Lauren Ryan from Thinktank speaks to Laurence Parker-Brown for our IN60 series. The Inside Adviser
That consumers are influenced heavily by well known, trusted brands comes as no great surprise. What does, though, is that they rate life insurance as the least most important tool in ensuring financial security.
A new way to measure a company’s planetary impact: Robeco
Over time the core role of ESG investing – delivering planetary impact – has become increasingly conflated with delivering shareholder returns in order to satisfy investors. Addressing the need to demarcate the two so impact can be gauged as accurately as returns, Robeco Asset Management has created an SDG score framework that captures a company’s contribution to mitigating climate change.
Speaking with The Inside Adviser about the SDG score and his recent research paper, Corporate Sustainability Performance: Introducing an SDG Score and Testing Its Validity Relative to ESG Ratings, Robeco SDG strategist Jan Anton van Zanten explains why the manager created the framework.
“ESG ratings fail to capture companies’ sustainability impacts,” van Zanten (pictured) says. “A recent list of the top five ESG-rated companies, for instance, includes British American Tobacco, mining giant Glencore and soft drinks producer Coca-Cola HBC – stirring an intense debate on ESG rating’s ignorance of these companies’ adverse impacts.”
Some of these lists don’t have environmental impact at their core, he argues.
“Despite the emphasis on sustainable development, ESG assessments have primarily focused on assessing if a firm’s financial performance may be influenced by ESG factors. Less attention has been paid to if companies contribute to a better world.”
According to van Zanten, the Robeco SDG score measures companies’ contributions to the United Nations’ 17 climate change mitigation ambitions, which is conceptually different from ESG ratings.
“Companies that ranked among the top climate change contributors received negative SDG scores and SDG scores for companies delivering positive planetary impact were overwhelmingly positive. Hence, the SDG score captures both companies’ positive and negative impacts,” van Zanten says.
“In contrast, ESG ratings insufficiently capture companies’ contributions to sustainable development, showing that the SDG score yields different results compared to ESG ratings. We conclude that the SDG score has high construct validity as a CSP metric and enjoys high discriminant validity compared to ESG ratings.”
Mechanics behind the Robeco SDG score
Van Zanten says the SDGs help determine how companies contribute to mitigating climate change, a metric linked to the UN’s 17 development goals. The SDG framework does this via a three step process.
“The first step uses key performance indicators to determine which SDGs are impacted by products and services,” he says. “The second step determines if the company’s business conduct contributes positively or negatively to SDGs. The final step investigates if the company has been involved in controversies, like corruption, fraud, or environmental accidents.
“Companies are scored on their contributions to each of these SDGs, allowing for seven types of SDG scores: low (+1), medium (+2), high (+3), neutral (0), low negative (-1), medium negative (-2) and high negative (-3).
“Once a company’s impacts on the 17 SDGs has been scored, its overall SDG score is calculated. As a rule of thumb, a company without any negative scores is given the highest score as its overall score. On the contrary, a negative score for any of the SDGs, will receive the lowest score as its overall SDG score.”
This rule reflects the precautionary principle in sustainability: the importance of avoiding harm.
Comparing to ESG
Using data and back testing, van Zanten says he compared the SDG method with the ESG framework and found a company’s SDG score is relatively uncorrelated to its ESG rating.
“Big polluters get negative scores, while those providing solutions are positively scored. The SDG framework assigns a positive SDG score on SDG 13 (climate action) to companies providing solutions to climate change such as renewable energy providers, manufacturers of electric vehicles and to technologies for renewable energy generation and storage,” he says.
“The SDG Framework thereby helps avoid the biggest polluters and prioritize those companies that can help solve the climate crisis.”
Van Zanten determined that SDG scores complemented rather than replaced the ESG framework.
“This makes these metrics complementary; whereas the SDG score helps align investments with sustainable development ambitions, ESG ratings might help avoid financially material ESG risks.”
