Page 148 – Top1000funds.com

In his first interview as the new CEO of the PRI, David Atkin outlines his priorities for the organisation and the areas of urgency for investors focused on sustainability.

Driven by good processes and planning David Atkin has had success in managing organisations through periods of immense growth. In the 12 years he was CEO of the profit-to-members Australian superannuation fund, Cbus, the fund grew from A$12 billion to be more than A$65 billion today with a large internal team.

Similarly the PRI has been an organisation that has undergone enormous growth. Now with 4,718 signatories it continues to grow, with 308 signatories coming on board in the last quarter alone.

“In organisations where there has been rapid growth you have to think about how you organise and deploy resources and how you think about execution might need to change,” Atkin told Top1000funds.com in an interview. “Clearly I’m coming in on really strong foundations – James [Gifford], Fiona [Reynolds] and I are all different in our leadership styles but we all consistently believe in the same idea. I now bring a different phase for the PRI. It’s boring, but process is important. If you plan well and you think about your processes you get better outcomes in my experience.”

Atkin says one of the challenges with rapid growth is how to meaningfully serve each of the signatories.

“We have to industrialise the way we provide opportunities to serve our membership base and our digital strategy will be important. We might need to segment better via groups of interest or region or investment style to provide the right forums and take advantage of the global perspective the PRI brings,” he says. “We are a member organisation and put our signatories at the heart of everything we do and ensure we provide value to them.”

Atkin, who will move to London from Melbourne in March, has had a long history with the PRI serving on the board from 2009-2015, and working with outgoing CEO Fiona Reynolds.

But he is aware that a lot has changed in the organisation and in responsible investment since that time. This year his focus will be on understanding the broader landscape, looking internally at the organisation’s ability to serve its signatories, and then conducting a comprehensive signatory consultation on the PRI’s mission and purpose.

“This is an important opportunity for me to really listen to our signatories and ensure our aims and outputs are aligned with their needs,” he says.

The issue of a generation

Atkin describes climate as not just the most important issue for investors this year, but the issue of a generation.

“It can’t be solved in one year and it’s not going away,” he says. “We are already seeing the consequences of not dealing with it as a managed transition and this will lead to a whole lot of other S and G issues. It is an existential threat. We have to solve it this decade.”

He points to initiatives such as the Net Zero Asset Owner Alliance and the Manager Alliance as really important. But he says that declarations of net zero now need to move from high level strategic intent to clear implementation and reporting plans.

Last October, the Net Zero Asset Owners Alliance released its first progress report with 29 asset owners setting targets to manage their portfolios in line with the 1.5C climate goal, including Axa, Swiss Re and the Church of England. This first round covers the investors’ plans out to 2025. Of the $9.3 trillion under management by alliance members about $1.5 trillion is now in motion towards a 1.5C-aligned target by 2025.

But while climate is the most important issue of sustainability it is not the only issue and in an environment where there is increasing change and focus on reporting, Atkin is prioritising that the PRI ensures the reporting and assessment obligations it is asking of signatories is fit for purpose.

“There are some questions around not duplicating what is being asked from other reporting frameworks and ensuring what we are doing is helping us identify the progression of our signatories in incorporating the principles,” he says.

To that end there are a number of internal projects underway, including one that assessed the reporting requirements of the world’s 10 leading economies. It identified 150 reporting requirements that signatories are being asked or required to participate in.

“With all that emerging we are looking at what is relevant and what’s duplicative,” Atkin says.

While there has been a lot of maturity in the PRI assessment reports they need to cover broad territory from signatories at the beginning of their sustainability journey through to leaders.
“We are asking whether the current structure can still provide useful information for each of those different categories,” he says, “We need to step back and see whether it is a fair ask of our signatories given the effort to complete the whole thing.”

He said that the PRI will communicate with signatories in the next few weeks about changes in the 2023 request, adding there was no doubt some information won’t be required because signatories can report through other obligations.

To this end the PRI is currently recruiting its first chief reporting officer.

“Reporting is a fundamental part of being a signatory and we need someone at the leadership level who has the remit of the program, the accountability and responsibility of that,” he says. “There is so much information that can be shared across the content areas and having someone to bring that out and seed that information across the organisation is really important.”

It’s no coincidence that Atkin is talking about shifting people out of their silos and working in a more integrated way. Under his leadership Cbus became, and remains, a leader on Integrated Reporting globally and its Atkin’s intent to produce an Integrated Report at the PRI as well.

