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Optimizing the power of ESG scores

Smart ESG Integration

RobecoSAM continuously works to enhance the integration of environmental, social and governance (ESG) factors into investment decisions to help investors reap the benefits of Sustainability Investing. Using the information collected through our annual Corporate Sustainability Assessment (CSA) RobecoSAM’s Quantitative Research team developed an innovative “Smart ESG” scoring methodology.

The next generation of ESG scores

Conventional ESG scoring methodologies do not fit into traditional factor models and typically result in size or regional biases. Large cap companies tend to have better corporate sustainability processes and disclosures than smaller companies, and European companies tend to be more transparent. As a result, these companies tend to receive higher ESG scores. In addition, in contrast to mainstream factors such as value or momentum, traditional ESG scores are broad, often aggregating hundreds of individual indicators into a single score, diluting financially material information. To address these challenges, we have built upon our existing methodology to develop unbiased and financially material ESG factor scores that are more relevant for investors.

Our Smart ESG methodology leverages the wealth of sustainability data in our proprietary sustainability database to identify the most financially material sustainability criteria in order to develop an ESG factor that can be combined with other common financial factors

RobecoSAM Smart ESG methodology

  1. Removing biases
    We begin by systematically removing known market cap, industry and regional biases from the historical sustainability data collected over more than 20 years of conducting the Corporate Sustainability Assessment.

  2. Combining forward-looking views with past evidence Our sustainability research is based on a forward looking financial materiality framework for each industry, which reflects our Sustainability Investing Analysts’ (SI Analysts) expectations on which ESG indicators are most likely to contribute to a company’s financial performance.
    Our quantitative research team takes this one step further and carries out a historical quantitative analysis to test which sustainability indicators have had the greatest impact on past financial performance, allowing us to pinpoint which ESG indicators are the most financially relevant for each industry. Not only are the results fed back into the CSA to determine future adjustments to the criteria weights, the sustainability score is also optimized so that the most financially relevant criteria are overweighted relative to those that had a minimal impact on financial performance, sharpening our focus on financial materiality.

  3. Neutralizing factors
    As a final step, we remove any unintended exposures to common financial factors. This allows us to isolate a quantitative sustainability factor that can be combined with other common factors in an investment portfolio. The resulting ESG Factor Scores are unbiased, evidence-based scores with an attractive risk return profile and low correlation to investment factors. This allows us to include sustainability in a traditional factor model and measure how much exposure any given portfolio has to sustainability as well as its contribution to the portfolio’s risk and return.

Simply put, our Smart ESG methodology uses quantitative analysis to “find the alpha” in sustainability.

Integrating Smart ESG

Having enhanced the predictive and explanatory power of our sustainability data, we have integrated Smart ESG into the S&P ESG Factor Weighted family of sustainability indices, and are now working on integrating Smart ESG across an even wider range of solutions, both active and passive.

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Disclaimer RobecoSAM

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