Advance magazine q4 2015

ENGAGING WITH CARBON COMPANIES P.6

MY PERSONAL JOURNEY INTO SUSTAINABILITY INVESTING: INTERVIEW WITH SOLANGE ROUSCHOP P.8 DIGGING DEEPER INTO MINING P.10

ADVANCE SUSTAINABILITY INVESTING IN FOCUS | NOVEMBER 2015

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HIGHLIGHT

The unstoppable advance of sustainability investing Sustainability investing is here to stay. According to the latest Global Sustainable Investment Review, the global SI market has grown by over 50% in two years, from USD 13.6 trillion at the onset of 2012 to USD 21.4 trillion at the start of 2014. This represents more than 30% of the professionally managed assets in the regions covered.

With almost 59% of investments being managed sustainably, Europe heads the pack. At the other end of the spectrum is Asia, with just under 1%. However, across this region the landscape is beginning to evolve as well, in part driven by the increasing awareness of the massive capital needed to finance the region’s transition to a low-carbon future.

USD

21.4 trillion Size of the global SI market (start of 2014)

The largest sustainable investment strategy globally is negative screening/exclusions (USD 14.4 trillion), followed by ESG integration (USD 12.9 trillion) and corporate engagement (USD 7.0 trillion).

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CO N T EN TS

COLUMN

In this edition of Advance: engaging with companies to lower their carbon footprint is more effective than divesting fossil fuel companies altogether; Solange Roushop explains how she integrates sustainability into ABN AMRO’s daily retail and private banking business; and Howard Covington wields legal power to fight climate change.

4 Highlights Emerging markets have more pressing issues than ESG, and a record number of delegates attend PRI in Person.

5 Analyze this: valuing carbon exposures Willem Schramade says investors can do more to value the impact of carbon exposures in their company analyses.

6 Cover story: Engagement can cut carbon footprints Divesting fossil fuel companies is not the most effective way to decarbonize portfolios.

8 Interview: From the smog of Asia ABN AMRO’s Solange Rouschop on why it makes sense to oversee both investment services and sustainability.

10 Digging deeper into sustainability in mining Sustainability risks can have a major impact in the mining sector. Credit analysts can add much value by including these risks in their analysis.

11 External perspective Howard Covington, trustee at ClientEarth, uses the law to help combat climate change.

14 Engagement case study Sylvia van Waveren says European utilities need to have ambitious environmental strategies in order to survive.

15 Sugar: the new tobacco?

US professor Robert Lustig says food companies need to change their business models.

For professional investors only

Good COP, bad COP There are few better examples of how sustainability investing has moved from an environmental crusade to financial materiality for investors than the issue of global warming. What used to be solely an issue for pressure groups is now firmly on investors’ radar. The reason? Cutting carbon emissions will mean a radical rethink by investors on what company securities they should buy and sell as businesses adapt to constraints placed upon business models.

It’s not just a simple matter of using exclusion on companies deemed to be emitting too many greenhouse gases in the same way that investors have shunned weapons manufacturers or some ‘sin stocks’ in the past. Reducing global warming means cutting our reliance on fossil fuels while redefining manufacturing processes that make up the global economic system. That’s easier said than done; the world is going to be dependent on coal to generate electricity and petrol to drive cars for many years yet.

So what to do? Robeco has long argued that using engagement, rather than exclusion or divestment, is a better way to effect the change needed. Some currently extremely large companies such as the oil majors and utility powerhouses will need to fundamentally change their business models in order to move towards a global energy system based on renewable sources. This in itself will create the problem of stranded assets; vast reserves of coal and oil that cannot be burnt if the world is to limit global warming to 2°C. In order to commemorate the upcoming 21st United Nations Conference of the Parties (COP21), which will meet in Paris to try to hammer out a new globally agreed climate change strategy, we focus this month on investor involvement in cutting greenhouse gases. Our cover story, ‘Using engagement to lower carbon footprints’, explains how Robeco tries to tackle the problem. We hope you enjoy reading it.

MATTHIAS NARR, ENGAGEMENT SPECIALIST, ROBECOSAM

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HIGHLIGHTS

Being sympathetic to higher priorities in emerging markets Meanwhile, pro-active engagement with emerging market companies is really showing some results.”

The reluctance of many emerging market countries to embrace sustainability becomes understandable when you consider their more pressing problems, says Robeco portfolio manager Fabiana Fedeli.

