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Q&A: Identifying Opportunities Through ESG Analysis

Masja Zandbergen, the head of sustainability integration at Robeco, discusses how ESG fits into the firm’s strategy.

Editor’s note: This is one in a series of Q&As with financial professionals about how they’re incorporating environmental, social, and governance factors into their investing approaches and their views on ESG risk.

Masja Zandbergen helps the investment teams at Robeco, an international asset manager based in the Netherlands, incorporate ESG into their investment process. She helped establish Active Ownership, the firm’s proxy and corporate engagement approach, in 2003. She says that Robeco and sister firm RobecoSAM, which focuses on sustainable investing, view ESG-related risks from a valuation perspective. “Our quantitative researchers have come up with a way to decarbonize the value factor.”



Why does Robeco integrate ESG into all its investment processes?
We believe it contributes to society and makes us better investors. It forces us to add an even more long-term view and also to look at information other fund managers do not see as relevant or do not have enough experience with to make good use of. Our investment teams can draw upon the long-standing expertise of our sustainable investing research team at RobecoSAM and the Active Ownership team at Robeco.

I want to make clear that ESG integration does not necessarily lead to avoiding “bad” companies straight away. It leads to “bad” companies becoming less attractive from a valuation perspective. And we apply this for all the strategies that we manage--not only sustainable strategies. One consequence is the multiplication of brainpower. Our quantitative researchers have come up with a way to decarbonize the value factor, and our fundamental analysts are working on climate scenarios to better analyze the impact on energy companies.

How does ESG analysis help investors assess risk?
We do not believe it only helps to assess risks. It also helps to identify opportunities. In an investment strategy that focuses on companies with increasing free cash flows and high ROIC, such as our fundamental global equity strategy, our ESG analysis on average actually increases our target prices. If we find interesting companies and they have good management of material ESG issues, it raises our conviction.

In value-based approaches, such as our fundamental Asia Pacific and emerging-markets strategies, and in credit strategies, the focus is indeed on identifying risks. Credit investors are really penalized when companies cannot repay loans. In emerging markets and value strategies, the trick is to avoid the value traps. We have many examples where bad corporate governance prevented us from investing and that turned out to help us tremendously.

Are there sectors where ESG risk analysis is particularly vital?
ESG risks are most vital in carbon-intensive industries and industries with high risk on human rights violations and accidents such as energy, utilities, car manufacturers, mining companies, etc.

Outside of governance and climate change, what are some less well-known ESG risks?
When we look across asset classes and sectors, we find that corporate governance is by far the most important topic, and climate and eco-efficiency comes second. Social issues, when added up, are also very relevant, but there are many different categories. We find human capital management, including innovation management; supply-chain management; and license to operate--how companies are operating within their communities--to be important.

Some topics that were added as new engagement themes in 2019 for our active ownership team were social issues around artificial intelligence, digital healthcare, single-use plastics, corporate governance in emerging markets, and biodiversity.

You’ve written that exclusion is not the best approach to sustainability. How might a fossil fuel company be part of a sustainable investment strategy?
A fossil fuel company that is preparing and working toward energy transition and has high eco-efficiency, good health, safety, and human-rights management, and no severe controversies could still be part of a sustainable strategy. In such cases, we do, however, apply a lot of effort to engage with these companies.

But sustainable strategies, although fast growing, still represent the minority of our assets--and of the market’s assets. If we are really serious about creating impact, we need to take action on all the assets that we manage. We have a 15-year track record of engaging with companies on their environmental practices and using our voting rights to support shareholder proposals that help address climate change risks. We walk the talk, as our own organization has been certified carbon neutral for many years.

A comprehensive approach that includes all assets managed by Robeco, not just the sustainable funds, takes into account business models and valuation impact, as opposed to simple exclusions.

This article originally appeared in the first-quarter 2020 issue of Morningstar magazine. Learn how financial professionals can subscribe for free.