Case study by VidaCaixa
In the spirit of showcasing leadership and raising standards of responsible investment among all our signatories, we are pleased to publish case studies of all the winning and shortlisted entries for the PRI Awards 2020.
Give a brief overview of your project’s objectives and how your approach to the subject matter differed from previous research.
VidaCaixa has developed an investment approach that aims to rate the impact of its investments on the environment, society and governance, against clearly-defined metrics, as well as to capture the positive contribution of its portfolios to the UN’s Sustainable Development Goals.
VidaCaixa believes that the SDGs serve as a useful guide to managing risks, both at the macro and micro levels, and constitute a robust framework of investment opportunities for any asset class.
This project represents a contrast from the firm’s traditional risk-return approach in that it breaks down the portfolio according to SDGs: The higher the percentage of investment that contributes to SDGs, the more aligned it will be with the global sustainability agenda.
This approach to investment management is a revolution for an institutional investor like VidaCaixa, and marks a new way of understanding the impact of ESG-related issues on portfolio management.
Describe your methodology, including how you addressed macro trends and mechanisms for effecting systemic change.
First, VidaCaixa focused on identifying those metrics that were the most representative of the impact of companies on society. One of the main problems that managers face when integrating ESG aspects into investment decision-making is the quality and quantity of information. It’s essential to obtaining homogeneous and comparable data from different companies. VidaCaixa used the following metrics to calculate the impact of different portfolio companies:
- CO2 consumption intensity (tCO2-eq / M€ sales)
- water consumption intensity (m3 / M€ sales)
- percentage of renewable energy generated
- percentage of women on the board of directors
- investment in innovation (investment in R&D / sales revenue)
- and number of controversial incidents.
The research also focused on measuring the positive contribution of companies to the different SDGs. For this, VidaCaixa used the PRI Market Map. It identified the business lines of the each company and mapped each of them with one of the 169 associated milestones, or SDG targets. It should be noted that not all of them could be mapped, since not all of the business lines contributed positively to SDGs (oil extraction, for example, does not positively impact any SDG). Once all business lines were mapped to one SDG target, the percentage of that particular line’s sales revenues in the company was defined as the SDG contribution.
It is important to note that the analysis of the different business lines of each company is very relevant. And it must be also noted that it is not possible to impact all of the SDG targets.
Outline how your findings have been applied in a practical context and their wider benefits for investors or the financial system.
Two investment portfolios were analysed in order to present the metrics and compare the results: one made up of the largest 440 European companies, weighted by capitalisation, and the other made up of the ESG best-in-class companies from each of the sectors, starting from the same investment universe, weighted by capitalisation.
The results showed that in most of the impact metrics analysed, the second portfolio, as expected, presented more sustainable characteristics. Regarding the contribution to the SDGs, the portfolio formed by best-in-class companies had a greater impact than the portfolio formed without establishing ESG criteria.
This analysis is applicable to any investment portfolio, investment fund or pension fund: fixed income as well as equity, or private assets. It can be carried out at the issuer level or, in the case of green bonds or social bonds or specific projects, at the product level.
It is very important to pass this analysis on to customers, who are aware of where their money is invested, what their impact is on society, and what global goal of 2030 they are contributing to, and in what percentage.