“They have other priorities such as feeding a huge population and giving healthcare to everyone, so

governments don’t necessarily have ESG as their main goal, although it is improving significantly,” she says.

“There is still insufficient data reporting and transparency. One reason for this is the language barrier, as not every company has an English language website, which would make it easier for us to understand their information. But we are seeing a huge improvement in terms of awareness, data availability and in the quality of that data.

Robeco and its sustainability specialist, RobecoSAM, have tried to solve the data problem by covering more companies each year. RobecoSAM now covers more than 800 emerging market stocks, while its annual Corporate Sustainability Assessment (CSA) survey is sent to over 600. Given the higher priorities in emerging markets, participation rates in the CSA remain lower than in the developed world, with 18% of companies completing it compared to 30% in the West.

“But there is some light at the end of the tunnel,” says Fedeli. “Emerging markets are catching up with developed markets. It has been a slow process but we have come quite far.”

Record numbers attend PRI (and in Person!)

More than 1,000 delegates attended the recent forum of the United Nations’ Principles for Responsible Investment (PRI) initiative – setting what may be a new record for a sustainability investing conference.

Labeled as PRI in Person, the aim of the London forum in September was to discuss the latest developments in making responsible investment more mainstream. Topics under discussion included active ownership, ESG integration across the asset classes and the latest academic research.

Robeco was one of its main sponsors.

Speakers included Edith Siermann, CIO of Fixed Income at Robeco on best practice case studies from across the globe; Matthias Müller, Senior SI Analyst at RobecoSAM on corporate tax responsibility; and Chris Greenwald, Head of SI Research at RobecoSAM on ESG integration and the investment process.

The event also saw the launch of the Sustainable Stock Exchanges’ Model Guidance on reporting ESG information to investors and plans for the next

phase in the PRI’s evolution following its annual Signatory General Meeting. The next PRI in Person event will be held in Singapore in September 2016.

1,000+ Number of delegates to PRI in Person

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COMME NTARY

Analyze this: valuing carbon exposures In the 1999 motion picture ‘Analyze this’, a psychiatrist is reluctant to accept a mafia boss as his patient, but is then forced to accept and analyze him. I think the same applies to investors and climate change: investors are reluctant to analyze carbon exposures, but in the end they will also have to do it, says Willem Schramade, Sustainability and Valuation Specialist within Robeco’s Global Equity team.

Fossil fuel divestment is too simple an answer - as is ignoring the problem altogether. To make better decisions we need deeper analysis and serious attempts to value carbon exposures.

CLIMATE CHANGE AND FALLING CARBON INTENSITY The COP21 conference is an important event that aims to keep climate change in check. With the planet currently on a path of well over two degrees global warming, crucial ecosystem services will likely be lost. The result would be warfare, collapsing states, and massive refugee flows. Clearly, such a scenario should be avoided. Fortunately, it can be avoided if we succeed in growing with less and cleaner energy, which requires a combination of technological improvements and pricing of externalities like greenhouse gas emissions (by means of taxes, caps or prices on carbon). In fact, according to a recent Citi report (Energy Darwinism II) the cost of action is lower than the cost of inaction, as the lower costs of fuels will offset the investments that need to be made. Still, COP21 faces a collective action challenge in that the bill needs to be split over the major emitting countries.

Even if COP21 succeeds, big question marks remain on the timeline and the interaction of technologies and regulation. Therefore, investment implications are far from clear. Yes, energy companies will be hurt and solutions providers will benefit. But by how much? When? And how are gains and losses going to be distributed?

carbon exposures. And traditional energy analysts tend not to put carbon prices into their models. They say that the energy transition is too unclear and likely too far out to be able to calculate anything about it. I think that is too easy and lazy. Carbon exposures can and should be valued and priced.

Analysts can devise scenarios, use shadow carbon prices, do sense checking on demand forecasts, while taking into account the future energy intensity of the economy. What if the carbon price goes to USD 40 or even USD 100? Who is going to be hit and in what way? For an oil company, what does a certain carbon price mean for its cost base, for the price of oil and its cost curve? What happens to the volumes and prices of derivate products like oil-based chemicals?

And what about the ripple effects further down the value chain, in industries like packaging, textiles, etc.? How will it hit companies’ profit and loss accounts? What’s already priced in? Which companies are best repositioning their business models?