Ensuring the organisation is walking the talk it has also just appointed a head of diversity, equity and inclusion in an effort, Atkin says, to cultivate a culture that genuinely embraces diversity.

The PRI’s current flagship projects:

Climate Action: This project is about moving towards net zero through investor action, corporate engagement and policy reforms. This is composed of a number of workstreams including The Inevitable Policy Response, Climate Action 100+, COP26, the New Zero Asset Owners Alliance, the Net Zero Asset Managers Initiative, the Net Zero Financial Service Providers Alliance and the Investor Agenda.

Driving Meaningful Data (DMD) – This project is about enabling the flow of reliable and comparable data from corporations through the investment chain
Sustainability outcomes and SDGs: –this project is about supporting investors looking to shape real-world outcomes
Human rights: – this project is about maximising investors’ collective contribution to global respect for human rights
ESG in Fixed Income: –this project is about driving ESG incorporation across the fixed income market in response to increasing investor interest and signatory demand
Active Ownership 2.0 – this project is about developing more ambitious, effective and assertive stewardship
Asset Owners: – this project is about providing tailored resources to further the adoption of ESG amongst asset owners, in their position at the top of the investment chain

Trimming exposure to shares

AustralianSuper currently has 57 per cent of its total portfolio in shares. It has cashflows of around A$25-30 billion a year and the fund is expected to double in size within the next five years.

In 2022 Delaney said the outlook, largely positive but with an eye on inflation and central bank tightening, is prompting AustralianSuper to trim back its exposure to shares which was in an overweight position.

“For much of the Covid period we have had quite a constructive approach to the market, being overweight shares, underweight fixed income and looking to increase our exposure to unlisted assets,” he said.

“That has been fuelled on the back of very stimulative policies by both central banks and governments, which has led to very strong economic growth, strong profit growth and an environment where the alternative to buying growth assets was pretty poor.”

“What we want to do with the portfolio is gradually reduce our exposure to shares from a meaningful overweight position. We will increase our exposure to fixed income if rates rise substantially,” he said.

“We have just started to take out the pro-growth (stocks) in the portfolio.”

The fund would also be looking at more investments in unlisted assets such as infrastructure and property which could provide a hedge against inflation.

“We think some of those unlisted assets which have also got some inflationary hedges in them (could still have) a slight risk (but would be less risky than some other investments),” he said.

Push to move offshore

Delaney said the continued strong growth of the fund would mean it would have to invest more of its assets offshore.

“We currently have about half of our assets overseas [and] my expectation is that it will get to two thirds over the next decade,” he said.

Delaney said this would mean that AustralianSuper would also continue to expand its offices offshore. He said the fund currently plans to expand its current staff of around 43 in London to more than 100 in the “next couple of years”. It also has plans to expand its current office in New York by 20 at the end of this year.

He said AustralianSuper had learned from watching funds overseas, particularly the big Canadian pension funds which had aggressively expanded internationally, that it was better to have significant offices in a few strategic places rather than small offices in many places.

He said Singapore was a possible future place for the fund to have an office but he argued he didn’t see Singapore as critical as getting London and New York City “right in the near term”.

He said the fund still found having an office in Beijing was useful to monitor developments in the Chinese economy.

“China is the second most important place in the world,” he said. “We know everything about what is going on in the US but we don’t know anywhere near as much about the second most important place.”

The Beijing office is run by Jing Li, a PhD in Economics from the University of Edinburgh, who was a former economist with HSBC and The Economist Intelligence Unit before joining AustralianSuper in Beijing in 2017.

Australia still an important market

Delaney said there were still plenty of opportunities in Australia for the fund to invest in and that it would continue to be a big player in the Australian economy. The fund did some A$18 billion worth of deals in Australia alone in the past year.

The past year has seen AustralianSuper’s involvement in a A$24 billion deal to buy Sydney airport which is expected to be finalised in the first half of this year.

Other deals have included increasing its stake in Sydney toll road operator WestConnex and being part of a consortium buying into the intermodal logistics hub at Moorebank in Sydney’s west.

The fund has also participated in capital raisings for a number of Australian companies in the past year including one in December by CSL.

“Australia is a pretty big place. It is a dynamic country. There are plenty of opportunities here as well,” he said. “There are only a certain number of airports and ports but there is a lot of digital infrastructure currently being built.”

The importance of liquidity

Delaney said AustralianSuper had a strategy of having no more than a third of the assets in its portfolio in illiquid assets.

