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Capital can boost sustainability

Advance sustainability investing in focus | JULY 2013

>5 Country sustainability ranking gives insight in risks

>6 What’s the impact of voting? Interview with Carola van Lamoen In cooperation with: advance | JULY 2013


Clean pores, dirty ocean Every year large amounts of plastic waste end up in the ocean. Fish and other wildlife get caught in fishing nets left in the ocean, or ingest small plastic particles, which damage their organs. In 2011, the United Nations Environmental Program identified this as one of the three main emerging environmental


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issues. There are also economic costs: fishing opportunities are lost, beaches have to be cleaned, and tourism in affected areas declines. An example of plastic waste relates to small fragments called micro beads. The average consumer uses micro beads every day, as most facial

cleansers contain them. They are not captured by wastewater plants and enter the oceans. They can be ingested by planktonic organisms at the base of the food chain, and ultimately end up in our food. To read more about micro beads, please visit


CONTENTS 4 Highlights A DJSI index family, the transformation of manufacturing by 3D printing and the financial relevance of sustainability

5 A tool to rank countries on sustainability Why a country sustainability ranking improves investment decisions

6 We don’t wait for the shareholders meeting to make our case Carola van Lamoen, engagement specialist at Robeco, explains the impact of voting within the context of an active dialogue with companies

8 Cover article: Capital is the most powerful driver of corporate sustainability Michael Baldinger, CEO of RobecoSAM, sees capital markets as the most powerful mechanism to promote sustainability

10 Engagement case study BP’s response to deepwater well blowout helps investors to assess the risks of companies active in deepwater drilling

11 ESG integration in practice How is ESG integrated in credit analysis?

12 Q&A with Alfred Slager, professor of pension

fund management Dutch institutional investors are not as short-term oriented as generally assumed

RobecoSAM Forum in September On September 23 and 24, 2013, RobecoSAM will hold its annual RobecoSAM Forum in Zurich, Switzerland. The RobecoSAM Forum is a sustainability investing conference, which brings companies and financial institutions together to create a dynamic dialogue on corporate sustainability and sustainability investing. The Forum is designed to provide participants with sustainability insights that are driving long-term challenges. This year’s Forum will include key note speeches on, among other topics, ‘Sustainability – seizing opportunities in times of crisis’ and ‘Asset owners and sustainability: what’s the reality?’ In addition, there will be breakout sessions on themes such as ‘Measuring country sustainability’ and ‘The impact of investors via voting and engagement’.

What is your impact? Every investment has an impact on society and the environment. An increasing number of investors want to know – or even improve – the social and environmental impact of their investments. This phenomenon, called impact investing, has been around for just a decade although some impact investment practices, such as microfinance, have an even longer track record. Impact investing is currently expanding into a wider approach, giving private investors alternative options to philanthropy. It is also slowly but surely reaching institutional investors. Impact investing, a subset of sustainability investing, is defined as investing in companies, organizations and funds with the intention to generate a measurable positive social and environmental impact alongside a financial return. The impact of any investment can be neutral, positive or negative and can be measured at the level of an individual company, the fund or investment strategy, and the overall investment. With an impact monitoring approach asset managers can define and measure the relevant criteria in consultation with their investors, taking into account their core beliefs and objectives. They will monitor and report on the portfolio’s socio-economic impact on behalf of their beneficiaries. An example of impact monitoring is calculating the total greenhouse gas emissions of a portfolio and reporting this number to investors. An investor can then choose to manage this impact, either through the selection of positive contributors or an engagement with the investment holdings on specific sustainability topics – in this example climate strategy. This way, investors can improve the portfolio’s overall footprint without compromising financial returns. Imagine the impact this could have.


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Add sustainability without increasing relative risk

3D printing to transform manu­fac­turing industry

Investors who want to invest more in sustainable companies now have the opportunity to do so without increasing their risk profile against the benchmark. RobecoSAM and S&P Dow Jones Indices recently launched the Dow Jones Sustainability Diversified Indices Family (DJSI Diversified Family). It offers investors a similar risk profile and financial performance to the S&P Global LargeMidCap Broad Market Index, yet with a significantly higher exposure to more sustainable companies.

In a resource-constrained world, innovation is critical to becoming more energy efficient. 3D printing is a prime example of such an innovation. It has been around since the early 1980s, but has recently started to boom because of rapid improvements in cost and performance, making this technology more competitive.