I’d love to see more work like that! So please, analysts, do your scenarios and calculations. Ask companies about their shadow carbon prices and other critical assumptions. To make better investment decisions, we need more openness and discussion on assumptions, scenarios and implications. Analyze this!

INVESTORS: TOO MUCH INTUITION, TOO LITTLE ANALYSIS Unfortunately, investors on both sides of the fossil fuel debate spectrum tend to take an intuitive approach that fails to value carbon exposures. The fossil fuel divestment movement simply excludes fossil fuels, which means it does not price

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COVE R STORY

USING ENGAGEMENT TO LOWER CARBON FOOTPRINTS Divesting fossil fuel companies from portfolios is not the most effective way to decarbonize portfolios, or deal with stranded assets, say RobecoSAM’s specialists.

Successive weather records mean that global warming can no longer be ignored. The world has already heated up by 0.7 degrees above the 19611990 average, research shows. Talks at the 21st United Nations Conference of the Parties (COP21) in Paris in December aim to find ways of limiting further global warming to 2°C before melting ice caps cause catastrophic rises in sea levels.

The call-to-arms to limit global warming has fallen at investors’ doors in their role as the owners of companies whose activities are contributing to climate change. The issue is complicated by the fact that enforcing carbon-burning limits to solve one problem will create another – the issue of stranded assets that cannot be then used.

So what can investors do? One simple way out has been to divest high-carbon companies, but this is limited in its effectiveness, says Francis Condon, Senior Sustainability Investing Analyst at RobecoSAM. Instead, RobecoSAM’s Governance & Active Ownership (GAO) team has been engaging with carbon-intensive companies to try to cut emissions at source.

And it’s not just with the fossil fuel producers, who are not even the biggest generators of C02. That title belongs to the utilities, including electricity generators which burn the fossil fuels and account for one-third of all global carbon emissions. The materials industry, which typically creates emissions during the manufacturing process, is second; energy is third, and transportation is fourth.

“The long life of some power generation assets also exposes this group to earlier risks of stranded assets,” says Sylvia van Waveren, Senior Engagement Specialist at RobecoSAM. “Our engagement is aimed at encouraging the implementation of proactive and ambitious environmental strategies, operational excellence in thermal generation, business model innovation, and participation in public policy debate. Over the course of the engagement, we expect to see electric utilities taking steps towards their own de-carbonization.”

“Engagement with the extractive industry is not only about having a dialogue. It’s also about seeing it for yourself; don’t just tell me, show me.

So I went on a field trip to West Canada to visit the third-largest oil reserves in

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COVE R STORY

license to operate, environmental management systems, owner engagements with occupiers, and energy and carbon reduction targets.”

DEALING WITH STRANDED ASSETS If global warming treaties are actually signed after COP21, stranded assets will become an unprecedented problem. Research by Nature magazine published in January 2015, suggests that one-third of oil reserves, half of gas reserves and 80% of coal reserves might go unused up until 2050. The research identified the largest risks as being to coal reserves in China, India, the former Soviet Union, and oil & gas reserves in the Middle East.

That leads to a major problem in using divestment as a tool: most of these fossil fuel reserves are owned by governments, not companies, says Condon. For those reserves that are held by corporates, divestment simply means one institution buying what another is selling. The better solution is to encourage carbon companies to change their business models, Mark Campanale, founder of the Carbon Tracker Initiative, told delegates at a Responsible Investor conference earlier this year. And that will require some seriously persuasive engagement.

the world - the oil sands. I saw how they recover oil from the oil sands, whether this unconventional source is, or isn’t, a vital source for the energy needs of the world, and under which conditions it can be made sustainable.

An important part of the trip focused on Carbon Capture and Storage, which could be such a condition for the sustainable recovering of oil from oil sands.” Van Waveren is pictured standing next to a giant tire from a mining lorry at the Shell Albian Sands mining site.

The owners of conventional office buildings which can generate large quantities of C02 have also been targeted. “We are engaging with retail real estate investment trusts,” she says. “Here, our engagement is aimed at climate change management,

CALLING TIME ON BUSINESS MODELS “We’re in a period over the next 20 to 30 years where we’ll have to wind down the fossil fuel companies,” says Campanale. “To wind them down probably requires new boards, new business plans and new strategies.” His firm has a ‘transition blueprint’ which plots how such companies can re-invent themselves, perhaps by switching to renewable energy business models.

