel

Solar-powered airplane Solar Impulse 2 is currently attempting to finish the First Round-TheWorld Solar Flight. The plane is able to fly day and night on solar power, without a drop of fuel.

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EN GAGE ME NT CASE STUDY

Data privacy: who is watching Big Brother?

115mln No. of Europeans using mobile banking by end of 2015

10% Of UK consumer spending is done on the Internet

An increasing amount of scandals reported in the news have revealed the risks involved with data privacy. However, this topic is under-researched in the investment industry. As the risks can impact companies’ earnings, it is important to create more transparency. Engagement specialist Daniëlle Essink researched the issue.

THE ICT SECTOR BEARS THE BRUNT OF THE RISKS In a world that is constantly digitizing, data privacy issues pose risks for companies from a broad range of industries. According to a study by MSCI, the ICT sector bears most of the risks. Violations of the right to privacy and freedom of expression may result in lawsuits and fines, negative attention in the press, customers’ mistrust and, eventually, loss of market share. As all these factors can have a negative impact on a company’s revenues, they are financially material.

DATA PRIVACY IS A KEY ISSUE FOR TELECOM AND INTERNET COMPANIES Within the ICT sector, telecom and internet companies are most at risk. Ties between governments and telecom companies are tricky, as in some situations companies need to comply with requirements for interrupting communications. As such actions often conflict with international conventions for human rights, they carry large reputational risks. In addition, consumers are increasingly concerned

12 Companies under engagement

about companies gathering their data, often without their explicit consent, while governments and security agencies also have access to sensitive customer data in their efforts to counter terrorism.

STARTING AN ACTIVE DIALOGUE We will start an engagement with seven internet companies and five telecom companies, including Apple, AT&T and Telefónica. We will focus on issues ranging from the monetization of user data and human rights, to privacy and freedom of expression. For the first topic, the business model of companies such as Facebook and Google fully relies on monetizing user data. We cannot change this, but will focus, for example, on these companies’ privacy policies.

Facebook, for example, has received quite a bit of media attention after the company published its new privacy policy. The way in which the company presented this was very good, using clear language and pictograms to explain the basic content. However, the policy itself distinctly eroded users’ data privacy.

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COMME NTARY

The French connection to sustainable credits France’s staunchly social principles provide an excellent insight into how ESG is being implemented in European corporate bonds.

seen today in the fact that three of the five pillars used in ERAFP’s charter are socially related. It’s also because VIGEO also grants such high weights to social criteria. This tends to direct how fund clients and providers behave.”

The strong labor movement tradition in France means the ‘S’ in ESG is more important than in most other countries, says Nicolas Bénéton, sustainable investment specialist for Robeco in Paris. How it works in practice can be seen in how the Robeco Euro Sustainable Credits fund chooses which companies to invest in, says the portfolio’s manager, Jan Willem de Moor.

Both the giant ERAFP pension fund for French public employees and the highly influential French financial rating agency VIGEO highlight labor rights as pillars of their operating charters.

These include ‘social progress’, ‘social commitment’ and ‘employee democracy’ along with a commitment to fundamental human rights. “It’s true that in France we have a social consciousness that is quite important,” says Bénéton. “It’s also a reason for the presence of trade unions on many corporate boards, institutions and retirement schemes.”

STRONG SOCIAL BIAS “The social bias that we have is due to historical reasons, which can be

Bénéton says this behavior is largely directed by using a best-in-class strategy, as the French corporate bond market is dominated by banks and insurers who tend to follow the benchmark. “Insurance companies have been the main investors in corporate bonds for many years,” he says. “So in France, the ESG approach is largely a best in class policy per sector.”

“This has been very much inspired by what has been done on equity funds.

So we’re now moving to a situation where the ESG criteria that are applied to equities are now being implemented for credits.”

COMPARING APPLES WITH APPLES De Moor says France’s favored bestin-class approach is also his principle means of selecting stocks for his Euro Sustainable Credits fund, using data from in-house sustainability investing specialist, RobecoSAM. “We use a best-in-class approach that compares apples with apples in the same sector, and then we choose those with the best sustainability profiles using the input we receive from RobecoSAM,” says De Moor. “Then we simply take out the bottom half and only invest in the top half. So we rank all the companies in each sector and then eliminate the 50% that score the

worst. In general for credits we’re looking to minimize the downside risk rather than optimize the upside, though of course we’re still looking to outperform the market.”

De Moor says that while JAN WILLEM DE MOOR social principles are portfolio manager important, he ­generally gives greater weight to the ‘G’ in ESG. “We use all three aspects of ESG, though from the credit perspective we tend to focus more on corporate governance. In some cases, the ‘E’ environmental aspect will be more important, such as for energy or chemical companies, but for the fund we take all three factors into account,” he says.

GOOD DELEVERAGING STORY De Moor says in terms of the choice of actual credits, he prefers financials along with bonds from outside the Eurozone periphery. “Up to half of the market for euro credits consists of financials, and we like the deleveraging story, particularly in the banking sector; it’s an improving credit story,” he says.

“We pay a lot of attention of course to the ­regulatory picture, including fines, when we look at the governance ­aspect.”

And does the strategy work? “Almost every year we have outperformed the benchmark and also other funds, so we don’t want to just compare ourselves with other funds that use ESG, but with the entire market,” he says.

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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 © 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