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Robeco’s SDG-based portfolio analysis separates climate leaders from laggards

© Shutterstock / JPstockRobeco.

Asset manager Robeco’s analysis has shown that sentiment over climate change is a determinant of the performance of stocks.  Analysing the performance of a portfolio of shares of clean and polluting companies during times of increased uncertainty over climate change provides a way to distinguish sustainability leaders and laggards. 

Robeco’s analysis used its ‘polluting-minus-clean’ (PMC) portfolio, made up of stocks chosen from the S&P Global’s (NYSE:SPGI) LargeMidCap Universe,  that made positive or negative contributions to the UN’s climate-related Sustainable Development Goals (SDGs).

The portfolio, which was long-polluters and short-clean companies, performed poorly when climate policy uncertainty was heightened, or during times when temperatures were anomalously high.

A focus on SDGs rather than ESG metrics may provide a way of investing in sustainability, Robeco has argued, further supported by performance in its PMC portfolio. Switching to UN SDGs and away from ESG metrics may alleviate a lot of confusion, but risks adding to the anti-sustainability argument.

Robeco has developed a proprietary SDG-based framework to develop related investment strategies, and measure SDG impact generated, which it argues is more relevant to making positive change. It backs up its claims, citing empirical evidence to support positive performance from screen for SDG impact generation and sustainability characteristics.

The firm’s SDG framework ascribes a quantified score to equity and credit issuers via a three-step process that captures and combines the SDG impact of a company’s revenues, and products, its internal operations, and what it calls “corporate controversies”, which can span the ESG spectrum.

Polluting-minus-clean portfolio performance under climate policy uncertainty stress

The PMC portfolio was constructed by taking long and short positions in stocks based on their score using Robeco’s SDG framework. Long positions (owning a stock) were taken in companies that had an SDG score of -2 or -3 for either SDG 7 (affordable and clean energy), SDG 11 (sustainable cities and communities) and SDG 13 (climate action). Stocks with a score of 2 or 3 in the same SDGs made up the short side (selling a stock that is not owned) of the portfolio.

The two sentiment gauges used to measure portfolio performance were climate policy uncertainty index(CPU), and a temperature anomaly index. The latter identifies months with temperature anomalies, while CPU measures volumes of text-based news flow linked to climate change, serving as a proxy for uncertainty around climate policy.

Portfolio performance measures sentiment related to policy, temperature extremes

Performance was measured monthly over a fifteen-year period, from December 2005 to December 2020. On average, in periods during rising climate concerns the portfolio delivered an annualised return of -4%, while during stable, and subsiding climate concerns, it returned 1.3% and 1.4% respectively.

Examples of heightened climate concerns included November 2015, the month before the Paris Agreement, December 2009 during COP15 in Copenhagen, release of the UN-IPCC report (October 2018) and during the Australian wildfires (December 2019). 

The performance was also more pronounced during periods of extreme temperatures, with a -4.83% return on average during periods of high temperature anomalies, and a positive (4.4%) return when the opposite occurred, with an almost flat return when there were no temperature anomalies.   

Aligning with UN SDGs can achieve standards harmonisation

Making sense of the various standards and disclosure methodologies used to derive ESG metrics adds complexities and poses challenges in harmonising regional norms and regulations. Proponents of investment strategies aligned with measuring impacts generated on UN SDGs suggest they present a universality that can be used by all sectors and across regions.

Meanwhile, assets continue to flow into ESG- and sustainability-labelled assets, as  standards and regulations to help provide some measure of harmonisation help investors align their sustainable investment choices with the right investments. 

An increase in popularity of SDG-based strategies could risk adding to the rising anti-ESG sentiment. To make matters worse, concerns over greenwashing have also resulted in many funds being stripped of their ESG label. At stake is the acceleration needed in affecting a transition away from fossil fuels, which has suffered delays due to the pandemic and geopolitical instability from events like the Ukraine war.

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