“At what point do these companies call time on their own business models?” he asks. “At what point do they say they have the right skills in-house to manage this transition? I don’t think they have yet reached the point where there is common consensus that to avoid breaking through the 2-3 degrees barrier of global warming, they will have to constrain business futures at these enterprises.”

A GROWING CAMPAIGN Back at the investment management ‘coalface’, a number of large asset owners, including the Norwegian Government Pension Fund and CalPERS of the US have joined Robeco in selecting engagement as their main approach. A number of frameworks have been so far been put forward, such as the Institutional Investor Group on Climate Change. These provide a benchmark for what an engagement with companies exposed to fossil fuel production could look like in the years to come.

Quant approach can cut carbon footprint Taking a quantitative approach can limit the environmental impact of companies in a managed equity portfolio, says Robeco fund manager Machiel Zwanenburg.

“Together with one of our clients we have looked at ways to reduce the carbon footprint of the portfolios we manage for them,” says Zwanenburg.

“RobecoSAM research shows that only a few critical industry groups account for over 80% of the environmental footprint in the global economy.

So we target these four industry groups – Energy, Materials, Utilities and Transportation – plus any other company with similarly high footprint.”

The objective is to reduce the carbon footprint of the portfolios without major impact on other portfolio characteristics. The flexibility of the client optimized, quantitative investment process allows for a reduction of the carbon footprint.

“For the enhanced indexing products we manage for the client, we do not allow overweights in any of the 20% highest footprint companies in the four industry groups,” says Zwanenburg.

“For the Conservative Equities mandate, no position is allowed in any of 10% highest footprint companies in the four industry groups.”

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INTE RVIE W

From the smog of Asia, to daily ESG integration in Europe

SOLANGE ROUSCHOP ABN AMRO

Solange Rouschop, global head of investment services and sustainability at ABN AMRO Retail and Private Banking, outlined to a recent RobecoSAM forum how

her journey into sustainability investing began with a newborn baby in a polluted Chinese megacity.

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INTE RVIE W

Can you describe your journey into using sustainability investing professionally?

“My role at ABN AMRO is to make sure sustainability becomes integrated into the day-to-day retail and private banking business. That can be a wide and varied job. To ensure focus, we took the view that ‘moving the money’ is where our biggest impact can be.

We are very focused on making our overall investment process more sustainable, and that goes from using and promoting research to advising our clients and managing our portfolios.

Every single day we are working, through the assets that we manage and advise on, to make an impact in the world.”

“Our corporate responsibility strategy is that we want to be a better bank contributing to a better world. The impact we have on the real world and the real economy is very important to me. I lived in Asia for eleven years, including Beijing, where it was so polluted that on many days I could not even see the opposite side of the road. Walking there with a newborn made me realize that this was not a sustainable living situation. I decided to make a move and approach the problem from a world I knew well: the investment angle.”

Are clients onside with this?

“It is great to see that our clients are driving this as well – over the past years we have had a lot of demand and a lot more interest from clients in sustainable investments. We quickly realized that when comparing public money with private money, there is a great deal more private money in the world than public money. So if you want to solve some of these issues, the private money really has to move.

That is what drives me, and the bank: we want to make that happen. The bank has been engaged in sustainable investing for more than 10 years now.

We also have the conviction that

ultimately we take better-informed investment decisions, so there are very good business reasons for this.”

“Our clients recognize this as well. If you look at our discretionary business, where we manage our clients’ assets, the sustainable mandates are the fastest growing mandates across the board. We organize a lot of client events, and we find that the ones that we run on ESG topics receive more attention than the next golf course does. We found that broadly speaking, 20% of our client base is highly engaged with sustainability and pro-actively looks for it; 20% is dead against it, and doesn’t want to discuss it; and 60% is looking to be passively sustainable. For them, if it doesn’t cost them too much, they are very willing to engage and to move in this direction. And the great thing about investing is that you don’t have to give up return, which is different from food, for instance, where you still have to pay a premium for organic products. So the risk/return balance has been at least equal, which means it is a very easy decision to use sustainability. Once you start discussing it, a lot of clients are open to it, and are putting money into it.”

And are colleagues onside with this?

“What we experience, and others probably do as well, is that it is sometimes harder to convince colleagues than clients. If we talk to the 60% of clients that are ‘passively sustainable’, we can have conversations about what they can do with their investment portfolios: about why we think it makes sense and adds value.

