Under its new sustainable investment policy, launched last month, ABP has set itself some ambitious targets for its investment portfolio over the next five years.
These include a reduction in the carbon footprint of its equity portfolio by 40 per cent by 2025 compared to 2015, while the €465-billion fund also has aligned itself to the Paris Agreement by targeting carbon neutrality by 2050.
But equally interesting is how the fund got there.
Sustainable investing is a big topic and it is easy to get bogged down by its enormity.
When formulating its new policy, ABP realised from the start it would have to make choices about what to focus on and decided to go back to its stakeholders to find out what mattered most to them.
“We have a lot of stakeholders,” Diane Griffioen, Head of Investments at ABP, says in an interview with [i3] Insights.
“First of all we have our participants, but we are part of society, so we also deal with corporations, government, NGOs, and we engage a number of external experts.
“We took a bottom-up approach and spoke to many of our stakeholders about what they see as important sustainability issues. Then we had to make choices for which we took also into account the opinions of our participants.”
When we developed the policy we said we wanted to be ambitious, but also realistic in what we can achieve. We had to make choices
This process identified three transitions stakeholders regard as crucial to any sustainability policy: climate change and the need to transition to new energy generation and renewable energy sources, the conservation of natural resources and the digitalisation of society.
ABP wants to address these three transitions, while ensuring all of its investments respect human rights, a fourth theme so to speak.
“When we developed the policy we said we wanted to be ambitious, but also realistic in what we can achieve. We had to make choices and we ended up with these four key thematics that will shape society in the coming years,” Griffioen says.
“Where this policy differs from our previous one is that this time we didn’t just set goals for the next five years, but also formulated a true long-term view on sustainability.
“Where will society be in 2050 and what is our vision? To make sure we get there, we need to develop strategies for 2030 and set short-term goals for 2025.”
Carbon Neutral
ABP’s ambition to be carbon neutral by 2050 reflects the goals set by the Paris Agreement, which together with a Dutch domestic climate agreement formed the basis for a number of the fund’s sustainability targets.
“We can’t determine the direction of the economy, but we can influence it indirectly by translating these goals into our portfolio,” Griffioen says.
The fund expects to introduce additional climate-related targets in 2022 as it continues to develop its sustainable investment methodology for asset classes other than equities.
“We’ve set ourselves a number of carbon reduction targets for our equity portfolio, but at the same time we’ve said that we should expand this to our other asset classes. But to do this, we first have to build a robust methodology and then set a number of realistic targets. In developing we like to share and discuss this methodology with other investors together with [our internal asset manager] APG in order to get a more common language and methodology,” Griffioen says.
Academic Backing
As part of the policy development process, ABP wanted to get a better understanding of how sustainable investment strategies affected investment returns.
In 2015, ABP commissioned a study led by Dutch Professor Kees Koedijk to conduct a meta-analysis of all the available academic research into sustainable investing to inform its first policy paper.
ABP asked Koedijk to repeat this exercise again in 2020 for its current policy, which resulted in a survey of some 6000 academic papers.
“It is of paramount importance to us that our sustainable investment policy doesn’t impact our risk/return profile negatively. We can’t make any concessions to this,” Griffioen says.
“But Professor Koedijk found that on average sustainable investment policies had a neutral to slightly positive impact on the risk/return profile of funds. For us, this meant that there were no obstacles in pursuing sustainable investments.”
It is of paramount importance to us that our sustainable investment policy doesn’t impact our risk/return profile negatively
ABP also analysed the impact of its 2015 policy on its own portfolio and was encouraged by the findings, although it says the period covered was too short to draw any definite conclusions from.
The fund will continue to monitor how its new policy will affect its performance. “There are three phases to this: the historical analysis, our portfolio analysis and how we are going to monitor it going forward,” Griffioen says.
Revolution
In its policy document, ABP refers to ‘the fourth industrial revolution’, a term originally developed by the World Economic Forum to refer to the impact of technological changes on production and manufacturing processes, and subsequently the wider economy.
When asked about the use of the term ‘revolution’ in its policy document, Griffioen laughs. “Perhaps it is more of a transition than a revolution, but things will definitely be different,” she says.
“Society will change and we can play into these changes and contribute to them. There are certainly risks to the digitalisation of society. Privacy is one.
Data is highly portable, but can a company pass someone’s data on or not? Can a client pass on certain data? These are sustainability issues here
“Data is highly portable, but can a company pass someone’s data on or not? Can a client pass on certain data? These are sustainability issues here.
“But there are also opportunities. For example, the digitalisation of the agricultural sector has meant that farms can be much more efficient in fertilising crops.
“Besides, digitalisation can assist in addressing many of the Social Development Goals (SDG) set by the United Nations, in particular those covering poverty and education by making services much more accessible.”
ABP is one of the few institutional investors whose sustainable investment policy ties directly back to a number of specific SDGs. Griffioen admits this wasn’t easy to achieve.
“In the beginning it was a little nerve-wracking, but we decided to go for it. What we found is that if you set specific goals, then people make more of an effort to achieve them,” she says.
“We won’t have a solution to every SDG, but we cover almost all. And especially those applying to energy and sustainable cities offer many opportunities.
“Together with APG we have developed a methodology that we call Sustainable Development Investments, which are investments that relate back to investments tied to the various SDGs.
“We together did this in partnership with PGGM and PFZW [the pension fund that was split off from PGGM in 2008, called Pensioenfonds Zorg en Welzijn] So at least we speak the same language there.”
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[i3] Insights is the official educational bulletin of the Investment Innovation Institute [i3]. It covers major trends and innovations in institutional investing, providing independent and thought-provoking content about pension funds, insurance companies and sovereign wealth funds across the globe.