At PGGM, ESG integration is primarily the responsibility of the different investment teams. Within the limits of the investment mandate, our investors have the freedom to make their own decisions in setting up the portfolio and the duty to report on progress. ESG plays an important role in this, as does financial return. How the investment teams take ESG factors into account and weigh these factors in the day-to-day considerations differs per asset class. This difference is mainly due to the degree of influence which PGGM can exert on the investment process, for example whether management is external or internal. Whether passive or active investment strategies are involved also makes a difference. The effect that ESG factors are expected to have on the asset class, such as risk reduction as compared to improved returns, also plays a role. For the more active mandates, the portfolio manager comprehensively takes ESG information into account in analysing a company, country or project and ESG analysis is consequently an integral part of the investment decision. Genuinely integrating ESG factors is no simple task. There are no clear standards or definitions. There is also much to be gained in relation to disclosure, the data that companies provide on their environmental policy, social conditions and sound governance. Qualitative assessments also need to be made sometimes - how can respect for human rights be expressed in financial models? Further on in this chapter, we show what ESG integration looks like in practice.
Bottom-up ESG integration: Infrastructure
Via the Infrastructure team, PGGM invests directly in infrastructure companies and projects. Because of our long-term focus, improving sustainability in the business operations of our investments is essential and in line with the interests of our clients and their participants. The team takes ESG factors into account when selecting new infrastructure projects. A first step in this process is the ESG Quickscan which looks at the possible ESG risks. For instance, they take the potential for conflict in the region, the labour standards and working conditions in the region, and the relationship with trade unions into account. During the due diligence phase, the identified risks are then managed. Depending on the outcome, they formulate agreements with the companies on managing these risks and on reporting potential incidents. Participation in the Global Real Estate Sustainability Benchmark (GRESB), the online ESG benchmark platform, and ESG KPIs are part of the reporting requirements. ESG factors are also a fixed part of the monitoring discussions and management is asked to devote attention to this, particularly if performance is less than satisfactory.
Bottom-up ESG integration: Long-Term Equity Strategy
The Long-Term Equity Strategy (LTES) team is positioned to invest by means of public equity in solutions for the four sustainability themes: climate change, pollution and emissions; water scarcity; food security and health care. Their investment universe is put together based on impact criteria. That means that the universe could include businesses whose ESG risks do not weigh up against the impact. It is therefore part of the assignment to screen businesses for ESG risks as part of the equities selection process. First, during their due diligence, an in-depth ESG analysis is carried out on a broad range of topics to chart out ESG risks related to the business. The analysis includes an assessment of the existing ESG policy, the reporting and management system, as well as research using independent external sources on the company’s ESG performance. The team uses external data sources such as the Internet, annual reports and specialist databases like Sustainalytics B.V. and MSCI ESG Manager. LTES also explicitly examines the outstanding controversies relating to every business. All these data are weighed in the investment case for the company. They also engage in dialogue with the management of the companies in which PGGM invests. The ultimate result of the ESG analysis constitutes an integral part of the investment case. If portfolio companies are associated with material ESG issues, they try to contact the executive management to encourage risk management and process improvements. They try to exert influence and move the company in the direction of the best practices and international standards that apply for the sector. In a number of cases, our ESG analysis resulted in a company not being included in the portfolio.
Bottom-up ESG integration: Private Equity
Within the Private Equity team, ESG criteria are integrated in the entire investment process. This starts already with the assessment of our investment partners. The PGGM Private Equity team not only wants good returns, it also demands ESG performance from the general partner. PGGM only selects funds with whom agreement is reached on ESG standards. This is important because the private equity parties we work with are responsible for managing ESG issues. The team assesses how they deal with ESG in their investment process by means of our ESG framework. Among other things, data about country and sector risks are examined and these are compared with the general partner’s ESG scores produced on the basis of PGGM’s own assessment. This is then used as a basis to identify the investment partners with whom to enter into dialogue. Incidents, such as accidents involving serious physical injury, major environmental incidents and the legally established misappropriation of funds, are also recorded and discussed. The analysis based on our ESG framework provides a good structure in which to engage in dialogue with our partners on how they set up their process. It is also an instrument for getting a view of which partners are lagging behind and enables us to chart out whether the investment partners’ portfolios involve high ESG risks.
Our investment teams have elaborated their own guidelines for responsible investment and published these on the PGGM website. See the website for more details on how they integrate ESG factors.