Case study by Robeco, Peter van der Werf and Laura Bosch
Signatory type: Investment Manager
Operating region: Europe
Assets under management: €171 bn
Why we engage with companies on the SDGs
Robeco focuses its engagement activities with listed companies on material environmental, social and governance (ESG) issues that create long-term shareholder value. We view sustainability as a long-term driver of change that impacts the future performance of markets and companies. Engagement activities are focused on an area in which the company can achieve the greatest impact. The SDGs frame the most relevant sustainability trends, representing inherent risks and opportunities for businesses and society as a whole. Firms can increase their attractiveness as investment candidates for investors by offering them solutions to contribute to SDGs, thereby lowering their cost of capital. This provides companies with more strategic flexibility by lowering hurdle rates and driving investment in new projects, products and business models. This creates the right incentive structure to encourage companies to contribute their expertise and capital towards accelerating sustainable development whilst generating long-term value for shareholders. Because the impact of financially sound SDGs can deliver returns to shareholders, we engage with companies to enhance their contribution towards SDGs.
How we engage with companies
We focus our engagement on a limited number of sustainability themes that have the most potential to create value for investee companies. The starting point of this selection is a financial materiality analysis conducted by RobecoSAM’s Sustainability Investing Research Team. Themes are selected by engagement specialists that work closely with investment analysts and portfolio managers. We ask our clients what they consider to be most relevant to focus on, and, with that input, a balanced set of financially material themes is produced. We also aim to align engagement themes, where possible, with the SDGs.
We then conduct a baseline study and develop engagement profiles for the focus companies. Based on this, we establish SMART (specific, measurable, achievable, relevant and time-bound) objectives and begin a dialogue to encourage companies to address the issues identified. Should SDGs be included in our engagement efforts, we tie our engagement objectives to specific SDG sub-goals. We have regular meetings and conference calls with company representatives to discuss their progress towards our engagement objectives over a three-year period. By discussing sustainability risks and opportunities with companies and providing them with insights into investors’ expectations of corporate behaviour, we encourage these companies to adopt better practices. After our dialogue, we determine whether we can close the engagement case successfully by assessing the level of achievement of the engagement goals.
Example of an SDG engagement
Robeco began an engagement programme in Q1 2018 aimed at reducing global waste and emissions. We engage with small and mid-cap companies from different industries related to solar energy, industrial waste management and technology that play a crucial role in this field, based in Europe, North America and Asia.
The core objective of this engagement theme is to improve companies’ quantitative reporting on their contribution to SDG sub-target 12.4, which aims to achieve the environmentally sound management of chemicals and waste throughout the products’ lifecycle. A bottom-up approach needs to be followed when setting the appropriate metrics, so companies must assess their own processes, services and products to determine the relevant metrics to select for assessment in relation to SDG 12.4. We aim to help companies unlock shareholder value while generating a positive impact.
We acknowledge synergies across the 17 SDGs and their sub-targets, as these are interlinked. Understanding the range of positive and negative interactions among SDGs is key to unlocking their full potential at any scale and addressing any potential conflicts, by ensuring that progress made in one area is not hampered by a negative SDG impact in another. This is assessed by reviewing the output produced by the company, analysing how it is produced and verifying whether the company has been involved in any ESG controversies. The engagement programme aims to profit from the synergies between SDG 12 (responsible consumption), 7 (access to renewable energies) and 6 (clean water and sanitation).
Our engagement discussions with the companies are framed around five main objectives:
- Environmental impact assessment: we encourage companies to conduct an environmental impact assessment of their products based on a product lifecycle analysis and production processes.
- Environmental strategy: companies should then set targets to reduce their most material environmental impact, increasing the efficiency of resource use and reducing operating costs.
- Sustainability reporting: we expect companies to continually improve sustainability reporting standards and provide disclosure on key ESG issues, as well as annual financial statements. We require disclosure on energy use and CO2 emissions and encourage companies to quantify their SDG contribution.
- Corporate governance: we assess the effectiveness of a company’s corporate governance practices in relation to management and supervision of ESG issues at the board level and in its compensation practices.
- Social impact: we encourage companies to increase their human capital management performance and reduce labour risks in their supply chain.
Impact will be measured during the end phase of the engagement programme in 2021. To accomplish this, the companies need to adequately measure and report on their positive and negative societal impact. We will assess progress made by the companies when reporting on the metrics initially identified as highly material to SDG 12.4. The disclosure level between the baseline and follow-up period will be compared to determine the overall progress of the company on this subject.
The ultimate purpose of this engagement theme is to manage risks to investors as well as generate an impact by ensuring that objectives pursued under SDGs 12, 6 and 7 do not counteract each other in terms of their net impact achieved.