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ESG Integration: Not Just An Equity Story

An Institutional Investor Sponsored Statement

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There is a tendency to see ESG methodologies as only being relevant to equity investment. In fact, they are useful and can applied in fixed income portfolios too.

Environmental, social responsibility and corporate governance (ESG) principles are well-known themes in the equity markets, where they have attracted loyal disciples among individual and institutional investors. But how about in fixed income? ESG methodologies are every bit as relevant and effective in debt as they are in the share markets. “We think it is very important to understand that ESG is not just an equityconsideration,” says Edith Siermann, managing director and chief investment officer for fixed income at Robeco. “Often people think that ESG only has to do with voting and engagement, and is just something that can be applied on the equity side. We believe there is no difference in applying it to fixed income.”

Siermann says ESG is gaining momentum in fixed income in the Netherlands, France and Scandinavia, and is attracting increased interest in the U.K. and Asia. “You see differences among regions and institutions, but the trend is there, and it won’t reverse,” she says.

As with the equity markets, Siermann says, investors have a choice about whether to make an ethical position the heart of their methodology or to take a financial approach, within which the sustainability of an individual corporate strategy is part of a broader assessment around an investment decision. “We truly believe that companies that take sustainability into account deliver better performance,” she says. “But if you immediately exclude companies that are not sustainable from your universe, you miss the chance of discussing an improvement with them and also miss out on any potential gains if changes are implemented.”

This is central to the Robeco approach to ESG, in two respects. First, “we believe in an integrated approach,” says Siermann. “That means seeing sustainability as a long-term driver of change in countries and companies, that can add to long-term performance. Sustainability is considered as one of the value drivers in our approach to investing and is therefore fully integrated into the process. Sustainability is an integral part of the world we live in and should not be considered a separate element; it should be integrated at the company level as well.”

Second, rather than simply screen out companies and ignore them from the outset, Robeco prefers to look at what a company could do. “We have a strong belief in engaging with a company,” Siermann explains. “We actively talk with them about what we think they should improve on the sustainability side. It’s an important element of our approach.” She says companies are surprisingly willing to talk about sustainability. “In general, they are receptive, and keen to hear from you.”

Another differentiator at Robeco is quality of research. RobecoSAM, part of the Robeco group, accumulates information on more than 3,000 companies specifically related to sustainability which focuses on industry/country-specific issues that drive the long-term growth and/or profitability. “The challenge is to make sure you get the right data from an investment point of view,” Siermann says. “A lot of sustainability information might be interesting but not relevant to making investment decisions.”

RobecoSAM helps Robeco form intelligent decisions, not just on corporate debt but on a sovereign level, too. It has an in-house country sustainability ranking, which is incorporated into the investment process. Analysts, researchers and engagement specialists work together to establish just how an issuer’s ESG behavior fits into an assessment of the prospects for that company’s or sovereign’s securities.

The awkward question all ESG equity professionals are asked is whether their efforts help or hinder performance. The question is equally relevant for fixed income. “ESG very much helps,” Siermann says. “There are all sorts of ways that sustainability plays a role. If you don’t know what is happening in terms of a company’s sustainability strategies, then you don’t have all the information you need to assess that company’s risk and potential. You are missing out. The risk-return profile improves if you can incorporate that information.”

As a practical example, a sovereign ESG ranking helped Robeco identify an opportunity in Ireland, where a fund manager increased investments partly because of improvements in governance and transparency of policymaking. The same methodology tells Robeco not to be tempted by Greece, because that country’s ESG score is not improving. Siermann says, “Because we don’t see the score picking up in the same way that it did in Ireland, that holds us back from stepping into the Greek bond market, even though some investors would think that it is priced relatively cheaply and therefore this is a good moment to get in.”

There are challenges in the approach — quantifying the impact of ESG from an investment perspective is an obvious one — but the trend is clear. “Sustainability and ESG integration will be increasingly important,” says Siermann, “and investors must be part of this evolution.”

For more information please visit robeco.com/sustainability. This statement is intended for professional investors. Robeco Institutional Asset Management B.V. has a license as manager of UCITS and AIFs

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