Russell Gilbert: In 2016 ABP began the implementation of a responsible investment policy with goals set for 2020. What were the motivations for this and can you outline the strategy and investment priorities?
Corien Wortmann-Kool: What we found is that our pension fund beneficiaries, 2.9 million people in the Netherlands who are either active employees in the government, education and public sectors or are retired, increasingly demanded that responsible and sustainable investment should be at the heart of what we do.
Through our Vision 2020 strategy, we have made a commitment to participants to realise returns in a responsible and sustainable manner. Of course, participants invest in our funds to achieve a good pension, so returns are extremely important and are central to our strategy. Understanding this, we of course did a lot of research before launching Vision 2020 and concluded at least the same and possibly better financial results could be achieved by investing our assets in a sustainable way.
With almost €400 billion in assets, accountability to participants and to the general public is extremely important. So in order to make this strategy more than just an exercise on paper, we’ve set very concrete goals for our new responsible investment policy as we head towards the year 2020 and communicate the progress we’ve made through our annual sustainability report. At the same time, the nature of our business means that we very much look to the future. So while we have goals to 2020, the policy for responsible investing is very much a long-term one and it is a pillar of our investment strategy.
Understanding that long-term perspective, why set out a strategy that looks forward only as far as 2020?
One reason for providing a shorter term focus is that if you set out goals over a longer timeframe – to 2050, say – the urgency to start delivering results is far less. By the end of this year we will evaluate the progress we’ve made and identify the next horizon for our goals. For instance, contributing to the Paris Agreement on climate change is an important part of our responsible investment policy. With this the goals are very much longer term, so in the upcoming years we will set goals for farther into the future.
Responsible investment policy
In your presentation at the RSM Leadership Summit, you identified ABP’s mission as being about realising returns in a responsible and sustainable manner while acting as a force for good without compromising returns and risks. How do you strike the right balance between the fiduciary duties ABP has to its fund members while being a force for good?
It’s worthwhile explaining the progression we went through in developing our responsible investment policy. Prior to 2008, our asset managers looked at all our investments from three perspectives: returns, costs and risks. Through the period 2008 to 2015, we developed an ESG Criteria policy on top of these three elements relating to how we engage with the companies we invest in.
[Editor’s note: ESG Criteria are environmental, social and governance principles applied as non-financial indicators by which the ethical impact and sustainability of investments can be evaluated.]
We also adopted a policy based around the exclusion list of the UN Global Compact’s 10 principles, which covers issues such as human rights, labour practices, anti-corruption and more. Adherence to this means we do not invest in companies active in certain areas or with certain products and services that relate to this list.
With our new responsible investment policy, which our asset management organisation APG started implementing in 2016, we aim to completely integrate ESG into each investment decision. Our approach is that with a portfolio of close to €400 billion in assets, a shift towards responsible investing cannot be done overnight. It takes time to transition. Every investment decision we make needs to relative to risks, costs, returns and ESG criteria, and this is the policy we are implementing towards 2020.
Leaders and laggards
Relative to the UN Global Compact, ABP has specifically aligned itself with a number of its themes, including the eradication of child labour, respect for human rights, safer working conditions, and more. Can you elucidate?
Next to setting concrete goals relating to climate change and the SDGs, we selected themes in the areas of engagement. By engagement, I mean where APG takes the initiative to have a dialogue with the companies it invests in and helps encourage them to strive for improvements. For ABP to achieve the goals it has set, it’s important to take a targeted approach. For example, a key component of electronic devices is cobalt, which is used in the batteries that power everything from mobile phones to electric cars. The use of child labour in cobalt mining is a big problem. Working together with other asset managers, we can put pressure on the companies involved and really make a difference.
We’re applying this approach to other sectors where we see issues, such as the cocoa and textile industries, and work with the expectation that engaging with sectors and companies to identify areas of concern will improve practices and enhance sustainability.
As we seek to fully integrate the ESG factors into each and every investment decision, APG has divided our equities and bonds – basically the listed companies we invest in – into business sectors. In each sector, we take relevant ESG themes as they relate to the UN Global Compact and make a distinction between firms we call leaders and laggards.
Leaders are companies in these sectors that are performing well. Laggards, on the other hand, are not, but have the potential to change, and the potential to improve their strategy and performance. This is a very interesting area for us to invest in. Here engagement is a very important instrument that helps us challenge and encourage companies that are laggards to fulfil their promise and push them to become leaders.
So how do you encourage these laggard companies to improve?
As a major investor, we can really make a difference. When companies know that improving their performance across these thematic ESGs might encourage our investments in them, it can be a powerful incentive for change. If laggards don’t have the desire to become leaders, we won’t invest in them or if we have, we’ll take the decision to sell the equities and bonds we have in them. With this approach to engagement and inclusion, we are one of the leaders in the world.
