Upscaling ‘impact investing’

Institutional investors take the step
Impact investing, where capital is used with the intention to advance social progress, is starting to leave its infancy behind. It is gradually becoming less the domain of smaller investors for whom financial returns are subordinate to the impact they want to have on the world. It is time for upscaling to also enable institutional parties to move towards making impact.

PGGM can now embark on the path of impact investing, because clients attach more and more value to social returns. We are working with them to explore how their capital can be used to contribute to solutions to large social issues, such as climate change. We call this investment category ‘investing in solutions’.

Investing in solutions is the next step in responsible investing, which started by defining what we definitely do not want to invest in, such as cluster bomb manufacturers. In recent years, we gradually started to work with pension funds to look at what we do want to invest in – as passive index trackers, our clients can shift their capital to companies that have relatively good CO2 and ESG ratings.

One question comes up more frequently: can we use the pension capital to make a difference? Can we take advantage of our position as a long-term investor by investing in companies that create sustainable financial value while helping to solve the greatest problems of our time?

These problems are clearly identified at the highest global stage: the UN Sustainable Development Goals. They correspond with four goals which have been identified as areas of focus for PGGM to aim for investing in solutions: climate, water, food and health. The challenge now is to find investments that make a tangible contribution to a better world, while still yielding market-rate financial returns.

In this way, we uphold what we see as our core task: investing for a good pension that can be enjoyed in a world worth living in.

Not easy
This looks great on paper, but the reality is not that easy. There is a lot of room for improvement in terms of measuring impact, for example in the area of climate. In a task force of the Financial Stability Board. I will be in a position this year to contribute to drawing up clear, comparable rules for how companies can incorporate their climate-related information into their financial reports. As a pension fund investor in climate solutions, we have a great interest in reliable data in this area.

We made both private and listed investments in solutions in 2015. Some examples include the Baltic-2 wind farm (infrastructure), SIG Combibloc food packaging company (private equity), ING and ABN AMRO green bonds (corporate bonds in developed markets), Brazil Foods (corporate bonds in emerging markets), Amvest Living and Care (private real estate) and Green Deposit Rabo (cash). We made a total of fourteen investments in various investment categories that generate impact.

We describe the measurable impact of such investments in more detail in our PGGM Annual Responsible Investment Report 2015(pdf). For instance, the impact of our water solutions is equal to the average water consumption of 3.4 million people in the Netherlands. The amounts invested in solutions are now increasing, especially in the area of climate, but the measured impact does still seem modest. By improving measurability, we hope to achieve two things: a better understanding of the possibilities of impact investing, and more evidence of tangible impact by investing pension money.