And the conversion rate is really high.

In certain segments, eight out of ten euros is now invested sustainably.

So we are working towards ESG integration in the whole investment process rather than just within certain mandates or certain products. For clients, it is a big topic in society.

They hear about it in different ways

from different sources, so they are willing to move. For colleagues, there is a generational aspect. Younger colleagues can be easier to convince than some more senior colleagues, and one of the things we have learned is that it is not only about research and evidence; it is also about creating experiences. Sharing experiences from people in the industry, such as senior investment managers, or the CEOs of pension funds or insurance companies that are integrating ESG, makes a real difference. It is not just about working on the business side of this, but looking at how to internalize this with people, and that is done through creating experiences.”

“There’s no right or wrong here; I dislike seeing things as ‘black and white’. Youngsters have their valid reasons to embrace sustainability.

They want sustainable topics to be addressed: they expect this to happen and they find it important. For the older generation, financials are more important, and there are valid business reasons to move in this direction.“ How do you handle the overlap in your role overseeing both sustainability and servicing all clients?

“It’s important that both roles fit together because we have aimed to integrate sustainability more into our core business models for a long time.

We have learned that if you try to do that from a central function which is pretty removed from the day-to-day business, the further removed it is, the more difficult it gets. So it may seem like a strange combination to run investment services and sustainability, but because we work with both clients and the investment organization on a day-to-day basis, it is actually easier to move the needle in that respect.

You have to be really close to the business and part of the business to be accepted as credible, instead of just some corporate function trying to do something else.”

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COMME NTARY

command a significant premium for credit investors to compensate for the risks.

Digging deeper into sustainability in the mining industry Sustainable mining appears to be a contradiction in terms, an area of tension prone to difficulties. It is in this field where credit investors can add value, says Jaap Smit, credit analyst at Robeco.

In the mining industry sustainability risk is a relatively heavy factor in a company’s credit quality. Mining traditionally has a bad reputation when it comes to managing these types of risks. Expensive multi-billion euro new development investments like Anglo American’s Minas Rio iron ore mine in Brazil have been postponed at high cost as a result of poor management of the interests of stakeholders involved. The remote location of the Minas Rio mine, for example, and the fact that the transport needed to go through 33 municipalities in 2 states caused severe delays and cost

overruns. This misjudgment led to a tripling of development spending and ultimately to the resignation of CEO Cynthia Carroll. As Brazil is a very environmentally sensitive investment area Anglo American could have done a much better job managing the local governmental stakeholders to acquire the 400 licenses needed to operate.

Another key sustainability factor is country risk. Often mining companies are tempted to venture into less stable countries to increase growth.

For an equity investor this can be an interesting addition but for bondholders these investments consume a lot of cash flow for many years and expose them to project risk.

A solid legal, fiscal and regulatory basis is therefore very important. A company like Anglo American derives almost 50% of its profit from South Africa, a country that has a relatively low sustainability score. Important issues like weaker bankruptcy procedures, poorer contract and property rights enforcement and political unrest

MIND THE TAIL RISKS Particularly important is the identification of tail risks. In the mining sector this means looking for probabilities of large potential value declines. A potential price decline due to new environmental regulation can drive mines out of business, a changing government can impact taxes or a shortage of water can require large investments making the asset unprofitable.

Of course the company can mitigate these risks by having solid policies and management in place. However, for investors the majority of the risk is often located in a select number of mining assets rather than the company as a whole. Unearthing these specific risks is where an experienced credit analyst can make a difference.

DETERMINE THE IMPACT ON THE COMPANY’S VALUE DRIVERS Having identified where the risks are, whether the company took offsetting measures and what the size of the risk and its probability are, we summarize the impact on value drivers like growth and profitability. If, for example, Teck Resources is investing in a large oil sands project this is good for growth but profitability is at risk as it is a high-cost energy source requiring very large amounts of capital. This exposes the company to high leverage and potentially low profitability if the oil price remains structurally low. This risk needs to be compensated in the credit spread.

These examples show that sustainability risks can have a major impact in the mining sector. Including them in the credit analysis can add a lot of value. Perhaps more than in other sectors it can be a major distinguishing factor.

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EX T ERNAL PE RSPECTIVE

‘A legally enforced carbon price would make a real difference’ HOWARD COVINGTON How can lawyers make a difference in the battle to limit global warming?

