Climate investing
Responsibility
No one can ignore climate change, least of all investors, as we have the means to put money to work where it can make a difference. Investors must take clear action to decarbonize portfolios and aim to achieve net zero by 2050. Active ownership can also help transform companies. With great power comes great responsibility.
49%
of global investors said they believed they had an ethical duty to support a sustainable economy, a proportion that was similar across Europe, North America and Asia-Pacific, suggesting a shared common purpose.
41%
of investors cited board demand, public opinion and wanting to be seen as a sustainability leader as significant motivation for making net zero commitments.
The role that active ownership can play has also risen in importance, with almost 7 out of 10 investors surveyed saying they are using engagement and stewardship to promote more transition-aligned practices among their investee companies. As not all asset managers have in-house engagement capabilities, many have partnered with others to achieve this.
But as with all things in sustainable investing, there remain conflicts – there is no silver bullet. While investors have a responsibility to promote the transition to achieve net zero, they also have a fiduciary duty to make returns for their clients. Adopting a more sustainable stance cannot come at the expense of underperformance in portfolios, which has caused issues in divesting from oil and gas.
Energy companies have been among the best stock market performers since Russia invaded Ukraine in 2022. Subsequently, the Global Climate Investing Survey showed that fewer investors plan to divest from oil and gas companies in the short term, the proportion dropping from 23% making this pledge in 2023 to just 14% in 2024.
Climate investing is more than just the next big thing
Lucian Peppelenbos (Climate Strategist) and Carola van Lamoen (Head of Sustainable Investing) look at climate change and climate investing from all angles. Listen to the trailer or to the full 25-minute podcast.
Steering the money towards sustainable companies
Investors can play a major role in directing how money is channeled towards those companies making a different to climate change. For listed companies, the threat of divestment combined with engagement is particularly effective. And the planned EU Taxonomy will give investors clarity on what constitutes an environmentally sustainable activity and under which circumstances.
Asset managers decide what equities and bonds to buy for portfolios, which means they can target companies working towards decarbonization. This is primarily done through negative screening (typically exclusions) and positive screening, which uses models to find companies with higher ESG profiles.
Engagement is also used to persuade companies to do better. Robeco has two engagement themes in 2021, targeting financial institutions that fund higher-carbon companies, and those companies that have been slow or reluctant to move to lower-carbon business models.
Meanwhile, a swathe of new strategies are being launched that invest in companies making a direct contribution to combating global warming. In December 2020, Robeco launched two fixed income climate strategies that have benchmarks aligned with the Paris Agreement – the first time this has been done in this space.
Other climate-related investment products include those involved in carbon capture technology, the circular economy, and reforestation. Other forms of impact investing target the UN’s Sustainable Development Goals (SDGs) – particularly SDG 13: climate action – along with green bonds. So, is it just a case of channeling all the money into these kinds of strategies?
Thinking laterally
No, because investors need to think laterally too: it’s not enough to just avoid the bad guys and buy into greener securities, says climate change specialist Lucian Peppelenbos. “The irony is that we currently need to use fossil fuels in order to abolish them,” he says. “Take the oil and gas industry, an everyday necessity that is both at the heart of the problem and part of the solution. Oil and gas will be needed for transport and heating right up until 2050, though to a declining extent each year. And we still need fossil fuels and chemicals to build wind farms.”
“Oil majors need to transform into renewable energy companies, and we need to help them to do that. Just divesting from them and only investing in renewables won’t get us there. For example, we know of one company that has a large carbon footprint because of its mines, but it also has the largest renewable energy power generation capacity in Europe. So, you want to be invested in that company to help achieve the transition and gain exposure to the renewables. That's the balance you need to strike.”
Not everything is investible
The investible oil and gas companies still need shareholder money to survive – and that’s where investors can wield their power. “The threat of exclusions or divestment is particularly effective when combined with engagement,” Peppelenbos says.
“I have engaged with oil companies for many years and for them, the threat of their leading investors divesting them is very real for them – they genuinely fear it. So, they're very willing to listen to what we want from them to avoid this happening, because they know that we’re under pressure too. We saw that with Shell. So, I think it works.”
Unfortunately, not everything is within investors’ reach. “We can only invest in listed securities; most of the world’s coal reserves are owned by governments, so we can’t threaten to exclude them,” Peppelenbos says. “At Robeco, we also don’t buy real assets such as wind farms, which are a critical part of the equation. What we can do though is invest in the companies developing the technologies behind the wind farms and other renewables instead.”
“We have a clear responsibility to offer investment opportunities in any of these areas while remembering that we can’t just dump all the fossil fuel producers and users overnight.”
EU Taxonomy can help
One thing that will help in steering money towards the more sustainable companies is the EU’s new Taxonomy. This will establish for the first time a unified classification system for ‘green’ and ‘sustainable’ economic activities under the EU’s sustainable finance regulations.
Under the Taxonomy, environmentally sustainable activities must make a substantial contribution to one or more of six environmental objectives. These are climate change mitigation, climate change adaption, the sustainable use and protection of water and marine resources, the transition to a circular economy, pollution prevention and control, and the protection and restoration of biodiversity and ecosystems.
Only activities that contribute to the first two environmental objectives – climate change mitigation and adaptation – have so far been defined. The first disclosures to meet for these objectives are due to be filed in January 2022. Technical screening criteria for activities that make a substantial contribution to the other four criteria will be released by the end of 2021, with disclosures due in the course of 2023.