“The thinking being, if the share market halved, the percentage in illiquid assets would go to half the portfolio. We wouldn’t want it to go to more than half,” he said.

He said the strong inflow of funds meant that AustralianSuper did not have any liquidity pressures at the moment but he said it still monitored its liquidity position “very closely”.

He said liquidity would become more of an issue for Australian super funds as the system matured in the 2030s and began paying out more in retirement funds than it was taking in.

“The Australian super system is still very young. Liquidity will become more of an issue when it moves into outflows.”

As the real estate industry begins to drill down on planning for net zero, awareness is growing around the need to consider buildings’ carbon impact throughout their lifespan, since a net zero energy building does not necessarily equate to zero environmental impact. Could this incentivise investors to commit capex to the renovation of older office space?

Important information

_{For Investment Professionals only. Not for onward distribution. No other persons should rely on any information contained within. This guide reflects M&G’s present opinions reflecting current market conditions. They are subject to change without notice and involve a number of assumptions which may not prove valid. The distribution of this guide does not constitute an offer of, or solicitation for, a purchase or sale of any investment product or class of investment products, or to provide discretionary investment management services. These materials are not, and under no circumstances are to be construed as, an advertisement or a public offering of any securities or a solicitation of any offer to buy securities. It has been written for informational and educational purposes only and should not be considered as investment advice, a forecast or guarantee of future results, or as a recommendation of any security, strategy or investment product. Reference in this document to individual companies is included solely for the purpose of illustration and should not be construed as a recommendation to buy or sell the same. Information is derived from proprietary and non-proprietary sources which have not been independently verified for accuracy or completeness. While M&G Investments believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions which may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. All forms of investments carry risks. Such investments may not be suitable for everyone. United States: M&G Investment Management Limited is registered as an investment adviser with the Securities and Exchange Commission of the United States of America under US laws, which differ from UK and FCA laws. Canada: upon receipt of these materials, each Canadian recipient will be deemed to have represented to M&G Investment Management Limited, that the investor is a ‘permitted client’ as such term is defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Australia: M&G Investment Management Limited (MAGIM) and M&G Alternatives Investment Management Limited (MAGAIM) have received notification from the Australian Securities & Investments Commission that they can rely on the ASIC Class Order [CO 03/1099] exemption and are therefore permitted to market their investment strategies (including the offering and provision of discretionary investment management services) to wholesale clients in Australia without the requirement to hold an Australian financial services licence under the Corporations Act 2001 (Cth). MAGIM and MAGAIM are authorised and regulated by the Financial Conduct Authority under laws of the United Kingdom, which differ from Australian laws. Singapore: For Institutional Investors and Accredited Investors only. In Singapore, this financial promotion is issued by M&G Real Estate Asia Pte. Ltd. (Co. Reg. No. 200610218G) and/or M&G Investments (Singapore) Pte. Ltd. (Co. Reg. No. 201131425R), both regulated by the Monetary Authority of Singapore. Hong Kong: For Professional Investors only. In Hong Kong, this financial promotion is issued by M&G Investments (Hong Kong) Limited. Office: Unit 1002, LHT Tower, 31 Queen’s Road Central, Hong Kong. South Korea: For Qualified Professional Investors. China: on a cross-border basis only. Japan: M&G Investments Japan Co., Ltd., Investment Management Business Operator, Investment Advisory and Agency Business Operator, Type II Financial Instruments Business Operator, Director-General of the Kanto Local Finance Bureau (Kinsho) No. 2942, Membership to Associations: Japan Investment Advisers Association, Type II Financial Instruments Firms Association. This document is provided to you for the purpose of providing information with respect to investment management by Company’s offshore group affiliates and neither provided for the purpose of solicitation of any securities nor intended for such solicitation of any securities. Pursuant to such the registrations above, the Company may: (1) provide agency and intermediary services for clients to enter into a discretionary investment management agreement or investment advisory agreement with any of the Offshore Group Affiliates; (2) directly enter into a discretionary investment management agreement with clients; or (3) solicit clients for investment into offshore collective investment scheme(s) managed by the Offshore Group Affiliate. Please refer to materials separately provided to you for specific risks and any fees relating to the discretionary investment management agreement and the investment into the offshore collective investment scheme(s). The Company will not charge any fees to clients with respect to ‘(1) and ‘(3) above. M&G Investments is a direct subsidiary of M&G plc, a company incorporated in the United Kingdom. M&G plc and its affiliated companies are not affiliated in any manner with Prudential Financial, Inc, a company whose principal place of business is in the United States of America or Prudential Plc, an international group incorporated in the United Kingdom. This financial promotion is issued by M&G International Investments S.A. in the EU and M&G Investment Management Limited elsewhere (unless otherwise stated). The registered office of M&G International Investments S.A. is 16, boulevard Royal, L-2449, Luxembourg. M&G Investment Management Limited is registered in England and Wales under number 936683, registered office 10 Fenchurch Avenue, London EC3M 5AG. M&G Investment Management Limited is authorised and regulated by the Financial Conduct Authority. M&G Real Estate Limited is registered in England and Wales under number 3852763 and is not authorised or regulated by the Financial Conduct Authority. M&G Real Estate Limited forms part of the M&G Group of companies.}