Where has the passion gone? Sustainability Investing has evolved from being an environmental crusade into an investment approach – but has it lost some of its passion in the process? We have moved on from “tree hugging” into conducting financial analysis of a company’s sustainability credentials using data rather than emotions, the recent Responsible Investor Europe Conference heard. However, one delegate asked: ‘Where has the passion gone? I haven’t seen a single person pound the desk and say: This stuff is important!’

The DJSI Diversified Family covers 26 developed and 20 emerging markets. It replicates the regional and sector allocation of the S&P Global LargeMidCap Index. Companies’ sustainability is evaluated using RobecoSAM’s Corporate Sustainability Assessment (CSA) methodology.

3D printers are transforming product development and prototyping. It can save costs as it only uses the material it needs, hardly producing excess material that needs to be discarded. It can also greatly influence how companies manage their supply chains and inventories. The possibility of insourcing the production of spare parts, effectively holding a ‘digital inventory’ of such components at production sites, could prove very attractive.

One delegate replied: ‘If you want to change the world, there are two ways: work for an NGO, climb onto boats and scream ‘it’s not fair’, or do what I do and work with companies to convince them that taking into account social and environmental considerations is not only good for the planet, it is good for lowering their risk.’

For more information, please visit

For more information, please visit

For more information, please visit


is the average amount of income spent on food in Egypt. The doubling of global wheat prices – from USD 157/metric tonne in June 2010 to USD 319/metric tonne in July 2013 – directly affects millions of Egyptians and fueled the ousting of President Morsi on July 3, 2013.


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Country sustainability ranking gives insight in risks The financial crisis of 2008/2009 was an eye opener. In this turbulent period, the analysis of traditional fundamental data proved insufficient to estimate country risks. To improve the analysis the RobecoSAM Country Sustainability Ranking was developed. Better investment decisions

It’s the story behind the score

The goal of the Country Sustainability Ranking is to gain a deeper understanding of fundamental developments in countries, and not just assess country risk like the rating agencies do. The tool was developed by Johan Duyvesteyn, researcher Quantitative Strategies, Rikkert Scholten, portfolio manager Fixed Income, and Jürgen Siemer, analyst at RobecoSAM. ‘By using our own sustainability criteria, we get a better picture of where the investment risks and opportunities are’, says Scholten. ‘In the end we want to make better investment decisions.’

Duyvesteyn, Siemer and Scholten do not see the ranking of countries as a goal in itself. ‘We look at the development of scores over time. Scores are a starting point, but it’s the story behind the score that matters’, Duyvesteyn states. ‘Our scores supplement the investment process. It is possible that a weak score is already discounted in the price of the investment instrument in question. If a stock has an attractive valuation or if a bond’s yield is high, it might be wise to invest anyway’, Scholten clarifies.

The G in ESG ‘We look beyond the traditional view of sustainability’, Siemer explains. ‘We do not only look at environmental aspects, such as a country’s CO2 emissions or its dependence on foreign energy, and social aspects, such as human rights.’ ‘In practice, we assign a greater weight to the factors that fall under the ‘G’ for Governance’, Duyvesteyn adds. ‘A good example is how a country’s government deals with the challenges caused by the ageing of its population. We have demonstrated statistically that, if a country takes proper care of the interests of future generations, its risk-return profile improves.’

Assessing the risk of countries The Country Sustainability Ranking has already proved useful in assessing the risks of the various EU countries. ‘France is a good example’, Scholten mentions. For some time in the

aftermath of the credit crisis, there was only a limited spread on French government bonds against German state debt. Our scores, however, already highlighted the powerlessness of the French authorities to act effectively to the rising cost base caused by its ageing population. A year later, spreads had indeed increased.’

Available to clients The Country Sustainability Ranking is also available to institutional clients. ‘They can use it to align their portfolios with their own principles or to improve their own investment process’, says Duyvesteyn. It can also be used by pension funds, insurers, religious and charitable institutions for exclusions. ‘Our information provides well-supported reasons to keep specific countries out of a portfolio’, Scholten concludes.

‘The sources we use for our analysis are international organizations like the UN, the IMF, the World Bank and the OECD, and the independent research institute EIRIS,’ Scholten explains.

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‘We don’t wait for the shareholders’ meeting to make our case.’ CAROLA VAN LAMOEN ON THE IMPACT OF VOTING


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Speaking and voting at a company’s annual general meeting of shareholders (AGM) is an important tool to influence companies. It certainly is the most visible one for the general public. However, ‘it often is only one element in a long-term active dialogue between sustainable investor and company’, says Carola van Lamoen, team lead Governance and Active Ownership.

institutional investors are a member. Prior to the AGM I had requested TNT to be more transparent about the appointment procedure, especially because the Board member appointed was a supervisory director himself. At the AGM TNT provided, in line with our request, an extensive explanation. This reassured shareholders that correct procedures had been followed.

