In the seemingly glacial slog towards the adoption of investment protocols based on environmental, social and governance (ESG) risks and returns, only a mere handful of the worlds largest investors stand out as role models. Since the late 1990s ABP, the worlds second-largest pension fund, has been a leader in ESG initiatives ranging from shareholder activism to sustainable real estate investing. Amsterdam-based ABP, along with the government pension fund of Norway and the California Public Employees Retirement System, have set a pace for both investors and asset managers to follow. They are leaders, acknowledges Christopher Davis, director of investor programs at Ceres, the Boston-based NGO, speaking about ABP.
Since 2008 ABPs ESG efforts have been carried out by its sole manager, APG Asset Management, which invests ABPs 261 billion ($330.4 billion) in assets alongside another 40 billion for five smaller Dutch pension funds. APG has a dedicated team of nine sustainability and governance investment professionals including one in Hong Kong, who oversees that strategy. ABPs ESG concerns go back to 1997 when, initially established as part of the legal team, it began pushing Dutch companies to improve their governance practices. ABP, which oversees pensions for 2.8 million civil servants and teachers, was one of the first European funds to take action following the accounting scandals at U.S. corporations like Enron and WorldCom.
In late March during a visit to ABP and APGs South Amsterdam offices, Senior Writer Frances Denmark met with Claudia Kruse the head of sustainability and governance at APG. Kruse, a German native, studied international management and Chinese in Bremen, Germany and China, then took a masters degree in tourism, environment and development from the School of Oriental and African Studies in London. Before joining APG in 2009, Kruse worked in London as a responsible investment analyst on the buy-side at F+C Investments and the sell side at J.P. Morgan. In 2008 Kruse was named a Rising Star of Corporate Governance by the Yale School of Managements Millstein Center for Corporate Governance and Performance. Kruse had just returned from attending the United Nations summit on sustainable development in Brazil.
What is the primary focus of APGs sustainability and governance approach?
We manage about 80 percent of our assets in-house, so that is the starting point and the reason we have the mandate to build an enterprise-wide ESG integration strategy across all asset classes. The implementation of the Responsible Investment Policy has three objectives. The first one is to contribute to risk-adjusted returns. Second, to demonstrate social responsibility and third, we want to contribute to the integrity of financial markets. Our big pension clients have the same objectives.
How is ESG implemented within APGs 14 major asset classes?
We work very closely with the portfolio managers. In some cases, as with the real estate investments, the sustainability and governance professional is embedded within the portfolio group. Because we have many different investment strategies, our approach is to tailor ESG to each and then find the most appropriate way to integrate it. No one size fits all.
How is that done?
For example, in the fundamental equity portfolio, using a sector-based approach, we actively engage with companies in our portfolio that we, and often other investors, believe need to improve their social, environmental and governance practices, often in order to deliver on their financial strategy. In our quantitative equity portfolio, we try to find a link between ESG performance and financial indicators. We use dedicated, third party research providers to find signals, then analyze the data with our quant professionals in-house.
How are ESG principles applied to the illiquid and other alternative investment portfolios?
The illiquid investments are selected through a two-committee approval process, one of which is at the board level, that combines a mandatory legal, risk management and ESG sign off. We identify financial and reputational risks and determine if there are sufficient mitigating factors in place. In the alternatives portfolio, hedge funds have specific implementation guidelines that give clear guidance on what is acceptable investment practice. The same applies to natural resources and commodities. We were one of the driving forces behind the Global Real Estate Sustainability Benchmark, now a 30-member group that manages over $2 trillion in real estate assets and 340 funds.
Can you give an example of a successful engagement with a portfolio company?
We had concerns about the environmental and social performance of Barrick Gold Corp., a Canadian gold mining company, particularly their mines in Papua, New Guinea which had security issues. Since we first began working with them in 2009, the company has established a board level social responsibility committee as well as adding a board member who has experience in sustainability issues earlier this year, and signed up to the Voluntary Principles on Security and Human Rights. We were not the only organization to engage with them.
What happens when an engagement fails?
Wal-Mart has been the subject of a long-term engagement. APG first wrote to the supermarket company in 2008 calling for management to abide by the ten principles of the United Nations Global Compact that cover human rights, environmental, anticorruption and labor issues. Last December APG divested its stake in the supermarket company because the company fails to meet international labor relations standards. APG has also excluded PetroChina, the worlds second largest oil company, after repeatedly asking the company to put safeguards in place to avoid being potentially complicit in practices that infringe on basic human rights in its operations in the Sudan and Burma. We currently exclude 17 companies that manufacture cluster bombs and land mines, including U.S. companies Lockheed Martin Corp., Alliant Techsystems and Kaman Corp.
What is the outlook for pension funds and asset managers adopting ESG investment principles?
We see more and more pension fund managers commit to integrating ESG in their portfolios. There is a lot more diversity in approaches coming to the fore and a greater mass of assets to drive it down from asset owners to asset managers. It has to permeate the entire chain.