Avoiding negative impact on the SDGs contributes to performance

This analysis shows that supporting the SDGs is not only a good way to make a difference, it is a means to support financial performance.

Positive link to sector performance

Robeco developed a unique approach in 2018 to screen for UN Sustainable Development Goals (SDGs), which is applied across a range of Robeco strategies. Last year, the initial analysis showed that sectors which were positively aligned with the SDGs had lower credit risk and that, over a five- year period, sectors with a positive or neutral SDG rating had a superior risk-return relationship compared to those with negative SDG scores.

With the SDG Credit strategies now having developed a track record, the next step of evaluating results at the portfolio level was taken, to determine how the SDG measurement framework adds value in practice. In particular, the results were assessed in the wake of the Covid-19-related market sell-off.

Holding strong during Covid-19 crisis

Following a positive start, 2020 has proven to be unprecedented, with a dramatic sell-off in global credit markets in response to the Covid-19 crisis. Spreads moved from late bull market tights to recessionary levels in both investment grade and high yield within just four weeks. The Global Investment Grade Credit Index 1 declined by -6.07% (EUR) in March and -3.6% over the quarter, while the Global High Yield index 2 showed a steeper decline of -12% (EUR) in March and -13.7% over the quarter.

Moret says that, by using detailed attribution analysis at the portfolio level, Robeco’s SDG screening methodology for credits shows positive results during the crisis.

Performance of the RobecoSAM Global SDG Credits strategy 3

The RobecoSAM Global SDG Credits strategy outperformed the Bloomberg Barclays Global Aggregate Corporate Index by +90 basis points in March, bringing the outperformance over the first quarter to +103 basis points (DH EUR share class,
gross of fees). Since inception in June 2018, the strategy has outperformed the index by 128 basis points per annum, and the cumulative outperformance over this period was 239 basis points (DH EUR share class, gross of fees).

“Importantly, half of this cumulative outperformance is directly attributed to the SDG screening, through avoiding the bad names,” Moret says. The findings show:

Avoiding names with negative SDG scores contributed 81 basis points cumulatively over the period since June 2018 – almost 70% of the SDG-related outperformance. This included avoiding some large integrated oil and gas companies that have a negative SDG score, avoiding large automotive manufacturers with little or no revenues from electric vehicle sales and avoiding some large well-known utilities and banks with a negative SDG score (including banks, for example, with negative SDG scores owing to concerns related to corporate conduct).

43 basis points of the outperformance is linked to favoring companies with a positive SDG contribution. Robeco’s SDG methodology led to the inclusion of a number of firms due to their positive SDG scores for business practices, including a global paper pulp producer, an Indian telecoms operator and a German automotive parts producer – among others – which contributed to the overall outperformance.

Performance of the RobecoSAM Euro SDG Credits strategy

4 SDG screening was implemented for the RobecoSAM Euro SDG Credits strategy in January. Over the period January 2019 to March 2020, the strategy outperformed the Bloomberg Barclays Euro Aggregate Corporate Index by +6 basis points. A similar outcome is seen here with regard to the contribution of the SDG screening to relative performance, albeit over a shorter period. The SDG screening added 68 basis points, with equal contributions from avoiding names with a negative SDG score and being overweight in names with a positive SDG score. A strong contribution from issuer selection is evident here, too (79 basis points).

How the SDG screening works

Robeco selects the SDG-eligible universe of credits using its proprietary SDG screening methodology, which was developed in 2018 in cooperation with RobecoSAM. This process of screening companies and giving each an SDG score comprises three steps: establish how the products or services produced by the company contribute in a positive or negative way to the SDGs, analyze how the
company’s conduct contributes to the SDGs, and determine whether it is or has been involved in any controversies and, if so, whether measures have been taken by the management to prevent this from reoccurring. The SDG scores range from +3 to -3. Only bonds with a positive or neutral SDG score are eligible for inclusion in the portfolio; those with a negative score are excluded from further consideration.