Robeco logo

Disclaimer

Please read this important information before proceeding further. It contains legal and regulatory notices relevant to the information contained on this website.

The information contained in the Website is NOT FOR RETAIL CLIENTS – The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorised to receive such information under any other applicable laws. The value of the investments may fluctuate. Past performance is no guarantee of future results. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency.

Robeco Institutional Asset Management UK Limited (“RIAM UK”) markets the Funds of Robeco Institutional Asset Management B.V. (“ROBECO”) to institutional clients and professional investors only. Private investors seeking information about the Robeco Funds should consult with an Independent Financial Adviser. ROBECO will not be liable for any damages or losses suffered by private investors accessing the website.

RIAM UK is an authorised distributor for ROBECO Funds in the UK and has marketing approval for the funds listed on the website, all of which are UCITS Funds. ROBECO is authorised by the AFM and subject to limited regulation by the Financial Conduct Authority.

Many of the protections provided by the United Kingdom regulatory framework may not apply to investments in ROBECO Funds, including access to the Financial Services Compensation Scheme and the Financial Ombudsman Service. No representation, warranty or undertaking is given as to the accuracy or completeness of the information on this website.

If you are not an institutional client or professional investor, you should therefore not proceed. By proceeding, please note that we will be treating you as a professional client for regulatory purposes and you agree to be bound by our terms and conditions.

If you do not accept these terms and conditions, as well as the terms of use of the website, please do not continue to use or access any pages on this website.

Decline

23-05-2019 · Column

Greenwashing: how to avoid it?

With the rise of new sustainable funds, the question of how to avoid greenwashing becomes more prevalent. There is a lot of attention in the media for this. SRI labels are popping up and the EU is in the process of defining an ecolabel. Whereas in the past a fund would simply be labeled (Socially) Responsible or not, the market is now distinguishing between different ways of implementing sustainability. In this column, I give my view.

    Authors

  • Masja Zandbergen-Albers - Head of Sustainability Integration

    Masja Zandbergen-Albers

    Head of Sustainability Integration

Let’s start with the easy part: strategies that only apply simple exclusions and are still labeled as being sustainable should be a thing of the past. Investing sustainably is also much more difficult than buying a set of ESG scores and applying it to a portfolio. There is more to sustainable investing. Let’s talk about the new ways of sustainable investing, and the ‘greenwashing’ dilemmas.

There are clearly areas that sustainable investors want to avoid, such as tobacco, weapons, breaches of labor standards and human rights, and certain types of fossil fuels like thermal coal. Other areas are less clear. Traditional fossil fuels, for example, are a big contributor to climate change. However, they are still widely used and needed. There are those who believe that energy companies are both part of the problem and the solution. Others simply want to avoid them. The question is whether being invested in those companies and engaging with them might be a better way of creating change than avoiding them all.

Integrated thinking

Secondly, in my opinion, a strategy is only sustainable if it is also financially sustainable. So, integrated thinking is important. How do long-term ESG trends and external costs such as climate change, loss of biodiversity and rising inequality lead to changes in business models? ESG investing no longer means only reducing an investment universe to the ‘best-scoring’ names. It means thinking hard about sustainability and how it affects companies and investment strategies. To give an example: in all our quantitative strategies, if two stocks have equal (financial) factor scores, the one with the better ESG score will have a higher weight. In our fundamental strategies, ESG will affect the valuation, i.e. the target price. For example, data privacy and its management thereof by internet companies was already priced into the valuation model long before this became an issue. It’s the same with the health care sector and pricing.

Structurally integrating ESG information into the investment process helps our teams make better decisions. It does not, however, reduce the universe, and they are still allowed to invest in companies with low ESG scores so long as they believe the risks are more than priced into the market. In our global equity fund, we saw that over the last two years, about 75% of valuations were adjusted after factoring in ESG criteria. This ESG integration combined with the exclusion of tobacco and controversial weapons contributed about 22% of the outperformance seen over the 2017-2018 period1. This method of integrating ESG, although infinitely more difficult and profound in its application than only using ESG scores to reduce the universe, is often not categorized as a sustainable strategy. Clients who want to invest in sustainable strategies simply do not want to invest in ‘bad’ ESG companies, even if this is already reflected in the share price.

Resources and research

Now, this all requires dedicated resources and research. If you ask an investment team to add ESG to their process, you need to give them the resources and knowledge to be able to do so. They did not get this stuff at university or in their on-the-job-training most of the time. At Robeco, we have many different sustainability specialists working with all the investment teams, and we do not have a separate sustainable investment team. Everyone participates. There is also a wealth of ESG data around, so being able to understand and judge this data is most important.

