While the Corporate Sustainability Assessment (CSA) is best known for the aggregate sustainability scores that determine membership in the Dow Jones Sustainability Indices (DJSI) and the Sustainability Yearbook, RobecoSAM has increasingly moved towards identifying subsets of data to generate innovative product ideas. Manjit Jus, Head of Sustainability Application and Operations, offers three examples of how RobecoSAM has leveraged its CSA data to provide customized investment solutions targeting clients’ specific sustainability objectives.
Head of Sustainability Application
RobecoSAM’s Corporate Sustainability Assessment (CSA) has been running since 1999 – making it one of the longest running corporate sustainability assessments in the world. This also means that we have now collected 17 years’ worth of non-financial data on thousands of companies. Multiply this by the hundreds of data points we collect for each company each year, and we are talking about a universe of data – millions upon millions of data points stored in our database.
Collectively, these data points offer insights into the corporate sustainability profiles of companies. Alone, each one of these data points can tell its own unique story – or be combined with other pieces of information to form new ones.
So what happens to all of this information? With the digital age and the growing amount of data available on just about anything we can imagine, it’s easy to get overwhelmed by the volume of information we have at our fingertips. How can we possibly make sense out of all this information in a meaningful and systematic way?
Collectively, the data points from our CSA offer insights into the corporate sustainability profiles of companies. Alone, each one of these data points can tell its own unique story.
We’re best known for taking holistic views on companies’ sustainability performance by looking at the aggregation of all these individual, bite-sized pieces of information – these views form the basis for the Dow Jones Sustainability Indices (DJSI) – and for selecting companies in this Yearbook. They may be used to rate companies, screen them for investment funds or create index products. However, one of the main challenges of sustainability investing is that investors typically have different views on what sustainability means to them and how it should be defined and measured. This means that when it comes to sustainability investing, a one-size fits all approach relying on aggregate scores may not be suitable for all investors. For this reason, we have been increasingly unlocking the full value of all this data by approaching this information at a more granular level. Individual data points from the CSA can be recombined to address new topics, bundled into new questions to emphasize emerging sustainability trends, or focused on topics that are of specific client interest.
Over the next few pages, we take a closer look at our research and development process – and highlight some of the successful collaborations with external partners and clients in which we apply the CSA data in new and innovative ways – and how this can add value for corporates and investors.
Identifying sources of Long-Term Value Creation
As part of its efforts to develop practical tools and approaches to encourage long-term behaviors in business and investment decision-making, the Canada Pension Plan Investment Board (CPPIB) was interested in creating an alternative benchmark to market-cap weighted equity indices that would identify companies that demonstrate excellent long-term financial results and have best practices in place to achieve long-term value creation. So, in 2015, CPPIB approached S&P Dow Jones Indices (SPDJI) to develop an index focused on companies that are geared towards long-term value creation. We worked closely with CPPIB and SPDJI, to develop such an index by combining SPDJI’s own long-term Quality Score reflecting companies’ quality of earnings1, with the Economic Dimension scores from our CSA.
The Economic Dimension captures a number of elements such as corporate governance, risk & crisis management, and innovation management, all of which reflect a company’s quality of management and its overall orientation toward long-term value creation. SPDJI was able to structure a focused low-turnover index − the Long-Term Value Creation Global Index (LTVC) − that includes companies with both strong long-term financial performance based on their Quality Score2, and high quality management with an orientation toward long-term trends based on their Economic Dimension Score.3
While the Economic Dimension Score is a useful proxy for evaluating management quality, it is CPPIB’s intention to work with SPDJI and RobecoSAM to further strengthen the focus on dimensions that specifically measure activities related to long-term behavior. With this in mind, CPPIB and our Sustainability Investing Analysts at RobecoSAM worked together to develop a new “Materiality” criterion for the 2016 CSA. The Materiality criterion directly asks companies to identify their three most important sources of long-term value creation. Specifically, the criterion asks companies to identify:
- the business strategies linked to the sources of long-term value creation
- the metrics, targets and time frames used to measure progress
- senior executive compensation targets that are linked to these targets.
Importantly, the Materiality criterion also evaluates companies’ transparency in reporting their most material issues to investors in order to evaluate the quality of corporate disclosure on issues that drive long-term value. Through the annual CSA process in which companies participate directly through the on-line questionnaire, the Materiality criterion serves as a form of engagement, encouraging companies to improve their disclosure to investors and to orient reporting toward long-term issues.
