"At the end of the day, transparency is most important"

Ralf Oberbannscheidt
Global Head of Thematic Investing, Robeco Switzerland

 

Greenwashing accusations against asset managers are bad for their reputation: what processes does Robeco have in place to avoid greenwashing?

With the rise of many new sustainable funds in recent years, the question of how to avoid greenwashing becomes more prevalent. Reliance on simple exclusions and consideration of sustainability risks is no longer enough to justify a sustainable label and the burden of proof is on asset managers to demonstrate how they evaluate and decide which companies belong in sustainable funds. It is much more difficult than just buying a set of ESG scores and applying it to a portfolio. At Robeco, we have many different sustainability specialists working with all the investment teams to do this evaluation in a consistent and credible process. It helps that there is also a wealth of ESG data around, but being able to understand and judge this data is most important. We clearly define specific sustainability objectives and characteristics of each strategy and hard code restrictions into our risk control frameworks, as well as perform internal audits on ESG integration done by the investment teams. At the end of the day, 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.

Personal responsibility or strict regulation: what works to avoid greenwashing?

Regulations are absolutely necessary; however, we also believe in personal responsibility via providing the highest degree of transparency. Let us look at labeling. Labels 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. In Switzerland, we are now in the process of implementing the Swiss Climate Scores. The Swiss Climate Scores are a tool that can help you as an investor increase the transparency of your financial investments’ climate compatibility. They offer you the advantage of a simple and consistent way of evaluating the climate impact and risks of our investment funds, as well as the opportunities and challenges of moving to a net-zero economy. Moreover, the Swiss Climate Scores also assist you as investors to compare different investment products and make informed decisions that support the global climate goals. Robeco is amongst the first international asset managers who has implemented reporting on the Swiss Climate Scores for all our investment funds authorized for distribution in Switzerland.

The pressure on the financial industry, and asset managers in particular, to achieve climate targets is enormous. Are expectations too high?

Indeed, the pressure to reach climate targets is high. However, it also encourages innovation of our holdings and potentially even more sustainable financial practices around the world. Many of Robeco´s solutions meet an increased demand from regulators with stricter rules on investments related to climate risks and the disclosure thereof. Since climate change presents a considerable financial risk for investments, for example physical risks from climate impacts or transition risks away from fossil fuels, we need to put extra emphasis on implementing analysis, risk mitigation, and forward thinking. It is always good to have great ambitions which we still can achieve with innovative and performance-oriented products, global collaborations amongst asset managers, more pragmatic and unified frameworks and regulations, new observable technologies, and finally, a global push for infrastructure upgrades. These are all hopeful green shoots for a long-term success!

What instruments does Robeco use to document a "sustainability return", i.e., impact, to investors?

We invest in public market equity and debt, so our approach to impact is to invest in companies that are generating a positive impact. We have been using a proprietary “SDG (Sustainable Development Goals) score” for many years in our investment strategies, as a novel metric of sustainability performance. This score measures to what extent companies positively or negatively contribute to the SDGs (Sustainable Development Goals). It allows us to focus portfolios on impactful companies, and to capture changes in impact over time. Another important way we approach impact is through Active Ownership. At Robeco, we have been an active owner for almost 20 years. We have a very structured approach in engaging with invested companies on critical sustainability topics that we believe have both an impact on sustainability as well as potentially on investment returns. We set clear milestones in our engagements so that we can measure progress toward goals.

How does Robeco ensure that there is no conflict between financial returns and "sustainability returns" in its investment products?

For Robeco, sustainable investing is about the risk return profile of investments as well as investing in sustainable companies. We believe that companies that are going to be future winners are those that are embracing sustainability and the energy transition. So, we analyse sustainability information to help us mitigate investment risks and identify alpha-generating ideas. One also should have a longer-term view when discussing financial returns. Both thematic and sustainability investments deserve patience as they both only resemble parts of global equity or fixed-income markets. The rush from quarter-to-quarter performance is not helpful in identifying structural winners or enabling companies. In some of our thematic strategies at Robeco, the Sustainability philosophy helps to shape the investable universe but there are enough opportunities for the portfolio managers to manage an active fund. We would not want to compromise returns.

What convictions do you follow with regard to sustainability and climate change?

As an investor one must take climate change and other discussions around sustainability quite seriously. Of course, not everyone globally buys into the concepts or urgency thereof on country, corporate, people, or company level, as the recent phenomena of a bipolar world order seems to suggest. Herin lies the beauty of (thematic) investing by having a variant perception in markets and in the future of a company´s cashflows. For these climate solutions, climate change mitigation is integrated in the investment process across multiple components, from exclusion of fossil fuels to bottom-up stock and issuer analysis to portfolio construction. The ultimate goal is to make client portfolios climate-proof by reducing their exposure to carbon risk and ensuring they are climate-ready.

Thematic funds have faced some headwinds lately; what is your view on the sector, where do we go from here?

One key observation from 2023 was the strong allocation toward quality-growth factors. We are thematic investors and are therefore somewhat agnostic in terms of deliberate factor positioning. Still, the divergence of performance last year is noteworthy. More specifically, some global technology stocks hit an all-time high in 2023, and again in early 2024. This spectacular performance has been driven by the potential of emerging technologies (AI (Artificial Intelligence) in particular) to deliver productivity gains in the wider economy. It is also being driven by the perception of tech stocks as a new ‘safe haven.’ A look at flows over the past two years reveals that narrowly focused themes had declining inflows. In contrast, broader-based themes, with a more diverse scope of underlying stocks, have bucked the downward trend showing resilient contrarian performances. A plausible explanation for attenuating flows is that after years of TINA (there is no alternative ‘to equities’), investors now have more attractive low risk returns elsewhere. Though nothing to write home about a decade ago, returns ranging from 4-5% seem to offer an alternative to thematic equities now. Despite market headwinds, most of our themes outperformed their strategic thematic reference indices.

Do you see new trends emerging that could be interesting for the coming decades?

We have entered this year with a keen sense of purpose and optimism. We are encouraged by several trends which present significant growth opportunities that our thematic strategies are well-positioned to leverage. From small cap to mega-cap, companies’ balance sheets are in much healthier shape, having spent the past 15 years repairing outstanding debt issues. This deleveraging has been possible also through positive earnings developments, disciplined mergers and acquisitions, and less exuberant managements compared to some investment periods in the past. The ‘Magnificent 500’ – 2023 ended with a broad equity market rally that included not just magnificent mega-cap tech stocks but also small and mid-cap companies. The latter have been noticeably absent from past recoveries. It could be that the indiscriminate selling (which also included not only individual stocks, but also multi-stock ETFs (Exchange Traded Funds)) has led to attractive valuations across the board. The M&A market is slowly reviving which means valuations of targeted companies (the sellers) are looking more attractive to buyers. We also expect to see more IPOs, given renewed appetite and liquidity in the market.