Voting can be an instrument to influence companies’ policy. Still, relatively often proposals are carried. How does that fit in with active ownership?

‘The conviction that there is a link between sustainability and financial performance.’

Voting is only one piece of the puzzle. By the time I actually speak and vote at an AGM, I have already had an active dialogue with the company behind the scenes for a longer time. In the run-up to the AGM season, I have discussions with the company, suggesting improvements to draft proposals. If the company agrees, changes are made and an adjusted proposal is put on the AGM’s agenda. At the AGM, I clarify our position and eventually vote in favor of the proposal. We don’t wait for the shareholders meeting to make our case.

Still, that seems rather ‘docile’. Isn’t voting against company proposals more effective to force them to be more sustainable? In some cases the only alternative left is to vote against a proposal, but I don’t prefer it. It actually closes the door to constructive talks between a company and its investors. I prefer long-term interaction with a company. Voting

‘Voting is only one element in a long-term active dialogue with a company.’ in favor of a proposal is then the final stage of a process in which institutional investor and company have actively discussed the item. In such a process, parties cooperate to reach

a proposal that is beneficial to company and investors and is sustainable as well. You can only reach this type of alignment if you have a relationship built on mutual trust.

Voting against a proposal does make the headlines. Doesn’t that have more impact as it influences public opinion? It certainly is more visible and it can have an important and quick effect. Look at the AGM of Glencore Xstrata, the world’s biggest exporter of power-station coal, where Chairman John Bond was voted out by 81% of the shareholders at the company’s first annual general meeting. Of course, this is a high-profile event, but also in cases that are not in the spotlight, voting can have an important impact when it is part of a broader engagement with the company. I actually think this has more effect than voting against a proposal.

Could you give an example of how you influence a company?

How do you interact with portfolio managers at Robeco, who may invest in the company? This is very important: in the end, we want a company to be sustainable because we believe this yields better results for us as investors. For TNT, for example, I have regular contact with portfolio manager Christian Vondenbusch, who is fund manager of our Dutch equities fund, Robeco Hollands Bezit. Like me, he is an active member of Eumedion and provides input for what I say at the AGM. Our cooperation underlines the core of our commitment to sustainability investing: the conviction that there is a link between sound sustainability – in this case corporate governance – and financial performance.

I recently spoke at the AGM of TNT Express, a supplier of global courier and express services for the corporate market. I did this on behalf of various members of Eumedion, a corporate governance platform of which several Dutch

Eumedion An independent corporate governance platform for ca 70 institutional investors active in the Netherlands. It represents these investors’ interests in the area of corporate governance and sustainability. Members with the same position, for example, can ask another member to speak on their behalf at an AGM.

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cover story

Capital is the most powerful driver of corporate sustainability What’s the future for sustainable investments? ‘It is important that we demystify this approach to investing so that it can become part of the mainstream’, states Michael Baldinger, chief executive officer of RobecoSAM and chairman of RI Europe 2013.

How would you describe the current status of sustainability investing? Is it something people only talk about, or do they act upon it as well?

‘Demystifying Sustainability Investing is important so that it can become part of the mainstream.’

Unfortunately, many large asset owners around the world still do not integrate sustainability factors into their investment portfolios. They are chasing quarterly returns rather than adopting a long-term investment view where sustainability factors become very important. Our clients embrace it. There is no doubt that Sustainability Investing (SI) has risen over the past few years. Our goal is to demystify SI and make it mainstream. At RobecoSAM, like any other asset manager, we analyze companies’ valuations. Additionally, we integrate financially material ESG aspects into our investment process, which enables us to take better informed investment decisions.

Can you give us an example of how integrating ESG can lead to a better informed investment decision? Let’s take a look at Nestlé. Water scarcity is


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an issue that could jeopardize its output and business, so the company is taking major steps to reduce its water-related operational risks. At Nestlé and many other large corporations, sustainability is an integral part of their longterm business strategy. How can investors not look at how a major corporation addresses such challenges and mitigates the risks associated with them?