The largest sovereign wealth fund in the world, Norway’s Government Pension Fund Global, resembles an index fund and is not making the most of its tracking error boundaries according to a review of the active management of the fund by a team of specialists.

The academics who reviewed the NOK11.95 trillion ($1.36 trillion) fund as a directive from the Ministry of Finance, said there was an opportunity to think more strategically and redirect the mandate of the fund towards active ownership.

They said the Ministry of Finance needs to specify the priority in the mandate and that having two goals (active ownership / net zero and active management) is difficult to execute when you just have one instrument (the portfolio).

Rob Bauer, Professor of Finance at Maastricht University, said GPFG which is managed by Norges Bank Investment Management had the complexity of an active fund, with more than 200 strategies and hundreds of investment staff, but the performance features of an index fund.

The academics looked at active management from January 1998 to September 2021 by evaluating sub strategy performance. They found overall the fund returned 7.03 per cent annualised since 1998 with a benchmark of 6.83 per cent, and while there was some evidence of added value in certain strategies overall it behaved like an index fund. Furthermore its tracking error has been 0.3 for the past four years but the mandate allows a tracking error of up to 1.25 per cent. The tracking error across the entire timeframe was 0.6.

The committee’s report urged the Ministry of Finance to investigate why NBIM does not take full advantage of its tracking-error limit and whether any operational impediments or structural barriers play a role.

Related, the committee recommended there be less emphasis on factor models in evaluating the fund’s performance and more focus and emphasis on the qualitative assessments of the organisation such as governance quality, long-term mindset, and creating the appropriate culture for successful execution of the strategy.

The analysis by the academics – which included Charlotte Christiansen from Aarhus University and Trond Doskeland from the Norwegian School of Economics alongside Maastricht’s Bauer – found some evidence of value-adding strategies, particularly in equities. At the total equity level annualised active returns were 0.36 per cent and gross active returns were 0.47 per cent. Security selection strategies, net of costs, were the biggest contributor with positive active returns of 1.27 per cent. In fixed income net gross active returns were 0.13 per cent.

However there was not enough persistence of value add to make a difference to a fund the size of Norway.

“We propose a bold change. This could be not just a requirement to beat the benchmark but perhaps a basis points minimum deviation from the benchmark. The mandate is not ambitious at the moment,” Bauer said in an interview with Top1000funds.com, while also acknowledging the difficulty of a fund the size of GPFG beating a benchmark.

A minimum target of outperformance would force NBIM to take a bit more risk, he said.

A new active ownership mandate?

The limited value add from active strategies combined with an increasing focus on sustainability presents an opportunity to revamp the fund’s mandate to focus on active ownership, according to Bauer who reiterated that combining active management may conflict with the ambition to execute effective active ownership strategies.

“The issue of active ownership is complicated. If you want to address issues of climate change and net zero it is difficult to combine that with the objective of having active management. The portfolio managers on the floor may want something different to what is being asked by politicians who represent the Norwegian people, and someone has to prioritise,” he says.

Christiansen agrees with the mixed messaging demonstrated by the lack of integration between the active investment management and the active ownership.

“This problem is generic for all pension funds – choosing whether to be active/beat the benchmark or have active ownership/net zero. Can only one make investment decision but how do you reconcile the two? Someone needs to have the decision and it needs clarity in the mandate.”

In the report the academics said: “We urge the Ministry of Finance to provide clarity in the mandate on the objectives and prioritization of active ownership strategies, as well as on what parts of this prioritisation are NBIM’s purview versus which are prescribed in the mandate.”

