Case study by ACTIAM

Signatory type: Investment Manager

Operating region: The Netherlands

Assets under management[1]: €56.3 bn

Why we engage with companies on the SDGs

We believe the UN Sustainable Development Goals (SDGs) can serve as an engagement framework used to map out companies’ strategies and assess whether they are addressing material SDGs through their operations and supply chains or have gaps in their strategies regarding specific SDGs. This assessment helps determine the extent to which we are exposed to sustainability risks and opportunities through our equity and fixed income investments. Ultimately, the objective for engagement on the SDGs is to help transform a business strategy into a more future-proof and SDG-aligned strategy.

How we engage with companies

Prioritisation of companies and issues

To select engagement targets, the ACTIAM Selection Committee assesses sustainability information from a specialised data supplier to determine the companies, governments and institutions that qualify for engagement within existing holdings.

We engage both proactively and responsively. Proactive engagement often concerns companies that face future risks but have limited policies in place (or have yet to implement them) or companies that could make a positive contribution to the SDGs. When selecting companies for this type of engagement, we focus on climate, water and land.

Responsive engagement occurs when a severe controversy has occurred. Our goal is to work closely with the company to remedy the issue and develop a long-term strategy to minimise the risk of a similar incident. We look at the company’s strategy, policies, risk analyses, implementation, training and education of employees, complaint procedures, transparency and reporting.

The engagement process

A regular engagement trajectory consists of one or two in-person and/or virtual meetings per year. Partnering with a specialised engagement provider, we conduct responsive engagement for a relatively short term (around two years). When engagement is unsuccessful, the ultimate consequence may be to advise our selection committee to exclude companies from our investment universe. As proactive engagements are not focused on violations of ACTIAM’s Fundamental Investment Principles, they can take much longer than responsive engagements. We often work with other investors through the PRI Collaboration Platform for proactive engagements.

Green bonds impact engagements (SDG 7)

ACTIAM views green, social and sustainable bonds as an important strategy to reach the targets it sets for climate, water and land. For our responsible and sustainable fixed income strategies, we strive to hold at least 10% of the portfolios in green bonds. Green bonds typically aim to contribute to SDG 7 – affordable and clean energy – by reducing the negative environmental impact of CO2 emissions and energy consumption. The types of projects green bonds finance often concern energy-efficient buildings, clean energy and clean technologies. Increasingly, green bonds attract additional investments in clean water (SDG 6), sustainable industries, innovation and infrastructure (SDG 9), sustainable cities and communities (SDG 11) and climate action, including climate adaptation measures (SDG 13).

The issue

There are two main challenges associated with understanding the impact of green bonds:

  1. Impact measurement can be qualitative or quantitative; issuers use different baseline scenarios for the same impact and the attribution of the impact is sometimes unclear.
  2. The extent to which issuers report the impact of green bond projects also varies. This can include the level of detail, in terms of whether they report on specific projects or at an aggregated level, the degree to which the impact is quantified or qualified, whether the issuer reports on the impact or output level, whether the impact is expected (ex-ante) or actual (ex-post), the number of indicators, and whether third-party verification has been solicited.

Subsequently, it is not possible to compare the impact of different green bonds. Plus, it is difficult to ensure that they effectively contribute to SDG 7, which is important because once money has been lent, it is locked in.

Objectives/intended impact

Our objective is “from insight to impact”, so we distinguish between investments with and without an impact measurement. ACTIAM engages issuers to improve SDG impact measurements and reporting by asking questions during issuer roadshows.[1] In previous years, we encouraged regional development banks and other sub-sovereign issuers to follow the best practices of early movers like the European Investment Bank that provide the following impact/output metrics:

  • annual carbon emissions of the project, including absolute (gross) and avoided emissions (relative emissions against the baseline);
  • renewable energy capacity added (in MW);
  • energy (heat and electricity) saved (in MWh); and
  • location of the projects.

ACTIAM also tests whether the contribution to SDG 7 is substantial and additional, which is challenging. First, we ensure that the issuer reports on the measurable impact regarding the three investable sub-goals:

  • 7.1: Ensure universal access to affordable, reliable and modern energy services
  • 7.2: Increase share of renewable energy
  • 7.3: Double the global rate of improvement in energy efficiency

Next, we analyse whether the use of proceeds accelerates or follows the issuer’s efforts to shift towards greener activities by assessing whether the issuer defines quantified upfront hurdle rates/eligibility thresholds that go beyond national standards and regulations. In early 2018, we engaged a global financial services group on its contribution to SDG 7.3. Based on its definition of green buildings, we concluded that the risk of “locking in” weak energy efficiency performance levels was too great. The issuer responded positively to our request to include a more ambitious hurdle rate, stating that it will only finance projects with a minimum efficiency improvement of 30%. In addition, the issuer is willing to finance green buildings that are in the top percentile of the local market, thereby aligning with market best practices.

To assess the impact on other, less quantified SDGs, we use the qualitative information from the issuer and assess the contribution to the SDGs accordingly. Where possible, we ask issuers to quantify and report on their impact in relation to the SDGs.

Client reporting examples

ACTIAM aims to understand the extent to which its investments contribute to the SDG agenda. Steadily improving impact data will allow investors like ACTIAM to better monitor, manage and communicate their contributions to (selected) SDGs to clients and participants. A case in point is client reporting on the SDG allocation to projects financed by the green and social bonds in our SNS Obligations Fund (Figure 1). Unsurprisingly, SDG 7 has the largest share and the rapidly-growing social bond market is already visible through SDG 8 in this example. Most likely we will see more reporting on social bonds in the near future.

Actiam SDG Allocation_Green bonds_SNSObligationpool

Figure 1. SDG allocation to green bonds we invested in through the SNS Obligations Fund in 2016