Joop Huij: Clients now want to express their preference in a more explicit way.
Robeco's bespoke index business has grown significantly over recent years – reaching around £100bn in assets under administration by the end of last year as pension funds increasingly demand indices built around their own sustainability preferences.
Speaking to Professional Pensions, Robeco head of indices Joop Huij says the firm had taken share in a market traditionally dominated by a small handful of large providers – with clients moving away from both active and passive strategies towards much more bespoke mandates. He adds the customised character of the indices was the main reason clients were coming to the firm.
Indeed, Robeco has seen some significant client wins over the past 18 months – with Scottish Widows announcing a strategic partnership with Robeco in January last year to co-design and create new customised equities indices in developed and emerging markets.
The indices will be deployed across Scottish Widows' investment offering for UK pension savers, meaning "responsible investing is fitted as standard" across its portfolio.
Explicit preferences
Huij says many clients had built up experience of sustainable investing and now wanted to reflect their own views far more precise way.
He explains: "Most of the clients we work with already have significant experience with sustainable investing. Their understanding has developed over the years and they now want to express their preference in a more explicit way."
Huij gives the example of a pension fund of a labour union that may want a manager to explicitly focus on employee rights as part of a mandate. And he says there are large geographic differences too – with pension clients in Europe, US and Asia having large differences in ESG preferences. He says preferences also varied by sector.
Geopolitical shift
Huij says geopolitical developments over the past 18 months had strengthened this trend – but also notes some clients had grown uneasy about depending on data supplied by a small number of large firms, expressing doubts that these providers would incorporate new academic insights quickly enough in future.
He says: "There is a worry that the handful of large providers will not bring a lot of innovation to the market."
Sustainability alignment
Huji says a striking illustration of the gap between mainstream ESG ratings and clients' own values came from analysis the firm had conducted.
He says Robeco had downloaded the exclusion lists that many European pension funds publish, then examined the ESG scores given to companies those funds had explicitly barred from their portfolios.
"We found that in many cases, 20 to 25% of the firms on an exclusion list get the highest ratings that are available, which really shows that there is not a good alignment between those ESG scores and how the clients that use those scores think about sustainability," he says.
Modelling preferences
In response, the firm had developed what Huij calls a "language" for capturing each client's sustainability preferences, mapping companies against the United Nations Sustainable Development Goals to model a client-specific sustainability score.
"There are now 150 plus KPIs on which we have data that we can use to make a bespoke custom score for the client," he says, referring to the key performance indicators, or measurable targets, that sit behind the goals.
Portfolio roots
Huij stresses the firm is also careful to investigate the impact on returns and risk if such scores are implemented – enabling them to show clients the consequences of ESG decisions on risk, return and diversification.
He says Robeco's indices also take account of things like trading costs and the market impact of buying and selling, which he says particularly mattered for mid- and small-cap stocks and emerging markets.
Huij says: "The way we construct indices is exactly the same way we would manage a portfolio, and there are big differences between managing a paper portfolio and a real portfolio where you need to take care of things like trading, cost, market impact."
Going forward, Huij expects demand for customised mandates to keep building. He says: "If I now look at the engagements we have with clients at this moment, I see this trend becoming stronger and our growth to continuing in the near future."
