Case Study: APG’s marathon men

The Netherlands’ largest pension fund investor has internal ESG targets to meet. Patrick Kanters (above left) and Derk Welling explain to Christopher O’Dea why this means they have to keep setting the pace

Setting the global standard for best practice in institutional ESG investing comes with a catch: you the need to keep raising the bar.

The real assets team at APG Asset Management is up to the challenge. The €482bn pension investment manager now invests €21.7bn of its nearly €42bn property portfolio in sustainable assets – an increase of €1.3bn from 2017. The trend is similar in infrastructure, where €2.3bn of the €11bn portfolio is deployed in sustainable investments.

Doing good makes for good investing, says Patrick Kanters, managing director of global real assets at APG. “It’s our strong belief that, if sustainability is well embedded, these assets will outperform on sustainability metrics and also very much on anything financially related.”

APG was one of the founders of the Global Real Estate Sustainability Benchmark (GRESB) in 2009, which expanded into infrastructure in 2016. Now these benchmarking tools are being widely adopted, more must be done. “To stay ahead of the pack, we keep raising the bar,” Kanters says.

The primary objective is the desire of APG’s largest client, Dutch civil servants’  pension fund ABP, to invest €58bn in assets that help to meet the UN’s sustainable development goals by 2020. APG requires that sustainable property investments be rated in the top two quintiles of the GRESB ranking with four or five stars. All infrastructure project operators and managers have  to complete the GRESB survey process – more than 50% have done so. “That allows us to engage,” says Kanters.

“We set very strict requirements for those managers and operators that are performing below average,” he adds. The GRESB survey outlines where managers need to improve. Several years ago “we had some difficulty enforcing changes, but we see are now seeing very good progress”.

While the GRESB process is now embedded, APG’s sustainable investment approach involves more than GRESB. “With our clients, we have agreed on targets across a wide range of indicators.” Targets include reducing C0₂ emissions, and encompass new renewables investments, and increasing the capital allocated to education-related and telecommunication-related investments.

“Real estate and infrastructure are very important contributors to CO₂ emissions, making them important contributors to these targets,” Kanters says. “That’s why we take this extremely seriously. We have made a very big effort over the last couple of years to invest in wind, solar and hydro energy in both Europe and the US.”

Kanters expects ESG goals will be a moving target. “We may expect that the requirements or objectives set by the Paris Agreement and future climate summits will become more stringent step by step,” he says. “We also know that carbon emissions are also driven by technological and regulatory change to a certain extent, and that technological change often follows Moore’s Law.” The result is that “some things can go faster than expected”.

For investors that means climate-change risk can be split into the physical risk of when climate-change events happen and the risk that assets that might be relatively clean in the current environment could be left behind as the world transitions to renewable energy. “For every investment that we make, we need to look forward and estimate the impact on the portfolio from possession of this kind of an asset in a future economy with clean alternatives,” Kanters explains. The key concern is a familiar one: “Who is going to buy your asset. If there are no buyers anymore for your asset, you’ll end up with a stranded asset.”

APG is developing a climate-risk dashboard for all asset classes to understand what kind of leading indicators will most accurately reflect the climate risks and opportunities towards a more carbon-neutral economy in the longer term, says Derk Welling, senior responsible investment and governance specialist at APG.

But the wide range of rankings and measurement programmes used to track sustainability performance is problematic. About 20% of APG’s global portfolio is certified with nearly two dozen certification schemes to rate the sustainability performance of assets. “It’s very difficult to compare apples with oranges and arrive at a level of harmonisation across all these different certification schemes,” Welling says. “And none of these measure transition risk.”

This has sparked APG’s latest initiative. “We thought perhaps we should develop a metric to measure transition risk and share that with the different certification bodies. We believe that being a top performer in sustainability will either drive your return or mitigate your current and future risks. That’s why we are so insistent on getting this right, and why we keep raising the bar.”