Case study by PGGM
PGGM is a Dutch pension fund service provider for six pension funds. As of May 2012 PGGM manages over US$150 billion of pension assets for 2.5 million Dutch participants. PGGM provides services in the field of pension management, integrated asset management, management support and policy advice to its institutional clients.
At PGGM portfolio managers are encouraged to look for ‘targeted ESG’ investments where feasible. These are investments that not only perform to the required financial standards but which also are intended to have a social impact. These investments are dispersed across asset classes and teams. Targeted ESG investments reached US$6.1 billion in 2011.
Examples of targeted ESG investments on behalf of PGGM clients include:
- A US$3.8 billion commitment to the Responsible Equity Portfolio – a concentrated portfolio invested for the long term in listed companies that operate in a responsible manner.
- Through two transactions with Banco Santander, one of PGGM’s clients is sharing in the credit risk of its European project finance portfolio. A large proportion of the underlying loans (currently 57%) relate to the financing of alternative energy, such as solar and wind power.
- US$324 million committed to 12 specialist clean tech funds in the US, Europe and Asia, through AlpInvest. The aim is to strike a balance between funds aimed at innovative technologies and funds investing in more developed and proven technologies. Both categories improve the efficient use of natural resources and reduce the impact of energy consumption on the environment.
- Joint development ventures such as with the International Finance Corporation (IFC) in its Latin American African Caribbean Fund. The aim of this fund is to contribute to the development of the private sector in order to create opportunities for the poor in developing countries in Africa, Latin America and the Caribbean.
- US$40 million in the Climate Change Carbon fund which invests in carbon credits.
- US$254 million in two forestry funds.
- Investments in Grassroots Capital’s Global Microfinance Equity Fund which invests loan capital mainly in start-up microfinance institutions.
- Three infrastructure funds and a direct investment that invest in sustainable energy projects, mainly in Europe.
Currently, there is limited or no information available regarding the social impact of these investments. PGGM is interested in developing some standardised metrics to measure the impact of their targeted ESG investments. Towards this end, working with Rotterdam University’s Centre for Strategic Philanthropy, PGGM has developed an approach to identifying impact across eight impact areas.
This year an approach to measure performance on impact indicators for each impact area is being piloted in close collaboration with external fund managers. Going forward, these impact indicators will be included in reporting requirements. PGGM is keen to collaborate with other asset owners to refine these indicators in order to reach a more standardised approach to reporting on impact.
PGGM expects that measuring and monitoring of the social impact of its targeted investments will enable better informed investment decisions. Also, it will allow PGGM to work actively with fund managers to seek ways to achieve greater social impact and reduce possible negative impacts.
While the ESG targeted investments are expected to meet the regular financial requirements as other investments in the respective asset class, it is too early to say what impact they have had on the risk/return profile of their portfolios. However, some teams have argued that this type of investment helps to diversify their investments – which may in turn have an impact on their risk/return profile. This is a question PGGM would like to investigate further in the future.