Exclusions – our last resort
Exclusions have long been used by Robeco for companies whose products or practices do not meet acceptable standards. A new policy in 2020 went much further by barring fossil fuels from all portfolios, subject to certain thresholds.
Robeco operates three kinds of portfolios. ‘Sustainability Inside’ strategies have ESG integrated as standard, and form the majority of UCITs funds at Robeco. ‘Sustainability Focused’ strategies go a step further, with specific ESG targets such as achieving a better carbon footprint than the benchmark. Impact Investing strategies go further still, typically targeting a theme in which a real, impact can be made on the ground, such as through SDGs.
In the past, companies excluded from any of these portfolios included those making controversial weapons such as cluster bombs, firms embroiled in corruption or other unethical practices, and tobacco. Climate change had not been widely seen as excludable – indeed, fossil fuels were often viewed as a necessary element of the current economy pending the transition to cleaner energy sources in the future.
Widening the scope
But under the policy announced in September 2020, companies that derive 25% or more of their revenues from thermal coal or oil sands, or 10% from Arctic drilling, have been barred from Sustainability Inside portfolios. This expands the thermal coal exclusion policy that previously only applied to the more bespoke Sustainability Focused and Impact Investing strategies.
Investments in companies actively engaged in oil sands and Arctic drilling were also barred for the first time. This means that 242 fossil fuel companies in the energy, mining and utilities sectors joined the exclusions list.
Stricter thresholds have been applied to Sustainability Focused and Impact Investing portfolios, excluding companies with just 10% of their activities in thermal coal and oil sands, or 5% in Arctic drilling. As a result of the expansion, the exclusions policy now covers the entire range of UCITs-registered strategies at Robeco.
“Although the preferred approach is to engage with companies, we believe it is very difficult to drive significant change at companies whose portfolios are skewed to coal or oil sands,” says Carola van Lamoen, Head of Sustainable Investing at Robeco. “Therefore, we prefer to focus our efforts on the companies and sectors where we are more confident that our engagements will be effective.”
How should investors act? Here’s the path to Paris-aligned investing
The race to net zero is on. We explain what the key components of Paris-aligned investing are and what we’ve learned from the process of developing our own net zero roadmap.
Practicing what we preach – a net zero carbon ambition
At Robeco, we like to practice what we preach. We commit to achieving net zero greenhouse gas emissions across all our assets under management by 2050. In this Q&A, we explain the rationale behind the move.
What has Robeco committed to doing?
Meeting the Paris Agreement’s goal to limit global warming to below 2°C by the end of this century means the world needs to become carbon neutral by 2050. Many nations along with the EU have since pledged to become net zero carbon by this deadline. As a leader in sustainable investing, we felt that we had a fundamental duty to do the same.
What does this mean in practice?
All Robeco’s assets under management must become carbon neutral, which means that all the companies held as stocks or bonds in our portfolios must meet this goal by 2050. As such, they will have to cut their greenhouse gas emissions and engage in carbon offsetting. To achieve that, they will need to make major changes to their economic models, including such as the long-term transition away from fossil fuels into renewables.
Doesn’t this just mean divesting problem companies?
It’s not just a matter of decarbonizing portfolios by throwing out high-carbon companies – this kind of divestment doesn’t solve the underlying problem. We need to work with the more carbon-intensive companies, including the use of engagement, to help them move their business models towards lower-carbon solutions
How will Robeco achieve this?
A roadmap will be used by all our investment teams to map out how we can gradually decarbonize all our billions of euros of investments. The targets set in the road map include the reduction of portfolio emissions using our data models that can calculate how much greenhouse gas emissions companies are producing.
Are we doing this unilaterally, or with others?
It was a decision taken by us as something we should do anyway, but we’ve always believed in the power of collaboration to work together and achieve a wider goal. So we’ve done this as part of an international effort by the Net Zero Asset Managers Commitment, launched by the Institutional Investors Group on Climate Change (IIGCC), of which Robeco is a member.
What about any new products?
In December 2020, we became the first asset manager in the world to launch fixed income climate strategies targeting companies that are making a direct contribution to combating global warming. We also have products targeting the Sustainable Development Goals, including SDG 13: climate action. And we have investments in solutions such as green bonds, smart energy and the circular economy.
What steps have been taken so far?
We think fossil fuels are the ‘low-hanging fruit’ in that they are an obvious issue on which to take a stand. In September 2020, we extended our fossil fuel exclusion policy to include all UCITS-registered funds (not just the bespoke ones), subject to certain thresholds. We combine this with extensive engagement to target not just the high-carbon companies, but also the financial institutions funding them.
Has Robeco boosted its resources to help with this?
Yes. We wanted to add some extra expertise in this arena. So in 2020, we hired a climate strategist and a climate data scientist to work exclusively on this project. They work within our news SI Center of Expertise, which we also created in 2020, partly to intensify our efforts on climate-related investment issues. They advise investment teams across the company.
Does Robeco publish all its findings?
Yes. We believe strongly that full transparency is an important part of sustainability. So, we publish all our sustainability policies on our website. We also produce regular updates on how sustainability is translating into fund performance and showcase our engagement work in quarterly reports.