The €109-billion PGGM has been one of the global leaders in allocating assets according to ESG criteria. Now it is taking the philosophy one step further and aims to measure how all of its investments have a positive influence on the state of the world by measuring “sustainable returns”.
The Dutch pension-fund service provider claims it is developing a methodology to measure what it calls “sustainable returns” – the non-financial, societal and environmental benefits derived from its investments.
PGGM will then report to institutional clients how its investment portfolios positively affect the broader society and the environment generally.
Marcel Jeucken, managing director of responsible investment at PGGM, says the fund has been working with Erasmus University in Rotterdam to develop a method to measure the sustainable returns generated through targeted-ESG investments totalling €4.73 billion in 2011.
The measurement of these returns looks to capture both the return on current investments and the expected return on an annual basis of long-term investments.
“This can be done for our focused ESG investments, and this year we are also trying to think through whether we can use this idea to capture societal returns for all the assets we manage,” Jeucken says.
“This is very complicated and will start with some pilot projects, but we think it is increasingly necessary to be able to communicate to our wider stakeholders and especially the beneficiaries of the pension funds we work for.”
Measure for measure
The methodology for targeted-ESG investments aims to measure the impact across eight key areas: employment, local development, capacity building, empowerment, health and safety, material use, ecosystems, and waste and emissions.
The expected impact of each environmentally focused fund is reflected in a score on a scale of -3 for highly negative to +3 for highly positive. Reporting also discloses the social impact of every investment over €1 million in a specific fund.
Its first pilot project to try and measure the sustainability returns in its broader portfolio of investments will be in real estate. This year it has one other pilots planned but PGGM has not decided which asset class this measurement program will be expanded to.
PGGM is a founding partner of the Global Real Estate Sustainability Benchmark (GRESB) database, which records the sustainability of a number of real-estate funds around the world.
The benchmarking system will form a valuable basis from which to measure its sustainable returns generated through real-estate investments.
Jeucken says that government bonds and derivative-type investments will be areas where measurement of sustainable returns will prove challenging.
“This will be a project over multiple years and will be very complicated, but we are also hoping to develop this with others, going forward,” he says.
“We could collaborate or we could go to the market with our thoughts and ask for feedback and wider consultation within the principles for responsible investment, for example. This is a journey and it will take some time to do this.”
The fund will also extend ESG considerations to its broader asset-allocation decision-making processes, Jeucken says.
Previously, asset allocation had been limited to issues around climate change. Work on this included participation in Mercer’s Climate Change Report.
This year PGGM plans to expand the ESG factors it considers when setting its strategic asset allocation.
“Which assets are more prone to ESG risks or opportunities than others and what does it mean for your asset allocation? This isn’t about implementing within your portfolio from a portfolio-management perspective, but more talking about the role of asset owners in terms of how they allocate assets within their strategic benchmark,” he says.
PGGM started a project last year and is applying what it has developed with a view report its progress more fully by the end of this year.
“We will look at expected risk and return and also expected risk and opportunities in ESG factors in the context of achieving our objectives in asset allocation, which is not just high returns but higher and stable returns,” he says.
“Now, we are adding responsible returns to these key asset-allocation objectives and that is quite interesting for us and why we are looking at ESG in terms of asset allocation.”
The environment-focused investment funds include three infrastructure funds. and one offshore wind-power park. In private equity, PGGM works through a fund-of-fund mandate with AlpInvest, which invests in companies developing innovative and proven clean technologies.
PGGM also supports alternative energy through structured credit that finances a range of initiatives including solar and wind projects.
In real assets PGGM invests in carbon credits and sustainable-forestry funds.