ClientEarth seeks to help governments draft and implement sound, practical environmental laws, and tries to enforce laws when they are breached, or when they can be used to help reduce climate risk. The British government, for example, was failing to observe its own laws on air quality, so ClientEarth successfully applied to the courts to have the laws obeyed.

In another case, shareholders of fossil fuel companies have sought to use company law to file resolutions at company meetings for greater disclosure of emissions. ClientEarth has made sure these resolutions are sensible and legally well-drafted. It is common knowledge that several environmental law firms are examining the legal obligations of investment fiduciaries such as pension trustees and asset managers to control systemic climate risk. This might eventually be another area where legal actions are brought. All of this helps reduce climate risk.

Are current laws in western democracies strong enough to deliver on carbon reduction? The Urgenda group in the Netherlands recently won a court case forcing the Dutch government to take greater action.

If by ‘deliver on’ we mean reducing emissions at a rate consistent with

a 2°C warming target, then the answer is certainly not. Adding in the unavoidable uncertainties to projections of the likely warming from current policies and pledges, we are on track for 2°- 4°C or more of warming by 2100. We have no real idea what will happen to the global economy at anything like 4°C of warming, so it is not at all surprising that a court found that a government was not doing enough. In the Urgenda case, if the appeal by the Dutch government is over-ruled many more cases will follow, and for good reason.

Similarly, is mounting legal challenges to issues such as government plans for new coal-fired power stations (or airport runways) effective, or does it just delay the inevitable?

It is highly effective and nothing is inevitable. The costs of solar power and batteries are each falling by around 15% a year at the moment.

Wind power is also getting cheaper.

Our ability to manage a grid supplied by a large amount of intermittent renewables will continue to improve. A year or two of delay can transform the economics of competing renewables.

It is not inconceivable that we will see a peak in coal and gas for electricity generation within a decade, although the fossil industry cannot yet face the thought.

Howard Covington was a founding shareholder and CEO of New Star Asset Management. He is a trustee of ClientEarth, a not-for-profit environmental law group that uses the law to combat climate change.

Would a legally enforced carbon price make a real difference?

Yes, if the principal economies (China, the US and Europe) all agreed, and if the price rose sufficiently quickly.

This would mean a price that started at the current level of around USD 10 per tonne of carbon dioxide and rose to something like USD 100 by 2030.

This would immediately choke off new fossil fuel-fired plants and equipment, unleash a wave of innovation in renewables and electricity storage, make carbon capture and storage economic, and probably power an energy bull market that would be good for a decade or more. It is unlikely to happen because it would upend the economics of many extractive and heavy industries and these have enormous political clout.

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IN THE PIC TURE

USD 7 billion After investing USD 7 billion, disappointing results caused Shell to abandon its oil exploration activities in the Arctic. Low oil prices meant the project was not viable.

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EN GAGE ME NT CASE STUDY

De-carbonization is crucial for European utilities to survive Power generation requires substantial investments, long-term planning and is greatly affected by regulatory decisions.

In order to be sustainable, electric utilities need to find the right balance between supply security, environmental impact and costs. Sylvia van Waveren, Senior Engagement Specialist at RobecoSAM, is engaging with twelve European utilities companies on this challenge.

We expect power generators’ business models to change significantly by the end of the decade, moving from centralized generation based on fossil fuels to a decentralized structure based on renewables. Environmental reasons are important drivers of this development. In order to survive, utilities should implement ambitious environmental strategies, moving from coal to gas and eventually to renewables. As the supply of renewables, such as solar and wind energy, is much more volatile than traditional generation from coal, the latter will continue to play a role to keep supply stable for the time being. The existing coal-fired power plants do need to maximize their thermal efficiency, by burning biomass, for example, and sourcing coal responsibly.

GOOGLE AND APPLE The changes in the utilities landscape are not without risks. As the sector is becoming more digital, new entrants such as Google and Apple may start proposing power management solutions, such as Smart Home. As investors, we need to know how electric utilities will deal with this tectonic shift in their industry, how they will address the risks and how they plan to profit from the opportunities.