1 as evidenced by (i) return on equity, (ii) balance sheet accrual and (iii) financial leverage ratio.
2 using a minimum of 3 years of data to determine the average Quality Score, and where possible, up to 5 years of data.
3 To further underscore the long-term orientation of the LTVC Index, a vintage rebalancing structure is applied. The weights of the companies in the index are determined using a rotation of three annually formed vintages, constructed over a three year period. Each vintage contains the top 150 stocks as ranked by the combined RobecoSAM Economic Dimension Score and the S&P Quality Score.
Stimulating economic growth through Human Capital Development
In December of 2015 the Bank of Japan announced its intention to make investments in exchange traded funds (ETFs) consisting of Japanese firms that are proactive in making investment in physical and human capital.4 While the initiative was certainly ambitious from an economic perspective, no such ETFs existed at the time of the announcement. In order to enable such investments, SPDJI and the Japan Exchange Group (JPX) turned to RobecoSAM to help develop an index that would focus on Japanese companies that perform well on human capital factors and that would be attractive from an investment point of view.
To create this index, we followed a similar approach to that of the LTVC Index: we combined both financial and sustainability factors. SPDJI contributed with its Capital Efficiency metric, which identifies companies that demonstrate success in their capital investments, while we provided the human capital element by focusing on the criteria from the CSA that evaluate human capital performance. Specifically, RobecoSAM created a customized Human Capital Score drawing upon the following criteria from the CSA:
- Human Capital Development
- Talent Attraction & Retention
Labor Practice Indicators and Human Rights
Through the resulting Human Capital Score, we were able to identify Japanese companies that understand the value-added benefits of their human capital investments and are therefore leaders in this area. By combining our Human Capital Score with SPDJI’s capital efficiency indicators, RobecoSAM and SPDJI were thus able to create a benchmark that is attractive for investors from both a sustainability and a financial perspective. Most importantly, by leveraging the human capital data from the CSA, SPDJI and the JPX were able to launch an instrument that allows the Bank of Japan to channel its investments towards companies that are investing in their workers and thereby contributing to the long-term growth of the Japanese economy.
Promoting gender equality
In 2014, the Fourth Swedish National Pension Fund (AP4) was interested in using its investments to promote gender equality and was looking for an asset manager that had the capabilities – and the data – to address gender-related issues in public equities. The RobecoSAM CSA had already been evaluating gender equality at the board level since 2002, and since 2012 we have been collaborating with with EDGE Certified Foundation – an organization that is on the front line of helping companies to address the topic of gender equality − to develop and define the CSA criteria for assessing companies’ performance on gender diversity throughout the workforce. Using this data, we developed a unique scoring methodology − the RobecoSAM Gender Score − to rank companies based on their performance on a range of key labor and gender-related criteria that go far beyond board diversity and that address the most important topics when it comes to gender lens investing. Such criteria include:
- the ability to develop and retain female talent across all management levels
- a comparison of remuneration levels between male and female employees (both base salary and bonuses)
- availability of work-life balance and flexible working solutions
- ability to track employee satisfaction levels, broken down by gender
The Gender Score derived from the CSA can then be used to identify companies that excel on gender equality and diversity. Not only do we believe that such an approach to stock selection helps promote corporate gender equality, we are also convinced that companies that lead on gender diversity are more likely to gain a competitive advantage because of their ability to attract and retain the best female talent.
The CSA and the vast amount of sustainability data collected over the years have provided us with over 17 years’ worth of insights, enabling us to drive innovations in the integration of sustainability into investment decisions. But as a growing number of investors, particularly institutional investors, become more sophisticated in how they wish to reflect their own sustainability convictions through their investment portfolios, we also recognize that it is important to take a more nuanced approach in order to deliver innovative, customized solutions that make the most of our sustainability database. This unique collection of information forms the foundation of our collaborations, partnerships and own research that help us further our mission to promote sustainable thinking in financial markets. And in turn, we will continue to work with our clients and partners to identify the specific ESG factors from the CSA that are most relevant to their sustainability objectives – while driving real, measurable change at companies around the world.
For more in-depth research on the topics of long-term value creation and corporate gender equality, please refer to the following studies: