How our clients’ investments contribute to the SDGs

PGGM Investments has a fiduciary duty to achieve clients’ financial pension ambition, but also to take into account the potential long-term impact of investment decisions on environmental, social, and governance factors.

Additionally, as a large asset manager, we feel responsible and want to contribute to a more sustainable world.

We firmly believe that embedding the UN SDGs into our investment process is important. The long-term orientation and the size of the assets invested by PGGM Investments create an opportunity to use the driving power of money in the interests of a more liveable and sustainable world.

PGGM Investments implements this by investing, in various asset classes, in scalable solutions for (future) social and environmental issues that matter to our clients and their participants or which may have a material impact on the investment portfolio. These targeted investments - which we call Sustainable Development Investments (SDI) - not only contribute financially to the returns achieved for our clients, but also create added social and environmental value. Through these investments, our clients contribute to the realisation of several SDGs in addition to a solid financial return.

With SDI, we look at portfolio alignment with contribution to the SDGs. We call this inside-out impact. On the other side, there is outside-in risk: ESG factors can form material risks to the portfolio. Read more about the impact of ESG factors on the portfolio here.

SDI method and developments in 2021

Our objective is to accelerate market adoption of investments aligned with the SDGs by standardizing the way companies’ positive contributions to the SDGs are assessed. To this end, PGGM Investments, together with other pension funds and administrators, developed the SDI Taxonomy in 2017. We classify investments that contribute to one or more SDGs according to this taxonomy as SDI. This taxonomy describes which SDGs are investable, and for each SDG describes which products and services contribute to that specific SDG. This SDI Taxonomy is "open source" and available to anyone. To create efficiencies in classifying SDIs PGGM Investments was one of the initiators of a pension collaboration initiative that uses the SDI Taxonomy to classify thousands of listed equity companies. This is the SDI Asset Owner Platform (SDI AOP).

Ultimately, we want to be able to understand and explain the real-world utility of all our sustainable investments, first through the SDI volume (in euros) but then also through companies’ actual outputs, outcomes and impact.

By the end of 2021, 18% (€ 52.7 bln) of the total investment portfolio was classified as SDI (2020: 16.4 %, € 44 bln Euro).

As the total investment portfolio showed a strong growth in 2021, the percentage of SDI within the total investment portfolio has increased even more. The increase of the euro amount of SDIs is a combination of new SDI-investments, new SDI classificatons and revaluation of existing SDIs.

In 2021 the investor demand for sustainable assets was again strong, resulting in higher prices for assets that are classifies as sustainable. In some markets this leads to risk-return characteristics that are not in line anymore with the goals of the investment mandates. Renewable energy infrastructure projects and some specific Green bond issues are examples where the expected yield of new transactions is, according to our analysis, not in line anymore with the underlying risks. This could even be a reason to sell existing SDI investments in the portfolio to improve the risk-return profile of the overall portfolio.

New commitments in the Private Equity mandate to specific SDI-focused funds and co-investments have increased, but most of these investments will be drawn and materialise in the next few years. In the fixed income markets the new issuance of Green, Social and Sustainabiltiy Bonds was strong, and supported the growth of SDI investments for this asset class. As the demand for these sustainable bonds increased, this also resulted in divestments of existing portfolio positions based on relative value analysis. One of the new SDI transactions in the Infrastructure portfolio was the investment in Alpha Trains, an operator of electric trains.

Together with our clients, we intend to allocate more assets to companies that contribute positively to the SDGs through their products and services. The goal we target at for our largest client, PFZW, is to have a total of 20% of the investment portfolio classified as SDI by 2025.

SDI in practice – Investing in Healthcare Combining good financial performance with COVID-19 impact Making climate impacts through mitigation or adaptation?

For the pensions of PFZW, PGGM Investments invests assets of participants working in the health & welfare sector. We therefore certainly have strong interests for investments in this sector. One example is a project in the United States in which urgent care clinics have been set up to relieve the burden of care provided by GPs and hospitals. Through this project, more simple operations take place in clinics, which results in more money and beds available at the hospital.

It is important for a pension investor to focus on the long-term prospects of companies and their impact on society. This is reflected in the mandate of PFZW to invest part of its equity investments impactfully for the longer term. Under this mandate, investments are made in companies that have a positive impact on society, are of high quality and are expected to offer good financial returns in the long term. These are precisely the companies that, in times of crisis such as the current COVID-19 crisis, see their stock market value decline less rapidly than the broader index while simultaneously creating positive real-world impact. An example of such a company is Thermo Fisher.

Investors are facing the question: do we fund mitigation to prevent future CO2 emissions, or adaptation with which the world adapts to the consequences of global warming?

Standardisation: the Sustainable Development Investments Asset Owner Platform

Our ambition is to contribute to improved standardization of the impact investment sector. Together with APG, Australian Super, British Columbia Investment Management, PGGM Investments established the SDI Asset Owner Platform (SDI AOP) in 2020 to enable the development of such standardization. Technology Partner Entis analysed 8,000 listed companies on their contribution to the SDGs using the SDI taxonomy (PDF). This classification is made available to other financial institutions through distribution partner Qontigo. Through this platform, other investors are given the opportunity to integrate the SDI classifications into their investment process and reports. By 2021, various pension funds, asset managers and index providers worldwide became members of the SDI AOP.

The SDI Taxonomy (PDF) is continuously updated based on new insights and availability of better data. These topics are examined in the Research Committee of the SDI AOP. In addition to updating the SDI Taxonomy, new modules are added to the existing SDI classifications. For example, in addition to listed stocks, in the new SDI classification of December 2021 bonds from listed and unlisted companies are also classified. Furthermore, the SDI AOP is exploring adding more “forward looking” information into the classification system as well, including analyzing owners of patents. The possibility of adding negative SDG contributions to the product range is also being investigated. Furthermore, there is a desire to also add non-financial outcomes or impact data to the SDI data in the future.

Moving from Euro’s invested to Real World impact

In the world of responsible investment, the focus is increasingly shifting from financial performance to results that provide an insight into the societal impact of investments. It is no longer enough to state that a certain asset is invested in ‘something’ from which a positive social contribution is expected. This would measure only good intentions, whereas the actual objective is to determine whether there is a true positive impact in terms of measurable improvement. Ultimately, this element of measurability is what makes an investment an impact investment. So, calculating the impact is essential, both for understandable communication of the positive impact of pension investments and for the credibility of investing with impact.

In 2021, PGGM Investments measured the impact of the companies it actively purchased as SDI. We report this impact in this integrated report, taking into account our share in these investments. In addition to the financial returns, we therefore calculate the impact of these investments and state how investments have contributed towards the selected SDG’s. Also, our biggest client, PFZW, used the SDGs as a guide in its new Investment Policy, which runs from 2020 to 2025. One of the objectives is to double the measured impact on seven focus SDGs: SDG 2 (food), SDG3 (health), SDG6 (water), SDG7 and 12 (climate and pollution), SDG11 (sustainable real estate) and SDG 13 (climate action).

This objective relates to impact measurement: tons of CO2 avoided, number of sick people treated, etc. The reported impact data is a combination of published data from companies, as well as impact data based on impact models which are estimates based on these models. For the calculation of the impact of investments, we are dependent on the impact data reported by companies. As a result, our impact calculation lags one year behind the portfolio measurement date. Because it is impossible to add up different impacts (tons of CO2 and liters of water, for example), we express the annual impact per KPI as a percentage of the last determined impact (for 2019) which we set to 100. After this normalization, the different impacts can also be added together and the measurement can simply double from 100 (in 2019) to at least 200 (in 2025). Progress against the objective is determined once a year. The impact indicators used are in line with the impact indicators as defined by the DNB Sustainable Finance working group on Impact Measurement. In addition an additional real estate impact indicator has been added that focuses on a specific sector related to SDG 4 Education.

The decrease in the normalized impact over 2020 is a combination of difference in values of existing impact indicators and changes of the number of SDI investments in the total investment portfolio. As the impact measured is based on the SDIs in the portfolio at the end of the previous year, new investments or divestments of SDIs with high impact values will have an effect on the normalised impact on portfolio level.

In 2022 we will focus again on stimulating companies to increase their reporting efforts to publish non-financial outcome and impact data for their products and services sold. We also work together with other financial institutions and platforms to collect outcome and impact data. This will over time expand the universe of companies that publish this data and will allow us to get a better insight in the social and environmental impact of the Sustainable Development Investments in the investment portfolio. For PGGM Investments, this means better insight into the real world impact of our portfolio.

Data-quality non-financial information

Asset managers, of course, know the exact financial performance of their investments. But due to the lack of solid, consistent, and reliable data that provides insight into the societal impact of these investments, investors looking for investments that contribute to the SDGs are facing challenges of identifying these contributions.
Although the quality of reporting on non-financial information by companies is still limited, improvements are visible. This is partly stimulated by the EU Sustainable Finance program, including regulations for Sustainable Finance Disclosure Regulation and EU Taxonomy.

