AustralianSuper, APG, British Columbia Investment and PGGM talk to [i3] Insights about their plans for the newly launched SDI Asset Owner Platform.
For some time, responsible investing was somewhat of a cup-half-empty exercise. By applying negative screens over the investment portfolio, investors took out the worst offenders in terms of company behaviour towards people and the environment.
Of course, there was impact investing, which does look at positive contributions, but in its truest form this type of investing is small in scale and very resource intensive, making it more akin to venture capital than to the investments in large, listed companies that form the bulk of institutional portfolios.
But with the development of the sustainable development goals (SDGs) by the United Nations in 2015, responsible investing has started to shift the focus to looking for areas where investors can make a positive change.
One of the key asset-owner-led initiatives is the Sustainable Development Investment (SDI) platform, developed by Dutch pension funds APG and PGGM. In July, the two funds welcomed two new members to the platform – AustralianSuper and British Columbia Investment Management (BCI) – and, last week, they officially opened the platform to the rest of the world.
PGGM already runs a responsible investment mandate under a portfolio it calls ‘investing in solutions’, but the SDI platform will help sharpen the focus, Hans Op ‘t Veld, Head of Responsible Investments at PGGM, says in an interview with [i3] Insights.
“One of the goals was to identify, in the portfolio, what the opportunities are to increase the weight of investments into these societal influences. And in order to do that you obviously need some sort of reference universe and that is one of the functions that we have for this project in that it can serve as a universe to identify contributions,” Op ‘t Veld says.
One of the goals was to identify, in the portfolio, what the opportunities are to increase the weight of investments into these societal influences. And in order to do that you obviously need some sort of reference universe and that is one of the functions that we have for this project - Hans op 't Veld, PGGM
The platform is also a good tool to measure what exposures the pension fund already has to the SDGs.
“Throughout the whole portfolio we would like to measure what we are doing in terms of contribution to the SDGs. That is not solely in common equities, but right across the portfolio,” Op ‘t Veld says.
“In order to do that consistently, you need some sort of a guidance structure on how to achieve that.
“That has always been a challenge because it is part art and part science. I think, over time, we’ve learned that if you can do more of the science part, then the better equipped you are to generate meaningful metrics out of that.”
PGGM runs both active and passive strategies and it will align its active holdings with the SDGs. Currently, the fund estimates 18 per cent of its total assets under management are aligned with the SDGs.
For the passive mandates, it will simply measure the exposure for now, but the fund hopes it will be able to build it into its passive strategies over time too.
“Not all of our mandates are run on the same basis, so we have large passive equity mandates and those large mandates basically are benchmark oriented. On top of that we have structures that serve active management strategies, which are built around generating impact,” Op ‘t Veld says.
“When you are creating an impact in one part of your portfolio, then obviously you look at other parts of the portfolio as well, so we will also use the same metric to look at the passive implementation and see what is in there. Over time, that may lead to further development in the thinking and serve allocations.”
The SDI Asset Owner Platform links the SDGs to investment metrics by what the pension funds refer to as a ‘taxonomy’. This enables investors to assess their global capital markets’ portfolios on their contribution to the SDGs and to report using a common and auditable standard.
With the addition of AustralianSuper and BCI, PGGM hopes it can develop an even more comprehensive approach to SDGs as the funds are able to compare notes across jurisdictions. Ultimately, the group hopes to consist of five to seven asset owners, which will all share their data and insights.
“Because you are working together with more than one or two asset owners, and are going to be informed by the feedback you get from the users [of the platform], this whole taxonomy will further develop with new insights,” Eloy Lindeijer, Chief Investment Officer of PGGM, tells [i3] Insights.
The addition of the two new asset owners, which will become part owners of the SDI platform, also helps avoid the platform becoming just another tool for greenwashing, Lindeijer said.
“We really want to understand what we are doing. We don’t want to be too accommodating,” he says.
“If we want to manage the risk of greenwashing, then we have to challenge each other that we are setting the bar high enough. And as the data comes in, we will be able to set that bar more precisely.
“This is exactly the reason why we want to develop this IP in the asset-owner community because then we feel more assured that we are not conflicted or that the supplier is not conflicted.”
APG Asset Management is the fully owned asset management company of Dutch pension fund ABP and ABP has set a very clear target for the assets it would like to align with the SDGs.
“ABP has set a target for having 20 per cent of its assets under management aligned with the SDGs by 2025,” Claudia Kruse, Managing Director Global Responsible Investment & Governance at APG, tells [i3] Insights.
This is a large chunk, since ABP has more than EUR450 billion in assets under management. The SDI platform predominantly gives insights into equities, covering 7898 companies, but only 1470 of those companies align with the SDGs. APG, therefore, will also apply the methodology to other asset classes, including private assets.
The taxonomy also applies to our private market investments. That isn’t automated on the platform, but you can use the definition, taxonomy and even the underlying classifications that you arrive at for the rest of your portfolio, but then it is more of a manual process - Claudia Kruse, APG
“For us, we don’t have an SDI portfolio; we look for SDIs across the entire portfolio, across all asset classes and within all investment strategies. So the risk of concentration, for us, doesn’t really exist,” Kruse says.
“The taxonomy also applies to our private market investments. That isn’t automated on the platform, but you can use the definition, taxonomy and even the underlying classifications that you arrive at for the rest of your portfolio, but then it is more of a manual process.”
APG owns a company called Entis, which consists of the former Deloitte data science team. Entis provides machine-learning capabilities to sort through the available data to see if companies align with the SDGs.
“The way it works is that they have vast streams of data that they trawl through. Sometimes the data is really straightforward. If it is a renewable energy company, you know that it contributes,” Kruse says.