A current theme is the conflict between opportunities in emerging markets and the associated problems with issues like child labor and personal freedoms. What role do you expect the developing world to play in ESG asset allocation? At RobecoSAM we didn’t have any emerging markets products for many years as we did not feel comfortable with the quality of information from these countries. Today it is different. In February we launched the Dow Jones Sustainability Emerging Markets Index because we feel we finally have better information on

Weaving accountability into clothing supply chains The accidents in Bangladesh’s clothing factories have focused the world’s attention on supply chain issues in the textile industry. Analyst Elsa Ben Hamou Dassonville explains the importance of sound supply chain management. Faced with ever-increasing scrutiny from multiple stakeholders – ranging from customers, NGOs and the media, to investors and legislators – the global clothing industry is under growing pressure to improve building standards and safeguard employee safety. This is particularly true in Bangladesh, where local health & safety regulations have been relatively lax. April’s Rana Plaza tragedy has served as a wake-up call for companies, underscoring the importance of managing their supply chains to mitigate reputational risks. which to base a product. Additionally, we are helping companies of these regions to reach better results on corporate sustainability, as we have driven the agenda with our Corporate Sustainability Assessment and the Dow Jones Sustainability Indices since 1999.

What role will the increased use of social media play in driving sustainability investing? The way that social media operates is incredible: one company told us that if an accident occurred in one of their facilities in the world, it would be on Facebook or Twitter before they even knew about it. It’s amazing how quickly news travels and how easy it is to access information simply by looking something up on Google. Part of improving sustainability is the need for companies to mitigate this risk, or they will face bad news coming out very quickly. In this sense social media is really a powerful tool that helps drive sustainability efforts forward.

Where do clients go from here? Each client has an array of investment styles and needs. Some are looking for a better risk/ return profile or to improve their reporting and communication; while some want to satisfy their ethical concerns and others are just searching for passive exposure to sustainability. Each style can be captured through the Robeco Group’s range of strategies – be it through a

However, supply chain management risks are not limited to reputational risks. As companies continue to outsource some of their key capabilities to suppliers around the globe, their suppliers’ risks become embedded into their own operations. Mismanagement of the supply chain can lead to business disruption, resulting in a backlog of inventories, reducing efficiencies and ultimately hurting financial performance. For instance, product recalls related to poor production quality can cause companies to incur significant direct costs. Shareholders are also exposed to the financial and reputational risks arising from the companies’ poor management of their supply chains. Investors therefore have an important role in encouraging companies to improve the transparency of their supply chains. Want to know how RobecoSAM evaluates clothing companies’ supply chain management? Go to

theme fund, voting & engagement, an index, private equity, impact monitoring or manager selection. Regardless of what it is, we have to provide customized solutions that meet the individual client’s needs. While social media is helping to drive sustainability efforts, in the end, capital is the most powerful driver of corporate sustainability.

‘The way that social media operates is incredible.’

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BP’s response to deepwater well blowout helps to 4,900,000 assess risks Well blowout at BP deepwater rig in Gulf of Mexico

barrels of oil spilt into the sea

Three years after the explosion of BP’s deepwater drilling rig in the Gulf of Mexico, engagement specialist Sylvia van Waveren visits BP’s Houston Monitoring Center to assess what BP is doing to prevent a repeat, and how investors can assess the risks of companies active in deepwater drilling. Engagement Following the well blowout, Van Waveren started a 3-year active dialogue – an engagement – with BP as the blowout was defined as a structural breach of the UN Global Compact principles. She recently went to Houston to see for herself how BP manages risk in wells. She had a look at the restoration work, training and the response in case of disasters.

the drilling operations. Some NASA staff has been employed as the technology for deepwater drilling is comparable to sending a rocket into space.‘ In the worst-case scenario of a blowout, BP has access to its own capping stack and industry shared equipment around the globe, aimed to stop any leak at a BP well in the world in less than 10 days.

The Houston Monitoring Center is one of BP’s answers

The engagement with BP is progressing favorably

How did the company respond to the well blowout? ‘One response was the set-up of a Monitoring Center in Houston (HMC), where all Gulf of Mexico operations can be monitored’, Van Waveren explains. ‘The center allows remote monitoring of real-time data, and surface and subsurface video control of

‘The engagement with BP is progressing favorably and can soon be closed effectively’, Van Waveren concludes. ‘BP is making good progress with the Bly report, named after BP’s former head of safety and operational risk, Mark Bly. The report contains 26 recommendations aimed at preventing


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26 recommendations in the Bly Report to improve safety

another blowout. BP’s safety standards are now better aligned with the risk exposure which, together with the company’s general streamlining, reduces the risk of its deepwater activities.’

What’s the relevance for investors in deepwater drilling companies? How is this relevant to investors? ‘My main takeaway is that by taking the situation at BP as a base line, we know better which questions to ask other companies active in deepwater drilling’, states Van Waveren. ‘It will help us as investors to identify the companies that are most advanced in risk control, and find early warning signs of operational risks.’

