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Risks and risk management

As a pension fund service provider, we carry out the investment instructions of our institutional clients. The optimal weighing of risks and expected return are the focus in this. Risks can never be entirely eliminated, however, nor would this be desirable. Because this is not our assignment: there is no return without some risk. The risks must be in line with our own wishes and choices, but mainly with those of our clients as well. What is important is whether our clients are rewarded for the risks they run. Where identified risks negatively impact the future expected return, PGGM can decide not to invest or to strive for a higher expected return.

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Risk management

PGGM risk framework

For the implementation of risk management, we use the PGGM risk framework to structurally provide insight into, monitor and report on risks. PGGM’s Risk Framework is based on the COSO Enterprise Risk Management methodology accepted internationally as standard.

Risk management at PGGM is organised in accordance with the generally accepted ‘three lines of defence’ model. Responsibility and primary risk management lie with line management (first line). The Finance & Control and Risk & Compliance departments (second line) supervise and report on the risks. Internal Audit (third line) assesses whether the management demonstrably complies with the different requirements stipulated in relation to risk management.

Risk appetite

With every decision, risks are taken, consciously and unconsciously, in order to realise certain objectives. In order to determine whether we are willing to run a particular risk, and to what extent, it is necessary to determine our risk appetite. If a risk is assessed as lying beyond the risk appetite, extra control measures are necessary in order to bring this risk within the limits of the risk appetite. The risks and the accompanying risk appetite are divided into three risk clusters: Corporate, Service Provision and Reputation. We have also made a distinction in relation to certain risks between risk appetite in a ‘running the business’ situation (execution) and risk appetite in relation to ‘changing the business’ situations. This is based on the thinking that continuity and reliability weigh the heaviest in the performance of our service provision, while major change programmes sometimes require more latitude for experimentation and learning, for example in the event of innovations.

Risk culture

Effective risk management goes hand in hand with a healthy risk culture. The risk culture we strive for is focused on risk-aware behaviour in an open and honest environment in which we are accountable to each other for responsibilities, results and behaviour in relation to PGGM’s values, standards and objectives. PGGM stands for a risk culture in which incidents – no matter how uncomfortable – are reported. We can then learn from these and mitigate their impact as quickly as possible and take structural measures to prevent similar situations in the future. To be able to offer best-in-class service, working under architecture must constitute an integral element of the corporate culture. In addition to the substantive mitigating measures (procedures, controls, etc.), known as ‘hard controls’, the ‘soft controls’ (behaviour and matters that influence the behaviour of others) also receive attention. In investigations by Internal Audit and in background and trend analyses of incidents by Risk & Compliance, attention is also devoted to the soft controls, the underlying causes of the problem and the behaviour appropriate for a solution.

Risk management process

Enterprise Risk Management is a continual process at all levels of our organisation. The Risk & Compliance department is responsible for coordinating the risk management process and draws up a monthly risk report. This risk report presents the risk picture for each cluster of risks, compared with the risk appetite. The substance of the risk report is discussed and adopted by our Unit Risk Committee. In addition to the risks that actually manifested themselves, the Committee specifically considers the risks that could manifest themselves in the short and longer term, i.e. the prospective risks.

Based on this overall risk profile, actions are initiated and we issue an ‘In Control Statement’ (ICS). With the ICS, PGGM Vermogensbeheer’s management team (first line) declares that internal control measures have been realised and have worked effectively and that it can be stated with a reasonable degree of certainty that the business operations were conducted in a controlled manner, with integrity. The ICS also states that the risk picture presented provides a true and fair view of PGGM’s risks, which is confirmed through the co-signature of the ICS in the second line by the Manager Enterprise Risk Management.

Risk management developments in 2019

We updated the PGGM Risk Framework in 2019. The PGGM Risk Framework was brought in line with the changes made to the risk management process in 2018 and 2019 as a result of, among other things, the updated risk appetite and PGGM risk language. In 2019, the risk appetite was defined based on the PGGM risk language and we started making the risk appetite more concrete in risk cards for each risk, including a link to the control measures (hard and soft controls). The next steps for structurally embedding this process will be taken in 2020.

We also updated the set of Risk & Compliance control indicators in 2019. In this context, several control indicators relating to incidents were specified for asset management. New control measures for, among other things, IT disruptions, project progress and budget overruns were included in the set. Existing control indicators were tightened up and outdated control indicators were scrapped.

Read more about our main risks and uncertainties in our financial statements

The risk culture we strive for is focused on risk-aware behaviour in an open and honest environment.

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Climate risks

The World Economic Forum has for years considered climate change among the biggest risks facing the economy and society. At the same time, forceful measures to put a stop to climate change have still not been forthcoming, despite ambitious intentions from the new European Commission. Greenhouse gas emissions continue to increase, while a steady decline is needed in order to achieve the objectives contained in the Paris climate agreement. The effects of climate change are, at the same time, becoming increasingly visible, with the forest fires in Australia representing a low point so far.

Central banks increasingly see climate change as a serious threat to financial stability and financial institutions. The Network for Greening the Financial System issued two reports in 2019, A call for action: Climate change as a source of financial risk and a technical attachment, Macroeconomic and financial stability: Implications of climate change. The reports underscore the importance of integrating climate change in investment policy and implementation.

Climate change has been a concern for PGGM and our clients for years. The relationship between climate change and investing is twofold. On the one hand, climate change - and measures to combat climate change - have an impact on the value of our investments. It is our fiduciary responsibility to understand and respond to these effects. On the other hand, our investment decisions have an impact on the climate. We feel societal responsibility to reduce our negative impact on the climate and increase the positive impact.