Complexity of benchmarks and the future of real estate

In conducting the review the committee also revealed that the current benchmark gives rise to some potential conflicts of interest as some objectives target active returns (trying to achieve a positive alpha) and others target total returns (diversification of the whole portfolio). Adding a net-zero-emissions targets to the portfolio would add more conflicts of interest to the mandate.

Specifically there was some opacity in the asset class benchmarks which made it difficult to examine. In addition real estate is not in the benchmark but is instead measured against stocks and bonds.

Christiansen says stocks and bonds were not the right performance measure for real estate investments.

“Norwegians like to promote the fact they own properties on some of the well-known streets in London, and it seems like they are quite proud of that. But they measure the performance of real estate against stocks and bonds, to us that is quite strange,” she says. “A quarter to a third of their people are working on real estate and that is mostly unlisted, but they don’t measure returns against an unlisted benchmark, that makes it very difficult to come up with some good information. The finding would be that performance is very bad because unlisted real estate has lower returns than stocks and bonds, but it’s not the right performance measure.”

The committee advises that if the Ministry of Finance deems unlisted real estate to be important for diversification purposes then real estate should be reinstated to the benchmark.

Unlisted real estate is a long term strategy which means attracting good people and retaining them is a long term exercise. The removal of real estate from the benchmark in 2017 could signal to that team that real estate is not an important asset class in the long term. That may lead to people leaving and difficulty to attract new personnel, Bauer said.

The CIO of Canada Pension Plan Investments, Edwin Cass, shares insights on the benefits of leverage, the impact on liquidity and the governance structures for success.

As CalPERS adopts a new asset allocation that adds 5 per cent leverage to the entire portfolio, board members gathered key insights on how the strategy will work including the lessons from Canada Pension Plan Investments which currently applies 22 per cent leverage to the portfolio.

Edwin Cass, chief investment officer of Canada Pension Plan Investments (CPPI Investments) shared the experience of the C$541.5 billion Canadian fund where a seasoned leverage strategy adds diversification and maximises returns without increasing risk.

Cass explained to CalPERS’ board members that many people associate the use of leverage with increased risk. Although leverage can be used to increase risk, CPP Investments’s use of leverage leaves its risk tolerance unchanged.

The Canadian fund invests based on a mandate to maximise returns without undue risk or loss and has an above average 85 per cent equity risk target – more than a standard 60:40 portfolio due to the fund’s long-term investment horizon and funding ratio.

Leverage is used to maximise return at its current level of risk – increasing the overall fund performance on a risk adjusted basis – by increasing diversification. Diversification, Cass told CalPERS board members, “is the one free lunch in investment.”

CPPI borrows money and adds leverage to the portfolio to get access to less risky assets. Increasing the fixed income allocation this way helps mute tail outcomes, namely correlation which Cass said is capable of “sinking a portfolio.”

“The portfolio has a higher risk-adjusted return and is a bit more robust. The important part is not to increase risk but decrease bad outcomes,” he said.

There are different measures of leverage. Top of house at CPP Investments is a total financing leverage – the amount of money the fund borrows physically or synthetically to increase exposure to its balance sheet. Today it is applying 22 per cent leverage to the portfolio below a limit of 40 per cent set by the board.

Sources of leverage

CPP Investments uses different sources of secured and unsecured leverage over the long and short term. The sources of leverage have expanded over time – as you diversify your asset mix, so you diversify your sources of finance, he said.

Today, sources include commercial paper issued in the domestic, US and UK markets for terms out to 30 years. Elsewhere, it borrows in the repo market while around one third of its exposure comes through derivatives, short selling derivative contracts.

A team of around 25 people follow the market, analysing the cheapest way to borrow and where to find staggered maturities. Cass told CalPERS’ board members that it costs more to borrow over longer maturities, however on the flipside borrowing longer-dated means there is less maturity risk and CPP Investments doesn’t have to go into the market and rollover debt, a dangerous exercise when liquidity is scarce like in March 2020.

According to the fund’s data, financing costs were $1,217 million in fiscal 2021, a decrease of almost 50 per cent compared to $2,429 million for the previous year, attributable to lower effective market interest rates.

Cass explained that alongside important board approvals, it also looks to rating agencies to help it set a comfortable level of leverage that helps ensure it can maintain its AAA status and comfortably meet liabilities.

“Rating agencies are another check on risk management,” he said. Other lenses through which to view leverage include peer analysis. CPP Investment’s peers in Canada follow a similar model.