These regulations ask for reporting on which activities of companies can be classified as ’sustainable"’. But in addition, companies also need to report the extent to which their activities have a negative impact on the environment. Next, an analysis is made whether there are any controversies surrounding international conventions such as the OECD Guidelines for Good Corporate Governance or the UN Global Compact. Reporting on ESG and social impact evolves from voluntary to legally required. This will be an additional incentive for companies to report more and better on non-financial sustainability information. Investors will start using this data more often to incorporate sustainability focus into their investment portfolios.

Adoption of goals in relation to three real impact indicators The ESG and impact dilemma when investing in gene therapy innovations How to assess the negative SDG impact of the solar value chain?

Besides the strong performance on the Global Real Estate Sustainability Benchmark (GRESB), with an outperformance track record that started back in 2012, our Private Real Estate team has a broader range of ESG goals. These goals include doubling of the number of life science buildings in the portfolio and doubling the on-site renewable energy generation most likely through solar panels. These two factors are part of our impact initiative used to create real positive impact with the global real estate portfolio. Read more here.

Investing in gene therapy provides great impact potential. A disease that is caused by an alteration in a person’s DNA sequence is called a genetic disorder; a single dysfunctional gene leads to a monogenic disorder. Gene therapy is the collective name for the increasing number of treatments for these types of diseases. Such therapy is a disruptive technology that has the potential to transform the treatment of patients. Read more here.

Solar panels, specifically the green electricity they generate, are viewed as vital to the global transition to a sustainable future (SDG 7 and 13). Much of the polysilicon, a key component of solar panels, is supplied by producers based in two Chinese provinces: Xinjiang and Inner Mongolia. Why? The producers here can produce it at a very low cost. Read more here.

Adoption of goals in relation to three real impact indicators Adoption of goals in relation to three real impact indicators

The ESG and impact dilemma when investing in gene therapy innovations The ESG and impact dilemma when investing in gene therapy innovations

How to assess the negative SDG impact of the solar value chain? How to assess the negative SDG impact of the solar value chain?

A day as an investor: Alex van der Laan’s take on impact investing

Alex van der Laan (47) has been with PGGM Investments for three years as a Senior Investment Manager. He graduated from Erasmus University Rotterdam with a MSc in Economics and is a CFA charterholder. Alex is part of our Long Term Equity Strategy (LTES) team. The LTES team seeks to invest in listed companies that not only yield a sound financial return, but also make a broader positive societal and environmental impact through their product offering. The companies in the LTES portfolio provide solutions to the United Nations Sustainable Development Goals (SDGs).

Read Alex van der Laan’s take on impact investing

A day as an investor: Alex van der Laan’s take on impact investing A day as an investor: Alex van der Laan’s take on impact investing

Read Alex van der Laan’s take on impact investing

EU SURE bonds: the question of additionality

PGGM Investments has invested close to €1 billion in social bonds issued by the European Union. These so called ‘EU SURE bonds’ are being issued to preserve employment in a comprehensive package to fight the socio-economic consequences of the pandemic. The AAA rating of the EU, an attractive valuation compared to other eurozone AAA government bonds, and an average 15-year maturity of the bonds provide for a compelling investment thesis for including these bonds in the interest rate mandate of PFZW.

With the initial EU SURE bond launched in October 2020, a first-year review and impact report has been published in September 2021. It is estimated that 31 million people worldwide were supported through EU SURE-supported programs in member states as well as 2.5 million firms.

The European Commission furthermore estimates that 1.5 million people have been preserved from becoming unemployed.

Still, we haven’t labelled our investments in EU SURE bonds as Sustainable Development Investments. Why? We don’t question at all the setup of the social bond framework, which firmly aligns with the internationally leading association for participants in capital markets, the International Capital Market Association’s (ICMA) social bond principles. Neither do we doubt the integrity of the program and the useful added transparency on the use of proceeds. The EU indicated that the proceeds of these bonds would contribute to SDG 3 (Good Health and Well-Being) and SDG 8 (Decent Work and Economic Growth). However, on healthcare related measures (SDG 3) only 5% has been spent. For the remaining 95%, employment support, also the EC recognizes it is hard to define additional impact since it is difficult to calculate a counterfactual scenario without the EU SURE program.

We do not question employment support, which is very useful. However, in our opinion this is the raison d’être for national governments: provide such assistance in times of stress. Every government or employer could claim to contribute to SDG 8, raising concerns about potential ‘SDG-washing’. Therefore, we would put up a higher bar for labelling an investment as significantly contributing to this particular SDG.