The essence of BiO is that the impact of the investments in priority themes is measured in tangible units, such as the generation of clean energy in MWh, or energy efficiency improvements in tons of avoided CO2 emissions (these priority themes - food, health, water, climate and pollution - are largely consistent with SDGs 2, 3, 6, 7 and 12).
Although impact measurement is difficult, PGGM keeps to this for two reasons: (i) ‘impact’ is an improvement for people, society and/or the environment that must be measured in order to avoid impact investment from becoming lip service. The other reason (ii) is that we want to show the pension participants practical, positive results.
PGGM’s impact measurements are steadily improving, in both breadth and depth: the positive impact of (part of) more and more BIOs is being measured. The quality of impact measurement is also improving. In 2019, the models that convert the revenue from a certain solution (in euros) into impact (in e.g. tons of avoided CO2 emissions) are rounded off and documented. They have also been developed further for application to individual companies (rather than industrial groups). In some cases, the rough model outcomes already lead via engagement to more accurate impact reports by the companies themselves.
Nevertheless, there are still many methodological questions, including in relation to who exactly benefits (rich versus poor countries or groups), precisely how much difference is made (and in relation to what), how to measure negative impact as well as positive impact and how to avoid duplications in the value chain. In order to arrive at a uniform approach in these cases too, PGGM heads the SDG impact measurement working group in the Sustainable Financing Platform of De Nederlandsche Bank. This working group has about 25 members: asset managers, banks and companies. The ‘key indicators’ for positive impact that the working group has proposed are brought to the attention of organisations including the Global Reporting Initiative.
PGGM also has a seat on the advisory council of the Impact Management Project (IMP), which seeks to generate global consensus in more general terms around the different ways in which investors can have an impact. PGGM will continue to improve the revenue-to-impact models and the further standardisation of impact investment and impact measurement in 2020.
Challenges of Investments in Solutions
In the world around us there are social challenges that call for funding. The most important is perhaps energy transition. A major energy transition is necessary in order to halt climate change. Major investments are needed in order to bid farewell to fossil fuels and to make energy consumption more sustainable, more efficient and more financially attractive. On the instructions of clients, PGGM actively contributes to this by seeking investments that can play a role here. Investments in Solutions must make a sufficient contribution to both returns and impact in order to remain attractive to our clients. If we encounter such investment opportunities, we are keen to invest in these. A concrete example of this is the interest, announced in early 2019, in acquiring a long-term interest in the Eneco energy company via a joint venture with Shell. Unfortunately, this deal did not go ahead as we were outbid by a Japanese consortium. This shows once again what a challenge it is to find investments that comply with the risk-return characteristics we have agreed with our clients.
Frank Roeters van Lennep
Chief Investment Officer
Disappointment regarding missing out on the Eneco deal
Chief Investment Officer Private Markets Frank Roeters van Lennep: ‘It is disappointing to hear that we miss out on a deal on which an entire PGGM team worked hard for at least two years, in close collaboration with our partner Royal Dutch Shell. This was an effort of the Infrastructure team, together with colleagues from Risk, Legal and Corporate Communications, and we can be proud of what we achieved: an excellent offer, both in financial terms and with regard to the sustainable future of Eneco. The sale of Eneco would have been one of the rare possibilities to make a major investment in the Dutch energy infrastructure with Dutch pension capital. PGGM showed its best side in the process and during this we continually showed ourselves to be a committed long-term investor with sustainability in mind.’
What is an impact investment?
Although we aim for a positive and preferably additional social impact with our Investments in Solutions, our clients, and we as the administrator, have the primary task of providing for a good pension and, therefore, for goods returns for an acceptable risk. We cannot make any concessions on the financial results to be achieved for participants and therefore also cannot maximise a positive social impact at the expense of financial returns. We therefore want to have a positive social impact while retaining returns at commercial rates.
A major social need is not necessarily a good investment opportunity. At present, therefore, the efforts to define the impact of our clients’ investments have no influence on the strategic asset allocation: we do not steer for the scale of specific social results. However, measuring the tangible social impact does enable us to make clear where we have a positive impact and whether data are missing for the evaluation of this. We hope that when we do this, more investors will realise that these things are not mutually exclusive: we can realise commercial returns and have a positive social impact.
We can also give an important signal to the market when we move part of the assets to companies with an explicit social contribution. The reasoning is that good examples will be followed. In addition, there is what most ‘real’ impact investors lack and that we (the pension sector) do have: scale.