Let’s use another example to explain, by comparing the carbon footprint of two mobile phone companies. Imagine that one company has outsourced all its operations, while the other is vertically integrated. The first one has a low carbon footprint and the other has one that it is much higher. This is an illusion: of course, making a mobile phone creates more or less the same carbon footprint. This is not visible in the data, but requires knowledge and judgement to see that it is there. If you have no resources committed to looking at this, and analysts do not have access to sensible research or an understanding of these issues, you will not be able to structurally integrate sustainability.

Active Ownership

Another way of implementing sustainability is through Active Ownership. At Robeco, we have been an active owner for 15 years. We have a very structured approach in tackling themes that other investors are not even thinking of yet, such as engaging on data privacy in 2015. This year, we are starting to engage on digital healthcare and the social impact of artificial intelligence. Both themes are very much forward looking and related to both new technologies and sustainability issues: the first aiming to tackle rising health care costs, and the second looking into the social risks that might occur in the long term.

Last year, our team of 13 dedicated specialists engaged with 214 companies. The engagement takes place over a three-year period, allowing us to track and measure the progress of companies. Some asset managers claim to engage with 2,000 companies per year. In my opinion, that cannot be more than asking one or two questions on ESG at a regular meeting, or sending a standard letter. You need to have substantial resources in place to be able to do this in a credible way.

Voting behavior is also interesting. Research shows that some of the larger (passive) investors almost always vote with a management’s recommendation, even on shareholder proposals relating to environmental and social issues. That doubts the credibility of that manager, I think. We see that social and environmental shareholder proposals are becoming better formulated and more in line with long-term shareholder value creation. So, last year we voted in favor of those proposals in 72% and 78% of the cases, respectively.

Walking the talk

This brings me to my key point: walking the talk. How credible is a fund provider if they provide a few very good SI funds, but are not doing anything in their other products, or in their own operations, such as the voting behavior I mentioned earlier? There are many questions that clients should ask to determine credibility. Another interesting resource is the PRI Asset Owners manager selection guide.

Lastly, a quick word about labeling. They could provide valuable guidance and a stamp of approval for a fund, which would be good for retail investors. Current labels do differ in their approach though. That is most likely because approaches to sustainability investing differ so much. The French SRI label, for example, focuses more on the investment approach, process and transparency. It is externally verified, so you really have to show that you have the right data, processes and procedures in place to obtain the label. The Belgian label is much more prescriptive, specifically on what not to invest in.

However, even this leaves a lot of room for maneuver, and asset managers still need to do their own research. If you need to exclude an electricity company that does not comply with the Paris Agreement, how do you calculate that? So, even with labels, there is a lot of room for debate. Transparency is most important: asset managers need to clearly show what is and what is not part of the strategy of the fund, no matter whether it is called sustainable or responsible, or something else.

Keep up with the latest sustainable insights

Join our newsletter to explore the trends shaping SI.

How SI works

Footnote

1 Source: Robeco Global Stars Equities fund performance figures. 


Robeco

Robeco aims to enable its clients to achieve their financial and sustainability goals by providing superior investment returns and solutions.

Important information This disclaimer applies to any documents and the verbal or written comments of any person in presentations or webinars on this website and taken together is referred to herein as the “Information”. The services to which the Information relate are NOT FOR RETAIL CLIENTS - The information contained in the Website is solely intended for professional investors, defined as investors which (1) qualify as professional clients within the meaning of the Markets in Financial Instruments Directive (MiFID), (2) have requested to be treated as professional clients within the meaning of the MiFID or (3) are authorized to receive such information under any other applicable laws and must not be relied or acted upon by any other persons. This Information does not constitute an offer to sell, or a solicitation of an offer to buy, any financial product, and may not be relied upon in connection with the purchase or sale of any financial product. You are cautioned against using this Information as the basis for making a decision to purchase any financial product. To the extent that you rely on the Information in connection with any investment decision, you do so at your own risk. The Information does not purport to be complete on any topic addressed. The Information may contain data or analysis prepared by third parties and no representation or warranty about the accuracy of such data or analysis is provided.
In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management UK Limited (“RIAM UK”) is authorised and regulated by the Financial Conduct Authority. RIAM UK, 30 Fenchurch Street, Part Level 8, London EC3M 3BD (FCA Reference No:1007814). The company is registered in England and Wales under Ref No. 15362605.

In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Investors may not get back the amount originally invested. Neither Robeco Institutional Asset Management B.V. nor any of its affiliates guarantees the performance or the future returns of any investments. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. Robeco Institutional Asset Management B.V. (“Robeco”) expressly prohibits any redistribution of the Information without the prior written consent of Robeco. The Information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, rule or regulation. Certain information contained in the Information includes calculations or figures that have been prepared internally and have not been audited or verified by a third party. Use of different methods for preparing, calculating or presenting information may lead to different results. Robeco Institutional Asset Management B.V. is authorised as a manager of UCITS and AIFs by the Netherlands Authority for the Financial Markets and subject to limited regulation in the UK by the Financial Conduct Authority. Details about the extent of our regulation by the Financial Conduct Authority are available from us on request.