Strategy. The United Nations' sustainability goals are to be implemented by 2030. "For companies that do not support these goals, this means significant financial and reputational risks," explains David Hawa of Robeco. He and his colleagues have therefore developed a model with which investors can determine whether a company is conforming to these goals.
"The biggest risk for investors investing in corporate bonds is not getting their invested capital back in the end," outlines David Hawa, Client Portfolio Management at Robeco.
This risk is particularly high for issuers that do not act sustainably. "It is precisely such companies that can get into financial difficulties due to stricter environmental protection requirements in the future or the outlawing of companies that violate socially accepted conventions.
Investors on the bond markets have been aware of this problem for some time. However, so far there has been no possibility of systematically taking this into account in the investment process. "For this reason, we have installed a filter in front of our SDG-focused corporate bond fund, which examines the eligible issuers to determine whether or not they have a positive impact on the 17 Sustainable Development Goals (SDGs) formulated by the United Nations in 2015," explains Hawa.
UN goals include combating hunger and poverty in the world, good education for all, health, access to drinking water and sanitation for all, and climate protection. "Companies that do not achieve a positive effect in any of these areas will be among the losers in the long term," Hawa is convinced. Or to put it positively: "Whoever sets himself up cleanly in every respect and has a beneficial effect on the environment and society promises real long-term added value for his investors".
Robeco thus goes beyond the analysis of the so-called ESG criteria, which have long been part of fundamental research in the investment process. "While the ESG criteria are primarily concerned with reducing risks, the SDG objectives are concerned with the actual impact of a company on the environment and society at im Vordergrund," explains the expert.
Hawa is convinced that the resulting opportunities and risks are not yet reflected in bond yields. "After all, hardly anyone has ever done this before when it comes to single-title selection." Some bonds issued by issuers that are not SDG-compliant were overvalued. Other companies, on the other hand, would have to pay comparatively high interest rates, even though they already meet the SDGs today. "If this becomes clear, yields could fall there and give investors price gains."
The catch is that it is not easy to compare companies across industries. To what extent can banks be classified in terms of sustainability objectives? Or the telecom service providers. Or a retailer? The challenge for Robeco's experts was to develop a system to examine companies from every industry for the United Nations SDGs.
"Our aim was to analyse an investment universe of 600 investment grade and high yield stocks and emerging market issuers for positive, neutral and negative SDG effects.
In concrete terms, the experts first use quantitative data to investigate the fundamental influence of an industry on SDGs and how strong this influence is. For example, the financial sector tends to have a positive influence, as it creates jobs through lending and thus reduces poverty and hunger. In principle, the telecoms sector and the healthcare industry also have positive effects; the effect is negative for the tobacco industry and neutral for insurance companies.
Companies from industries that have a strong positive influence start the further analysis process with the highest value of plus 3, companies from neutral industries with zero and those with a strong negative influence with minus 3. In the next step, the individual companies are examined for individual, industry-specific key performance indicators (KPI). In the case of banks, for example, this is the share of lending to small and medium-sized enterprises. The higher this is, the stronger is the positive influence on the SDGs. Depending on the industry, other KPIs are used. "For telecom companies, a high share of business in emerging markets is an indicator that a company is positively supporting SDGs," says Hawa.
Thus, the initial rating of each analyzed company can change. Scoring, for example, could improve from minus 3 to minus 2 or worsen from zero to minus 1.
The next question is how a company produces in detail. Qualitative data such as gender equality and safety at work are also taken into account. "We have a lot to do with globally active companies," says Hawa. "The question is whether the same safety standards apply and are observed everywhere, whether employees are treated equally in every country or whether child labour is used. The production process itself must therefore also be compatible with the goals of the United Nations.
"However," the expert concludes, "even this information does not yet provide a comprehensive insight into the company. It may perform well so far, but perhaps it is or has been involved in other areas of problematic activity such as fraud, bribery or money laundering."
To find out, Hawa and his colleagues work with Robeco's commitment team. This is in a constant dialogue with the companies and deals with such issues. It is also a question of constantly checking whether a company that has been involved in a scandal is doing enough to prevent something similar from happening in the future.
"For example, we can determine whether a bribery scandal was a one-off misstep and whether a repetition can be ruled out by appropriate security measures, or whether the problems are of a structural nature and can therefore recur at any time. This last point can also lead to the company failing in the end and not being eligible for an investment - even if a company comes from an SDG-supporting industry and produces SDG-compliant.
Based on their analyses, the professionals came to the conclusion that around 60 percent of the 600 companies analysed had a positive impact on sustainability principles. 16 percent rate them as neutral, 24 percent as negative. Hawas conclusion is also very positive: "Our approach enables a well diversified portfolio that not only outperforms traditional bond indices. We also achieve a positive influence on the SDG of the United Nations." ®
// How to invest SDG-compliant?
For the RobecoSAM Global SDG Credits corporate bond fund, portfolio management preselects from the 600 issuers in the universe according to the system described above. For the further investment process, in which the fund management takes into account the respective phase of the economic cycle and the fundamental data of the individual issuers and bonds, among other things, only those can be considered who have a positive or neutral SDG assessment at the end.
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