Global Goals: European Pension Funds Tilt Capital Toward ‘SDG Investing’

When trillions of dollars – or euros, as the case may be – in private investment are flowing toward solutions for food security, universal education and sustainable development, let it be said that Dutch and Swedish pension funds helped lead the way.

Those funds and other major asset owners will gather today at the Impact Summit Europe in The Hague, one year after the Dutch central bank asked them at last year’s event to help mobilize private capital to finance the UN’s Sustainable Development Goals for 2030. The summit is organized by Phenix Capital, an institutional impact investing consultancy in Amsterdam. 

Investments can produce satisfactory long-term returns only if society develops in a balanced way.Eric Uijen, executive board chairman, PME

Last December, 18 Dutch financial institutions managing more than €2.8 ($3) trillion in assets, declared their support for “maximizing ‘SDG investing’” in the Netherlands and around the world. They were quickly followed by a half-dozen of Sweden’s largest institutional investors, including the insurer Folksam and the AP7 pension fund, which declared their intention to align their investments with the SDGs as well.  Major funds in Australia, Canada and elsewhere are jumping on board (see, “Sustainable Development Goals take hold as a universal impact investment framework“).

Today, the Dutch pension fund PME, representing the metal and electrical engineering industry, announced its ambitious goal to bring 10 percent of its €45 ($49) billion investment portfolio in line with the SDGs. “Investments can produce satisfactory long-term returns only if society develops in a balanced way,” said Eric Uijen, PME's executive board chairman.

PME’s funds are managed by MN, which has a total of 123 ($133) billion in assets. The new strategy will target affordable and sustainable energy, work and economic growth, sustainable innovation and sustainable cities. To meet the new target, MN managers will undertake a “deep drill,” first measuring the SDG investments already in the portfolio and then going further to meet PME’s new goal.

“Setting specific goals is a major step forward in our socially responsible investment policy,” Marcel Andringa, executive director of PME asset management, said in a statement. “Our main task is to ensure a satisfactory and affordable pension. Furthermore, we wish to contribute to a sustainable world when it comes to climate, living & working conditions, energy and the use of fossil fuels. Investing on this basis is in line with the wishes of our participants.”

In terms of market development, SDG investing appears to be about five years behind green investing, but on the same kind of growth curve. The World Bank, for example, which issued the first “green bond” in 2008, recently issued the first “SDG bond” (see, “World Bank raises $173 million with first SDG Bond”).

The development of SDG investing gives large institutional investors a way to act on their interest in the broad, inclusive uplift of the global economy. Whereas “ESG” factors (for environmental, social, governance) provide important signals for downside risks, SDG investing lets “universal” asset owners nurture the kind of inclusive global growth that is good for overall returns (see, “Crunch Time for the Owners of the Universe”).

The reputation boost for institutional asset owners who need to maintain their intangible “license to operate” is an additional benefit. Institutional investors are supposed to be supporting the real economy and in the aftermath of the 2008 financial crisis, they are being asked to show tangible social and environmental benefits.

Common narrative

Supertankers are slow to turn, however. For fund managers like PGGM, with 205 ($221) billion in assets under management, or APG, with 439 ($474) billion, policies and practices must be painstakingly prepared. SDG investing has to be consistent with the funds’ commitments to their pension beneficiaries, just like every other investment, and have measurable impact against at least one of the SDGs.

There’s simply no concession. We can’t afford to, and we don’t have to.Piet Klopp, PGGM

Complicating matters, the Sustainable Development Goals were not designed as an investment framework. Some, such as No. 13 (climate action) and No. 2, (zero hunger), are good candidates for private investment. “Peace and justice” (No. 16) is downright difficult. “Gender equality” (No. 5) may permeate all investments, but is harder to actualize in investments at the scale needed by huge funds.

Mapping investment themes is only the beginning. Investors need to understand fiduciary and risk issues and the links between the SDGs and their broader investment allocations. They need  SDG-linked impact performance indicators and modifications to their existing ESG shareholder engagement strategies.

That makes the past year’s progress all the more remarkable. Four working groups co-coordinated by Carolien De Bruin of the Dutch consultancy C-Change, and Herman Mulder of the SDG Charter Coalition, a former top executive at ABN Amro, were led by institutional investors themselves.

“We focused on getting to a single narrative that all could embrace, and on concrete actions that people could take,” de Bruin said. “We couldn’t be yet another talking shop.”

Some obstacles were more perceived than real, such as investment mandates that may not be as restrictive as they first appear. The process, de Bruin said, was intended to “get through a gridlock of each party looking at the other to ‘go first.’ We created the space for honest conversation.”

The original group was joined by seven more Dutch and Swedish institutional investors that committed to align their investments with the SDGs. In December, 18 signatories presented recommendations and a roadmap, “Building Highways to SDG Investing,” to the Dutch Central Bank.

Impact themes

The nature of each fund or fund manager’s commitments varies. PGGM manages investments for PFZW, the Dutch healthcare industry pension, the world’s 10th largest pension fund, as well as for others clients. PFZW several years earlier had asked PGGM to help it halve its carbon footprint. PGGM has committed to quadruple its sustainability investment, to 20 billion, focused on climate, which was consistent with their fiduciary obligations; food and water, in which the fund already had expertise; and healthcare, per their client’s identity.

When the Sustainable Development Goals came along in 2015, it became quickly clear that there was a fit.  “The SDGs were here to stay and had value because they provide a standard view of organizing the world’s problems and create a menu of themes that impact investors can choose from,” according to PGGM's Piet Klop.

PGGM portfolio managers are encouraged to look for the SDG themes across asset classes. Among public equities, a specific mandate targets companies from a list of 350 that PGGM believes have tangible impact on at least one of the targeted themes. Those companies are in three buckets: pure plays (the company derives more than 50 percent of revenues from the theme), decisive plays (companies with large market-share in the relevant theme), and transformational leaders, such as Unilever, which integrate sustainability throughout their value chains.

“There’s simply no concession. We can’t afford to, and we don’t have to,” says Klopp.

APG Asset Management, which has long had a “high sustainability” portfolio, committed to double such holdings to 58 ($63) billion. APG doesn’t single out any specific SDGs, but is committed to reducing its carbon footprint, investing in education and communication and promoting safe working conditions, respecting human rights and eradicating child labor.

The European approach is starting to spread. CBUS, a leading pension provider in Australia, has hired an expert to review how it can can better align its investment expertise with the SDGs. Global institutional investors from Canada, the UK and Europe say they are hoping to piggyback on the Dutch effort. The UN-backed Principles for Responsible Investment, which includes institutional investors with assets of $59 trillion under management, has launched an initiative to help its signatories navigate the SDG agenda.

Will American pension funds be next? Until now, most U.S. pension funds have been more reluctant than their European counterparts to adopt ESG or impact norms. The first movers on SDG investing in the U.S. are more likely to be foundation and university endowments and the wealth management platforms of the big banks. Still, global frameworks such as the SDGs may ultimately facilitate capital flows toward shared global goals, with or without public pronouncements.

Disclosure

ImpactAlpha is a media sponsor of the Impact Summit Europe.

Photo credit: Davide Ragusa

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