Kees Koedijk is a Professor of Finance at Utrecht University and a Fellow of the Centre for Economic Policy Research in London. He is one of three academics on Robeco’s Advisory Board for the UN Sustainable Development Goals, providing objective feedback on the scoring methodology of our SDG Framework, as well as its application to investment products.
- We can capture impact in a proper way and also get good risk-adjusted returns
- Limiting stocks with ESG doesn’t produce a big change in risk/return outcomes
- Many companies are intentionally making specific choices about their impact
You began your career in traditional finance. What triggered your interest in sustainable investing and finance?
“It began back in the early 2000s while I was a professor of finance at Maastricht University in the Netherlands. At the time, I was also working as an external advisor to the Dutch pension fund ABP and other members of the investment community. One of the issues that kept surfacing was the potential for applying environmental, social and governance (ESG) factors to investments. These issues drove me and fellow colleagues at Maastricht to study their impact at the portfolio level. We found that there was no real difference between the risk/return characteristics of conventional investments and those of sustainable portfolios.”1
“This was a really significant finding because, at that time, most academics and investors believed that ESG would introduce a new portfolio constraint that would limit the investment universe and ultimately a portfolio’s return potential. Our findings to the contrary triggered a lot of attention from institutional investors, think tanks, governments and other institutions, which led to many projects and collaborations on sustainable finance and development in the years that followed.”
What are you currently working on?
“I continue to do research in both traditional as well as sustainable finance topics; more specifically on examining the evidence of sustainable investing’s impact from real-world applications. I’m an academic who appreciates theory and models, but I’m also practical and want to see how things play out in reality. Right now, I’m focused on studying how deliberate choices made by investors can change company actions and limit such things as carbon emissions and climate change.”
“Together with others, I’ve helped launch two separate companies, Global Property Research (GPR) and Finance Ideas, which are focused on applied research. An offshoot of Finance Ideas is the independent Global Real Estate Engagement Network (GREEN) – an alliance of prominent asset owners and investment managers, including Robeco, who are devoted to incorporating ESG criteria into real estate and infrastructure investments. It provides a forum for things such as sharing and comparing building emissions data across developers globally to support recommendations that help improve building design and renovations.”
How is your current research informing and advancing sustainable investing?
“Some of the major questions that researchers are currently asking is whether all these sustainability criteria are having an effect on portfolios or real-world outcomes? Are we measuring something that is real, or is it greenwashing? One funny thing I’ve observed is how the sustainable investing market has changed after ESG and the EU’s Sustainable Finance Disclosure Regulation (SFDR) moved in. I am currently working on what the classification of investment products according to their level of embedded sustainability did for market players. Sometimes the press reads it negatively, but I found that investors have used ESG positively in ways that can be measured, such as through fees, performance and behavior. We have not found any tangible evidence of greenwashing.”
“In terms of impact, the key question is whether you can capture it in a proper way while also getting good risk-adjusted returns. I think the SDGs provide a valid, reliable way of working towards that impact question for investment portfolios. This is certainly the case when you have a physical asset like a building or infrastructure from which you can concretely measure the emissions and effects.”
Was it discouraging to not find a performance difference between conventional portfolios and those incorporating ESG?
“No, not at all. The prior thinking in finance was that limiting your choice worsens your risk/return trade-off. And everyone thought that integrating ESG factors would limit your choice, reduce your diversification and lower your expected returns. But we found that limiting the number of stocks as a result of incorporating ESG didn’t really produce a big change in risk/return outcomes compared to traditional portfolios.”
“That’s a good thing because it shows that a portfolio’s risk/return profile – which is crucial for investments – is definitely not deteriorating by incorporating ESG. At the same time, you are allowing your product to become more focused and aligned with investor values, priorities or beliefs. We often think that market efficiency means that markets will take care of everything, but this is not the case. You need to maintain your own thesis, your own focus, your own ideals. The market won’t do that for you.”
“Moreover, sustainable investing realigns society and investing, which until now have been moving along different trajectories. If investors want to invest in firms with less of an environmental footprint, or which are aligned with the SDGs, they can without hurting returns.”
Aren’t asset managers still trying to find an alpha effect (beating the benchmark) from ESG?
“It is very difficult to have continuous and enduring alpha from the same sustainability factors over the long run. At the beginning with the launch of a new sustainable product, you may be able to capture some alpha for a short time, maybe three to four years, because alpha from sustainability does exist. But you must be vigilant because markets are super-efficient. We saw that in our research even as far back as the early 2000s with governance characteristics already being well incorporated into stock prices. This was followed by the ‘E’ and then the ‘S’ factors.”
“Datasets are being updated all the time, and market participants are watching closely and learning quickly. All of this information is being integrated into stock prices. Beyond alpha generation, sustainable products should have other attributes that are important for investors, such as greater value alignment. Sustainable products shouldn’t be bought or sold based solely on the need for alpha generation.”
