Case study by PGGM Investments

PGGM Investments (PGGM) invests in infrastructure worldwide for our clients due to the expected stable and attractive long-term returns. The investments include projects in the regulated sector and monopolies or those with long-term purchase contracts.

Key findings

  • Make the investment managers owners of the ESG integration process.
  • Share ESG knowledge among your alternative investment managers.
  • Taking a subsector approach to infrastructure makes the variety of ESG factors manageable.
  • Take advantage of sustainable infrastructure opportunities for financial and social reasons.

We consider ESG factors in all investment activities for our clients. We believe ESG factors impact the risk and return of our investments and responsible investment is an integral part of our investment policy and beliefs. For our infrastructure investments, two responsible investment activities are relevant as they relate to investment decision-making: ESG integration and targeted ESG investments. By ESG integration we mean ‘systematically adding material ESG factors to existing investment processes’. ‘Material ESG factors’ are those which have a significant financial impact on the underlying investment. Targeted ESG investments are investments which not only contribute financial performance for clients but also generate a social return.

ESG integration process

In the fourth quarter of 2009 PGGM developed a structured approach to ESG integration comprising three phases for infrastructure investments: ‘inventory’, ‘implementation’ and ‘internalisation’. Our internal asset managers are the owners of the individual integration processes and specialists from the responsible investment department supervises and supports this work. One advantage of this model is that integration processes are implemented simultaneously across all investments, further raising awareness of ESG among internal and external investment managers. It also guarantees that all relevant investment and ESG knowledge is integrated.

“By integrating ESG into our investment decisions, we align our process with the ESG criteria of our institutional clients. We look at both the opportunity and risk side of ESG factors to deliver a financial and sustainable return.”

Henk Huizing (Head of Infrastructure) PGGM Investments

Implications for infrastructure

Phase 1: Inventory

Because infrastructure is a very diverse investment category, we carried out a survey phase for six subsectors. ESG frameworks have been developed for gas storage, toll roads, distribution networks for gas, water and electricity, marine ports, telecommunications, and power plants. Desk research and conference calls with infrastructure and ESG analysts helped to find the relevant ESG factors. We also looked at research papers and existing ESG frameworks, such as the IFC.

Our survey showed that issues including biodiversity, human rights, climate change and stakeholder management can have a material impact on infrastructure. For example, failure to involve the local population in infrastructure projects can lead to lawsuits and delays, therefore reducing income. Climate change, particularly regulations or taxes on carbon emissions, can have major effects on the income and/or expenditure of power plants, toll roads and airports. This can also lead to a major change in assessing conventional and renewable power generation.

At the end of 2009, PGGM took part in the Mercer project on climate change scenarios. Leading institutional investors and experts investigated how climate change could be included into strategic asset allocation and affect asset class performance, including infrastructure. The project shows that policymakers play a crucial role in managing climate change and the need for engagement as part of ESG integration.

Phase 2: Implementation

This is our current phase, where we analyse how to further strengthen current practice. For example, in new investment proposals the infrastructure team includes an ESG paragraph of ESG risks and opportunities. RI specialists are also involved in due diligence processes in relation to various investment proposals. This includes additional questions on human rights raised with the intended external manager prior to a new investment.

Specific next steps:

  • developing a baseline measurement questionnaire, similar to our private real estate portfolio;
  • developing a specific responsible investing policy for infrastructure that outlines our current ESG requirements for inclusion with contracts;
  • generating ESG reporting requirements for funds.

Phase 3: Internalisation

In the next phase, ESG factors will form a natural part of the overall investment process. This means ESG factors are part of the normal routine of the investment process and are periodically assessed and adapted if necessary by the infrastructure team.

Other supporting activities

  • We try to stimulate knowledge sharing among asset classes. For example, in June 2010 we organised an ESG integration workshop as a prelude to the individual surveys. The heads of the investment teams took part, together with representatives of the RI department and senior management. The investment teams gave all the presentations and supervised the work sessions. The aim of the workshop was to present best practices and exchange experiences gained during the ESG integration process.
  • The head of the responsible investment team is permanently represented on our main Investment Committee, ensuring that important ESG investment decisions become a structural part of investment assessment.