The impact of ESG on credit analysis: an example from the banking sector In our previous edition we explained the integration of Environmental, Social and Governance (ESG) factors in the analysis of stocks. How does this work for credits and does ESG information really impact an analyst’s opinion? ‘Not always, but in some cases it definitely has a material impact’, says Taeke Wiersma, Head of Robeco’s Credit Research team.

The credit analysis process To grasp the role of sustainability information, we need to understand the process first. Each analyst in the credit team covers one or more sectors, up to a maximum of 40 names. He or she analyzes an issuer’s credit fundamentals within the context of its rating, expressing his view in an F-score, which ranges from -3 to +3. The F-scores are established after extensive discussion in a credit committee.

Using ESG to assess downside risk So what about sustainability? ‘The F-score is based on five building blocks, i.e. the company’s business position, strategy, financial position, corporate structure and its ESG profile’, Wiersma explains. This doesn’t mean that ESG data – or any of the other building blocks – necessarily has a 20% weight in the decision-making process. ‘Its weight depends on how material its impact on a company’s fundamentals is. This is part of the discussion in the credit committee.’ Like any true-blooded fixed income analyst, Wiersma mainly focuses on downside risk. If the ESG component does impact the F-score, it usually lowers it.

Wiersma suggests. ‘The first four building blocks led to a neutral score. To assess its ESG profile, I first looked at the information provided by RobecoSAM, including the sustainability score, and discussed it with the sustainability investing analysts. I typically screen this information on negative elements, such as weaknesses in corporate governance or environmental policies. They function as a warning signal. I also looked at the ESG sustainability ratings from EIRIS, a global ESG research platform. While RobecoSAM’s sustainability assessment looks from an investor perspective, this external source of information has a more general stakeholder perspective, which can reveal additional reputational risks.’

ESG information provided by RobecoSAM

The analyst makes the final call

How does it work then? ‘Let’s take the example of a big American bank I recently analyzed’,

Wiersma supplements his research by analyzing media sources to make a final conclusion

on whether the bank has a satisfactory sustainability performance. ‘In this case it didn’t’, says Wiersma. ‘The bank turns out to be involved in numerous litigations and settlements, having misrepresented the quality of mortgage packages it sold. It is subject to multi-billion settlements, which have a material impact on the bank’s profitability.’ As a result, Wiersma lowered the issuer’s F-score from 0 to -1. ‘Of course this is not a typical example’, Wiersma adds. ‘More banks are involved in litigation but most of them are profitable enough to manage the resulting fines and settlements. Still, this governance example shows that, if material enough, the ESG component can single-handedly affect the F-score’, Wiersma concludes.

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external perspective

‘Dutch pension funds and asset managers are longterm investors.’ ALFRED SLAGER PROFESSOR OF PENSION FUND MANAGEMENT, TIASNIMBAS BUSINESS SCHOOL Alfred Slager is professor of pension fund management at TiasNimbas Business School, and director of CentER Applied Research at Tilburg University. Before that, he worked as Chief Investment Officer at Stork Pension Fund and as investment strategist and policy advisor at PGGM Investments. Slager regularly publishes on pension investment management subjects and teaches executive courses for pension fund trustees. so Dutch pension funds and asset managers must have increased turnover. This is not what we found.

Your research with Frans de Roon shows that institutional investors have not increased the turnover of Dutch equities over the past decade. What is your conclusion? Pension funds and asset managers are long-term investors. The core of their investments forms a stable portfolio, where holding periods of 5 or 10 years are not unusual. Turnover activity takes place in a smaller part of the portfolio, and is probably related to specialized investment strategies or rebalancing.

This contradicts the public opinion that institutional investors are short-term oriented. Why is the consensus different? My guess is that the public assumes that there is no smoke without a fire. Financial markets have been volatile in the last five years,

How do you explain the unexpectedly long horizon of institutional investors? The choice of a strategic asset allocation, investment style or benchmark does not change overnight. Most investors tend to treat these decisions with great prudency, which suggests that changes in the equity portfolio will be small.

Can your conclusions be extrapolated to global financial markets? That would be a long stretch. There is not one financial market, but a multitude. Institutional investors with a long-term focus have low turnover, but retail investors, endowments, hedge funds or mutual funds each have their own horizon and trading activity.

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-, 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 © 2013 Robeco – all rights reserved.


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Robeco Coolsingel 120, 3011 AG Rotterdam, The Netherlands, sustainability-investing/index.jsp RobecoSAM Josefstrasse 218, 8005 Zurich, Switzerland,

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