Via the investing in solutions mandate from our biggest client, we have amassed a great deal of experience in developing investment strategies that explicitly take climate change into account. This experience puts us in a good position to comprehensively manage the growing risks, although quantifying these risks remains a challenge.

We distinguish between the physical and transition risks posed by climate change. The physical risks are the consequence of climate change. This could include higher temperatures, extreme weather, drought and rising sea levels. Transition risks arise when the causes of climate change - greenhouse gas emissions - are eliminated. Fossil energy is being replaced with sustainable energy, and businesses and other assets dependent on fossil energy that do not change in time will decrease in value or even disappear entirely. These become what are called stranded assets.

Physical and transition risks complement each other to a certain extent. If the world succeeds in limiting global warming to a maximum of 2⁰C as agreed in the Paris Agreement, transition risks will dominate. If the world does not succeed in that, physical risks will increase. In our investments, we try to manage these risks as well as possible, and weigh them against the expected returns. What is crucial in this context is how these risks have already been factored into the prices of financial assets. Various studies argue that the market still appears to be underestimating these risks.

CO2 reduction in the investment portfolio

Like most economists, we take the view that better pricing of CO2 and other greenhouse gases is the more effective and fair measure for counteracting global warming. We firmly believe that over time, higher CO2 pricing is inevitable. As such, CO2 pricing constitutes a transition risk for the investment portfolio, which is why we started reducing the footprint of the equities portfolio several years ago already. We do this by reallocating investments in the most COintensive sectors - energy, utilities and materials - to companies that are relatively COefficient. Companies with high emissions are, in our view, insufficiently prepared for a CO2-poor future and are therefore gradually disappearing from the portfolio. By doing this we send the signal that businesses must reduce their emissions. We keep the sector allocation unchanged because we believe that all sectors will continue to play a meaningful role in a CO2-poor economy for the time being. This phasing out can also function as a hedge against the possible decrease in value of investments with a large carbon footprint.

Our largest client has set the goal of halving the CO2 emissions of their investments by 2020 in comparison to 2014. Since the baseline measurement, the carbon footprint has been reduced from 339 tonnes of CO2 per million dollars of business turnover to 202 tonnes of CO2 per million dollars as of 31 December 2019. Over the period from year-end 2018 to year-end 2019, from 239 to 202 tonnes of CO2 per million dollars in business turnover. This is a decrease of over 40% in four years’ time. Therefore the objective of 50% was not entirely achieved over this period. This is mainly a consequence of the CO2 intensity of the broader market. Many businesses and even entire sectors are gradually showing higher CO2 intensity. The historical data in fact point to a steady decline. There has therefore been a break in the trend over the past several years. The method designed could not stand up to this kind of ‘setback’. Nonetheless we are proud of the results. We must not forget that when we started on this in 2014, CO2 reduction was still largely unexplored territory. A CO2 reduction of over 40% of the total equities portfolio in four years’ time is therefore already an excellent result.

At the moment, we are working with our largest client to look into what targets are possible for the future. The CO2 reduction achieved in the 2014-2020 programme will of course be maintained. But there are plenty of options for next steps. This could include extending the climate target from equities to the total portfolio, broadening the criteria for emissions to transition and physical risks, for instance, and seeking even more harmonisation with our peers at home and abroad so that the results achieved are more amenable to comparison. We expect to be able to say more about this in the coming year.

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Task Force on Climate-related Financial Disclosures

Two years after the publication of its reporting framework, the work of the Task Force on Climate-Related Financial Disclosures (TCFD) has taken off. The call for TCFD reports to be made mandatory has since become louder. In 2019, the European Commission published a new version of the Non-Financial Reporting Directive to which the TCFD framework was added. We published our first TCFD report in 2018. The information in that report is still broadly current. We aim to update the report in the event of any material changes. This report can be consulted for detailed information. In the table below, we summarise this information and describe new developments in the management of climate-related risks and opportunities. 

TCFD: quality of climate reporting improves

Read the blog

Decarbonisation Pathways for Real Estate Available for Public Consultation

Read the press release


  • The management board supervises all material financial risks - including climate-related risks - and the management of those risks in our clients’ portfolios.

  • The Corporate Risk & Compliance Department coordinates the risk management process.

  • Individual investment teams are responsible for managing risks, including climate-related risks, as part of their strategies in public and private markets and when entering into and managing individual transactions.


  • Scenario analysis is an instrument for our climate change strategy. As an investor, we take a number of climate scenarios into account. This means that both transition and physical risks could materialise, and that both climate mitigation and adaptation pose opportunities. We also expect companies in our portfolio to prepare for several climate scenarios and that they provide insight into this.

Risk management

  • In 2019, we further tightened up the management of both transition and physical risks in the portfolio. In particular, we looked into how we could bring the property investments in line with the Paris Agreement; the knowledge gained can be applied more broadly, however. The knowledge provides tools for taking into account in the property portfolios what we expect will be the inevitable price increase in CO2. Details can be found in the paper Climate risk assessment in global real estate investing.

Risk estimates and goals

  • In 2019, we concluded the CO2 reduction strategy announced in 2015. The decrease achieved was over 40%. As such we did not achieve the original ambition (to reduce by half). The portfolio changes implemented contributed to the CO2 reduction as expected. Contrary to expectations, companies themselves have become more CO2 intensive, which has partially cancelled out the effect.

  • In 2019, some of our clients, including our largest client PFZW, committed to the Climate Agreement. In the coming year we will be investigating how we can concretely flesh out the new ambitions from the Climate Agreement and investment policy.

  • 1 The International Energy Agency reported in February 2020 that carbon emissions for the generation and consumption of energy had stabilised in 2019. Whether this is the start of an actual turnaround and whether non-energy-related emissions are also stabilising remains to be seen.
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