The SFDR emphasizes the concept of double materiality – the impact that a company has on the world as well as the impact the world has on the company. What’s your view on the SFDR’s impact on investments?
“I’m positive on the SFDR’s effects. I think it’s great that Europe is taking the early initiative and the lead on this. It really focuses the attention of investors toward more societal and environmental goals. On the negative side, you could argue that it will create a lot of bureaucracy; but on the positive side it provides a competitive edge. It should push investors to rethink and realign their portfolios.”
“I can already see that its moving things positively forward. I sit on a lot of investment advisory boards and even as of two years ago, no one was paying attention to it. However, now they are diving deep, rethinking what they are doing and asking their members and stakeholders what their preferences are.”
Company executives, government leaders, the investment community, even celebrities, are talking about the SDGs. How do you explain their popularity?
“Everyone was looking for a common language and the SDGs provided that. Climate change has shown that we can no longer deny the negative impacts of business activities. Business, governments and investors have to confront these real-world issues because they are not going away. The SDGs are 17 goals that capture and prioritize sizable sustainable challenges that, like climate change, represent a risk to global business.”
“Another attractive aspect is that they were standardized right from the start and are relatively straightforward in terms of their intended goals and metrics to measure progress. That has helped companies, investors and a broad community of stakeholders to put them to use in measuring, managing and reporting on their impact.”
“But the idea and momentum behind considering real-world impact in investments has been building for a long time, it just wasn’t visible. What we are witnessing now is really the tip of the iceberg. Underneath, there is more than two-decades’ worth of work from academics, members of the investment community and other stakeholders. Moreover, climate has also been a big force for change. It’s a sustainability challenge that has evolved into an inexorable global crisis that business, governments, consumers and investors are being forced to confront. That’s increased the focus on what might be the next ‘in-your-face’ sustainability challenge with global ramifications.”
When it comes to the SDGs, are company data and disclosures adequate to measure impact?
“There are many companies that are intentionally making specific choices about their impact. Unilever is a great example. It focuses a lot on creating what we call ‘shared value’ among stakeholders. They’ve looked closely at what they are producing and where those things bring positive benefits but also negative effects across their supply chains. They’ve mapped out what they can cut out of the process and what steps it takes to do it. This kind of shared-value creation and the competitive advantages it creates is really gaining momentum among companies championed by business school academics like Porter and Kramer out of Harvard.2 It is a whole new way of looking at your business that many companies are actually undertaking.”
“We are only at the starting phase and we are also seeing pushback. In the US, many argue that a company’s main purpose is to generate shareholder profits. But I think ‘shared-value creation’ should be part of a company’s mission and so measuring impact is going to stay with us.”
How is SDG measurement different from ESG integration? What does one measure that the other doesn’t?
“I like the SDGs because they are standardized, forward-looking and focused concretely on specific societal challenges. ESG, on the other hand, tends to be non-standard, backward-looking and much too fuzzy and qualitative. To be honest, as an academic, I would say the jury is still out. The advantage of the SDGs is that there are standardized and a globally accepted framework. The financial world has accepted and adopted them much like the real world. Part of that acceptance comes from its use of simple metrics laid out in straightforward language that resonates with businesses.”
Can the SDGs be used to generate alpha? Is this an appropriate expectation of investors?
“Like any innovation, there is the possibility to generate alpha, for sure. But that shouldn’t be the product’s prime selling point. Managers shouldn’t forget what they are up against – a highly efficient and adaptive investor market. Any price effects from SDG information could be mitigated very quickly as most investors are moving in the same direction. I think it’s much more important to focus on value alignment and the impact goals. The finance industry has for too long neglected the societal and environmental effects of companies; the SDGs are a tool to help us get back on track.”
Isn’t there room for companies to misuse the SDGs, to pick and choose only what they want to disclose?
“Some will certainly do that, but that shouldn’t stop us from continuing to measure and advocate for company disclosure. We need to take a long-term perspective and realize that this is an enormous challenge for companies that has come to the fore only in the past three to five years. Prior to that, while researchers were interested in studying impact, there was no real push for companies to measure, monitor and disclose anything.”
“It’s now out there, and companies have grasped the importance of the SDGs for their customers, suppliers, investors and regulators. With so many onlookers, companies realize the need to be clear and transparent. That’s why I like Robeco’s SI Open Access initiative; it gets company results out in the open. With time, I am optimistic that companies will get better at measuring and reporting their outcomes.”
1 Bauer, Rob, Kees Koedijk, and Rogér Otten. 2005. “International Evidence on Ethical Mutual Fund Performance and Investment Style.” Journal of Banking and Finance 29 (7): 1751–1767. doi:10. 1016/j.jbankfin.2004.06.035.
2 Kramer, M. R., & Porter, M. (2011). Creating shared value. Harvard Business Review, 89(1/2), 62-77.