“But if it is a pharmaceutical company or a company in the food and beverage industry, you really have to trawl through the details of all the closures to infer whether a product can be labelled as contributing to the SDGs.
“That is why a lot of contextual research is needed and they do that through natural language processing, machine learning and word clouds. What they are able to generate is not able to be replicated with just a few humans.”
She makes the point that the platform is not an environmental, social and governance (ESG) platform; it looks solely at whether the products and services a company produces align with the goals set out by the UN, but it doesn’t assess company behaviour.
“It is agnostic to company behaviour because for some people it matters, but for others it doesn’t. And because it really differs between jurisdictions how they look at company behaviour, we wanted to keep it pure and not mix those two things up,” she says.
“Within APG, we have a second layer in the process where we look at controversies, misconduct, et cetera. Only then do we decide whether a company is an SDI or not.”
AustralianSuper is so far the only Australian asset owner in the group. When the fund was approached to participate in the platform, it was pleasantly surprised by how detailed the framework was.
“One of the things that was attractive to us to want to join the platform was how well developed the taxonomy was, the mapping of SDGs and the measure of positive impact. There is a lot of work that has gone into that,” Andrew Gray, Head of ESG at AustralianSuper, tells [i3] Insights.
“The SDGs in their pure, original form don’t map that easily to investment measures and so the work that has gone into the taxonomy to do that is really good. It makes it really attractive. So a lot of that base work is done and now we can refine it as we go forward,” Gray says.
The SDGs in their pure, original form don’t map that easily to investment measures and so the work that has gone into the taxonomy to do that is really good. It makes it really attractive. So a lot of that base work is done and now we can refine it as we go forward - Andrew Gray, AustralianSuper
AustralianSuper is planning to integrate the SDI platform into its ESG processes and Gray thinks it will help the fund find better investments.
“For us, it is about trying to integrate it into our investment process. If in fact SDGs are the framework, or as Fiona Reynolds [CEO of the Principles for Responsible Investment] calls it ‘the business plan’, for the future economy, then we would think that companies that are exposed to those themes, that are contributing to those themes, will potentially be well placed for that future economy and, therefore, will be better investments,” he says.
AustralianSuper is planning to integrate the SDI platform initially for its three main asset classes: equities, infrastructure and property. But the fund also runs a socially aware investment option, which so far has focused predominantly on exclusions. Gray hopes the framework will provide a way to take a more positive approach to responsible investing in this option.
“Across the whole fund we do our ESG integration, but we have some members that irrespectively of that just don’t want to be invested in certain industries. So we’ve got this dedicated option, which does ethical screening to screen out certain industries,” he says.
“We already had contemplated increased member demand for positive impact products. Can we invest in companies that have a positive impact? This SDI platform is perfectly positioned to answer this question.”
Canadian asset manager BCI says it is still in the early stages of measuring its exposure to the SDGs and hopes to leverage off its asset-owner partners in SDI to develop a comprehensive approach to incorporating the data into its framework.
“I would say the uptake of SDGs in North America generally is behind the Europeans, so we see many European investors have those kinds of targets, but we are not there yet,” Jennifer Coulson, Vice President, ESG at BCI, tells [i3] Insights.
“We also need to make sure that we understand our exposure first before we are in a position to set any targets, similar to our peers. We are hoping to learn from our partners in Australia and Europe.”
BCI, which manages investments on behalf of British Columbia’s public sector, runs nearly 80 per cent of its C$171 billion in assets internally.
Further down the line we can use it as a tool with external managers to have those conversations, take a look at their portfolio, be able to provide some observations and just better understand their processes, because we do try to encourage our external managers to ultimately try to align with our ESG philosophy - Jennifer Coulson, BCI
“We do manage a significant amount of money in-house, so we do plan on incorporating the data into the investment analysis,” Coulson says.
“So for those mandates that we do manage in-house, it is our ESG team that is coming up with their ESG analysis and so we are planning on layering the SDG data onto that.
“Our portfolio managers know how important ESG is to our clients and they are asking more questions around the SDGs, so there is that internal alignment that we work with. But we also don’t want to forget about the external managers as well.
“I think further down the line we can use it as a tool with external managers to have those conversations, take a look at their portfolio, be able to provide some observations and just better understand their processes, because we do try to encourage our external managers to ultimately try to align with our ESG philosophy.
“But that is a conversation and it happens over time. It is not a quick fix.”
The four asset owners are looking to expand the group to five to seven asset owners in total to get maximum benefit from data sharing and to reduce the individual costs. Beyond these seven asset owners, investors, including fund managers, can gain access to the data through Qontico, which is licensed to distribute the platform commercially.
“They have the distribution, education and client support,” Op ‘t Veld says.
“We realised early that that was not our cup of tea. We did some workshops early on and were inundated with questions. We were happy to do that, but we didn’t have the scope to continue to do that.”
Lindeijer adds that the partnership with Qontico allows the platform to reach a global audience.
“Ultimately, we hope that companies take notice of this. You need scale, so these people help us build scale,” he says.
But Op ‘t Veld stresses that between the asset owners in the group there are no commercial interests and this will help in developing the platform into the future.
“I think it is important that between ourselves we had no qualms about being completely transparent in sharing information about what we were doing here. There was no commercial interest involved and we were very much aligned on what we wanted to get out of it,” he says.
“That is true for how to structure ourselves and set up the governance, but also the cooperation between the teams that were putting everything together. Because there was a lot of work involved in the nitty-gritty behind it.
“And with British Columbia Investments and AustralianSuper coming on board, there has been a tremendous acceleration of ideas and the exchange has been fantastic. If you try that in a commercial setting, there is no way you get those kinds of speeds.”
For a general guide on ESG issues in Australia, please see here.
[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.