Laggards are assessed by portfolio managers not just with financial indicators, but also by other factors, including ESGs, that show their potential. Companies know that if they are highlighting their investment case to ABP, they need to show their performance on these ESG indicators. This is the game changer.
ABP is proactive when it comes to influencing companies. Last year it voted on the election of some 18,000 directors at more than 1,500 shareholder meetings, has made recommendations to many companies about how they might improve on issues such as gender diversity, energy reduction, and a whole lot more.
We can achieve results in this way, although I must explain we don’t do this on our own and have co-operation at national and international levels. Some areas we focus on more than others – remuneration for example. We are very keen that remuneration and variable pay is linked to performance, and that performance criteria go beyond the short-term. Instead, performance and strategy should also support the medium and long-term interests of the company.
How do you deal with public criticism of ABP investment decisions, for example, that it maintains fossil energy investments while proclaiming it wants CO2 reductions? Also, ABP supports the UN Global Compact, which is centred on human rights. However, in spite of international criticism of Saudi Arabia for its discrimination against women and the lack of political freedom, ABP still invests in the country.
Sometimes people disagree with what we’re doing in some areas. This is not a bad thing as it’s important to have open discussions. We’re told sometimes that we should exclude all fossil fuel investments, for example. In respect to this, we look to major industry players like Shell and expect them to show in their strategy that they are contributing to combatting climate change and to the transition to renewable energy. It’s common sense that the energy sector has to contribute to the energy transition.
Indeed, Shell is changing its strategy and has adopted an approach where it will assess its own portfolio relative to financial risks and climate change. And they will report on that, which shows they are moving in the right direction. ABP strongly supports such actions.
Our own results show we achieved a 16 per cent reduction in CO2 emissions in 2016, which positions us very strongly to achieve our goal of a 25 per cent reduction by 2020. And we want to achieve this goal across all our portfolios, not just with energy companies.
Something important to consider when it comes to criticism is that our responsible investment strategy is being implemented in steps up to 2020. Our approach to sovereign bonds hasn’t yet been fully determined. It could be that we place inclusion criteria on these investments, but we must first develop a clear policy on them. It is a dilemma, just as tobacco is. In 2016, we began basing our inclusion policy around the themes of the UN Global Compact. However, that doesn’t include health, although it is a part of the SDGs. So in the future we’ll assess whether our inclusion policy should only centre on the Global Compact or whether it should also include other aspects.
Our belief is that even though we might be challenged about what we’re doing, they represent opportunities to show how we want to achieve better and more sustainable results. We’re not perfect, but we do want to be transparent, and are open to dialogue. Doing so enables valuable discussions, especially public ones.
Relative to the SDGs, in 2016 we examined how far we could use them as guidelines for sustainable investments. Only two, targets 16 and 17 – which are essentially governmental concerns – are beyond our scope. Thus, we are able to make what we define as Sustainable Development Investments (SDIs) in companies that have a positive influence on people and the environment across 15 of the 17 SDGs. By 2020, rather than the current €29 billion, we will have €58 billion of SDIs aligned to the SDGs that contribute to addressing social and environmental issues.
While ABP can measure financial success based on investment returns, how will it measure its success as a “force for good”? The SDGs, with 169 targets and 231 indicators, are noted for being complex to measure. And there are initiatives such as the World Benchmarking Alliance, which proposes the introduction of league tables in which companies can compete and be ranked.
In our next annual report, we will show how our new policy is progressing. Our SDIs are relatively new, so we are still working to determine how best to show how we are delivering on these. At the same time, we acknowledge that the framework for impact measurement isn’t fully in place yet.
Rather than measure companies through financial and management results, sustainable investing requires the measurement of products and services across many sectors relative to how they directly contribute to the SDGs. Clearly the measurement and benchmarking of impact is important and will become more critical as time goes on, which is why we are working on it.
APG has developed its own methodology for measuring the CO2 footprint of our equity investments and, in co-operation with others, wants to develop the means by which society can compare our results against other asset managers. Again though, we’re not there yet.
ABP is proactively looking to invest more in the Netherlands. Why is this?
We’re actually a bit overweight with our investments in the Netherlands, which stand at about 14 per cent of our portfolio. However, we believe that as well as providing people with good pensions, investing in this country is our contribution to encouraging strong sustainable economic development and growth. So wherever we can make worthwhile investments with good returns, we consider it our duty to do so.
In the Netherlands, we actively participate in initiatives relating to energy transition because we want to contribute to it. We also have interesting investments relating to the circular economy, which is also a very important issue. It comes as no surprise to know our participants are very supportive of our approach to investing in the Netherlands.
And while the amounts involved might appear small when compared to our overall investment portfolio, they are significant for the Netherlands. We consider investing here to be extremely important because we believe we can make a difference over the longer term.
Corien Wortmann-Kool became chair of ABP, the Dutch public sector collective pension fund, in January 2015. She is also vice-chairman to the Supervisory Board of AEGON N.V.