30-40 Realistic future carbon price reflecting the impact of emissions, in euros per ton

12 European utilities companies under engagement

27% EU target for the share of renewable energy consumption by 2030 Our assessment of the sector translated into four engagement objectives. First of all, we believe companies should have a proactive environmental strategy to position themselves for future changes such as rising carbon prices. We expect them to decrease their carbon intensity and have a plan of how to deal with a future carbon price that reflects the emissions’ impact (about 30-40€/t). We expect electric utilities to shut down aged and less efficient coal-fired power plants.

ADJUSTING BUSINESS MODELS Our second objective is for electric utilities to strive for operational excellence at their traditional thermal generation assets. This includes having quantified thermal efficiency targets, creating cleaner plants and sourcing coal responsibly. Third, electric utilities should adjust their business models by diversifying their revenues, for example via energy services and by capitalizing on digitalization.

Our fourth engagement objective is that companies are transparent on their lobbying activities at national and EU level and on their positions on relevant environmental legislation. This allows investors to see if the utilities are indeed embracing the changes or trying to hold on to the status quo. Over the next three years we will engage with twelve companies on these objectives, including E.ON in Germany, Electricité de France, and Iberdrola in Spain.

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COMME NTARY

Sugar: the new tobacco?

Sustainability investors will face a new challenge in how they view sugar and the role played by processed food companies in portfolios, says US nutritional expert Robert Lustig.

Asset managers have long dealt with the dilemma of whether to exclude tobacco companies, given the wellknown health problems associated with smoking. The irony has been that cigarette manufacturers’ shares have often outperformed – sometimes even outperforming the shares of pharmaceutical companies making anti-cancer drugs.

CHANGING THE BUSINESS MODEL Investors don’t however face the same issue with the big three sugar companies, whose shares have underperformed in the past three years for the first time in decades, says Lustig, Professor of Clinical Pediatrics at the University of California, San Francisco.

Lustig runs a campaign entitled ‘Processed food: changing the business model’ which aims to encourage companies using sugar as an additive to foodstuffs to improve the nutritional content of their products.

Ten conglomerates produce most of the developed world’s processed food, of which nine are listed, making it possible for asset managers to engage with them.

“Why would we need to change the processed food business model? After all, for most of the last 40 years it

has been the most consistent return on investment that there is, always beating the S&P 500,” Lustig told a recent RobecoSAM forum. “Food is 20% of investment, yet it is 40% of global warming. And in terms of public health, we now have children who have diseases as adults that they never had before, because of processed food.”

He says the principle problem with modern processed food is that it doesn’t contain enough fiber, Omega-3 acids, or the micronutrients essential to maintain health, and instead contain too many trans-fats, chemical additives and emulsifiers, salt - and above all, sugar. The latter ingredient, sugar, has proved detrimental to health, leading to obesity, diabetes, heart disease and in some cases, cancer.

Lustig says evidence shows that of the average 600,000 items in the US food supply, 74% have added sugar, and of the 4,000 packaged items regularly on sales, 50% have greater than the recommendation for added salt.

Meanwhile, obesity is up tenfold and diabetes has gone through the roof, up 44-fold.The rise in obesity is now 1% per year globally, but the increase in diabetes rates is 4% globally.”

According to research by the International Diabetes Federation, the average American now consumes over 600 calories per day in sugar, and the US now has the highest obesity rates in the world, with 12% of US citizens now suffering from diabetes.

ALTERNATIVES CAN BE EXPENSIVE Part of the problem is that nonprocessed, sugar-free foods can be expensive in the supermarket. “More healthy food costs more than twice as much as unhealthy food, and the rate

of increase in price over the last decade has been much higher. So there is a premium on healthier food which the consumer – and the investor – does not want to pay,” he concedes.

However, Lustig says ROBERT LUSTIG investors now have a financial argument against investing in fast food or sugar companies, since the shares of McDonald’s, Coca-Cola and Pepsi, and the big three sugar producers Tate and Lyle, Illovo and Sudzuker have all underperformed the S&P 500 since 2012.

“If sustainability investors think they are going to be able to make money out of this, they have another thing coming,” he warns.

Lustig says one company which is leading the way with taking a responsible approach to additives, warning that sugars should account for no more than 10% of a daily calorific intake, is Mars – which is privately held and therefore uninvestable.

For investable companies: “Up until 2011, they did pretty well. But now, not so good. They have to change the business model, and there are many ways to do that.” He says moving to replacing sugars with artificial sweeteners is not the answer, as it still provokes an insulin response in the body, which can impact health. “We need to de-sweeten our lives. We didn’t always have this problem.”

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