Building a 3D portfolio together with external managers

By moving towards 3D investing, PGGM has fundamentally renewed the strategy for its equity portfolio. We are realizing this transition, from largely tracking an index and excluding companies that do not meet our minimum norms, towards an inclusionary approach, consciously constructing our portfolio bottom-up, in close collaboration with our external managers. This approach demonstrates that steering on financial return and societal impact goes hand in hand with the specific expertise of our partners.

The traditional approach to equity investments often relies on an index-proximate distribution of capital. In this model, portfolios follow thousands of companies without formulating an explicit justification for each individual investment. At PGGM, we see that this “passive” method, where sustainability primarily functions as a reactive filter, falls fundamentally short in today’s reality: holdings are only assessed after the index has been compiled by external parties based on purely financial criteria. However, the increasing pressure on global ecosystems and social structures leads to systemic risks that can no longer be diversified away. These insights form the foundation of our 3D strategy: we are leaving the passive index approach behind and exercising active direction through an integrated justification of every individual interest based on return, risk, and sustainability.

From back-end control to front-end direction

The greatest challenge lies in translating this strategic ambition into the daily practice of external managers. We often see sustainability added only at the 'back end' of the investment process, causing it to remain an administrative checklist rather than a genuine driver. We therefore seek a model in which the external manager is no longer merely an executor of a predefined mandate, but a partner who integrates our 3D vision into their own choices from the start. The goal is to shift the direction: from back-end control to a shared determination of course at the front end.

In PGGM's new setup, the external manager plays a decisive role in the quality of capital allocation. We are shifting the focus from managing the tracking error relative to an index to the specific business case of each individual holding. PGGM selects specialists based on their ability to assess a company's operational and financial robustness in combination with its impact on society and the environment. By including the impact that the environment has on companies (outside-in) and the impact companies have on the environment (inside-out), we aim to build a portfolio that’s robust for all the environmental and societal challenges we are facing.

Transition to active direction

As part of this process, PGGM has drastically reduced the number of names in the portfolio from approximately 4,000 to about 750 companies. This concentration is necessary to be able to explicitly substantiate and explain the integrated trade-off between return, risk, and sustainability for every individual investment. With 3D investing, PGGM trades the statistical spread of a broad index for the ability to explicitly account for each individual investment across three dimensions. For the external specialist, this changes the core of the assignment. Within this 3D approach, sustainability is no longer a filter applied to a selection after the fact, but fully integrated into weighting and placement in capital allocation. 

Assessment and direction

The construction of the portfolio rests on an integrated assessment, where a company’s societal contribution is weighed against the quality of its operational management. These two dimensions, in combination with risk, jointly determine a company’s position within the 3D scope and drive the final selection decision based on three core points:

• Products and Services (What / SDG): we analyze the extent to which a company's core activities contribute (both positively and negatively) to the Sustainable Development Goals (SDGs). The focus is on companies that provide solutions to transition challenges, such as climate adaptation or accessible healthcare, through their core products.
• Operational Standards (How / ESG): simultaneously, we assess how a company achieves its results. ESG criteria are decisive here for operational quality and the management of long-term risk exposure.
• Minimum Standards: companies that do not meet our minimum sustainability standards are not included in our investment universe. This is a necessary intervention to minimize unacceptable practices, risks and reputational damage within the portfolio.

This does not mean that PGGM only invests in companies with a very strong sustainability profile. Rather, PGGM is looking for a thorough underwriting of sustainability risks and opportunities in conjunction with the “traditional” return and risk dimensions. The aim is to build a portfolio that is more robust and has a stronger sustainability profile overall compared to the market. This also leaves room for companies with a neutral sustainability profile, for example because they support diversification or the portfolio’s return profile. At the same time, we also want to invest in “improvers”, companies which are not very sustainable now, but have the ambition and credible plans to improve.  

To technically realize 3D objectives, we seek a conscious balance between qualitative depth and quantitative scalability. We exercise direction by combining two complementary types of managers. 

One-third of the portfolio is entrusted to fundamental 'stock pickers'. These managers focus on a concentrated selection of approximately 40 to 60 companies. This focus is essential for thoroughly understanding the actual context behind sustainability data, which often requires specialist interpretation.  A concrete example is the weighting of water consumption: while this risk is limited in water-rich regions, it constitutes a critical factor for future-proofing in drought-prone areas. 

Future development and the 3D route

3D investing determines the direction of our equity strategy, fully integrating outside-in and inside-out risks into the underwriting of our investments and incorporating all three dimensions (return, risk & sustainability) into our decision-making. Where the traditional index often functions as a rearview mirror, the 3D portfolio serves as a navigation instrument for the future. It ensures that we do not just anticipate the world of tomorrow, but also actively help shape it through our capital allocation and the expertise of our partners.

This layered approach is not a static destination for us, but a methodology we continue to refine to further professionalize the 3D standard in our sector. The methodology of active direction and integrated front-end assessment forms the blueprint that PGGM continuously optimizes based on new insights and market developments. By actively seeking dialogue with external managers and peers, we work toward a collective standard - a route we chart together with the sector, using today’s complexity as fuel for the sustainable returns of 
tomorrow.

Want to know more about how PGGM puts 3D investing into practice? Read more about our general vision on 3D investing or view other practical examples in our additional 3D cases.