“We are at the low end compared to Canadian peers regarding the amount of leverage we use. We get comfort from looking at our peer organisations.”

He added that from a strategic perspective, the fund’s use of leverage is not dynamic. However, on a day- to-day basis it can fluctuate depending on where it sees opportunities in the market.

Liquidity

Next the conversation turned to governance and reporting leverage, particularly its impact on liquidity ratios. At CPP Investments, the board has insight of the total financing leverage program with a particular eye on liquidity levels.

The pension fund has floors to its liquidity coverage ratios, below which the organisation is put at risk.

Cass said his priority is to target a level of liquidity that does more than simply allow the fund to meet its liabilities. For example, he wants money on hand through cycles to re-up with private equity funds. Elsewhere, the variation margin in derivative contracts requires capital on hand.

He said that inflation doesn’t hold much of a risk for the fund’s leverage strategy. Sure, inflation increases borrowing costs, but the fund always ensures its financing costs are adequately compensated with expected returns.

Cass warned that taking on too much leverage would put the portfolio in harm’s way. He said that leverage and liquidity are linked, and March 2020 illustrated the importance of keeping enough liquidity on hand to help platform companies in the investor’s large private equity allocation.

At the large Canadian fund a special committee came into play to control capital going out the door and ensure liquidity levels through the 2020 crisis. It was stood down nine months later.

Cass concluded with a note on the importance of board oversight of a leverage strategy. He said investors should understand why they use leverage, ensure transparency, and anticipate how the portfolio will behave in times of stress.

He advised on a “crawl, walk, run” approach and reassured CalPERS’ board members that watching how the portfolio reacts to leverage will imbue confidence in the strategy.

Investors contemplating risk, return and impact in their portfolios will have read with a wry smile last week’s criticism of Unilever’s quest for purpose penned by one of the United Kingdom’s most influential fund managers . The consumer goods company is pushing its purpose credentials at the expense of the business, argued Terry Smith in his annual shareholder letter to his retail following.

“A company which feels it has to define the purpose of Hellmann’s mayonnaise has in our view clearly lost the plot. The Hellmann’s brand has existed since 1913 so we would guess that by now consumers have figured out its purpose (spoiler alert — salads and sandwiches),” he wrote, referencing the company marketing its mayo as a solution to food waste because it encourages people to eat leftovers.

For Piet Klop, the new head of responsible investment at €268 billion Dutch asset manager PGGM where he has worked for the last 12 years, the criticism comes as no surprise. Moreover, he acknowledges the management time that impact investing requires and agrees that in the short-term, Unilever may make more money for shareholders if it abandons complex impact considerations.

Yet he doesn’t buy the idea that steering capital into assets that reduce and mitigate negative impacts and increase the positive will end up costing asset owners. He is adamant that in the long-run, impact will pay since well-managed companies with a clear purpose that mitigate negative outcomes are simply better companies.

“You can’t wish away climate change or water scarcity,” he argues. “And I don’t believe in less return for more impact. Picture a Venn diagram and the circle of financial returns increasingly overlaps with companies’ social utility.”

Active impact

Klop has been one of the main architects of PGGM’s gradual embrace of 3D portfolios shaped around risk, return and impact which began with an actively managed €5 billion impact equities portfolio. Today, although PGGM’s giant portfolio means it will “always do a bit of everything” he does acknowledge a broad direction of travel around impact. So much so the fund is currently planning to tilt its broader passive allocation to companies that have a bigger share of their revenues mapped to the SDGs.

Reducing negative impact means the fund is “peeling off” of its traditional passive strategy with exclusions and benchmark adjustments in a process that triggers obvious questions whether the strategy is still actually passive.

“One could argue that the next logical step is to go active to be able to account for both negative and positive impact,” he says.

Such a move would be in keeping with PGGM long blazing a trail in the area. Like its work measuring impact by pioneering revenue-to-impact modelling in partnership with UBS and others since 2015. The process, which explores the extent to which a company’s revenues map to the SDGs and real-world impacts, is an attempt to provide a solution to limited company reporting on SDGs and climate impacts. Today the proliferation of new companies going further and faster than PGGM developing revenue to impact models, gathering data and producing ratings for investors means PGGM’s work in the area has slowed. It’s an evolution Klop finds particularly satisfying.

“We are the in-house asset manager of the second biggest Dutch pension fund PFZW. We can throw our weight around a bit and point the markets to impact and 3D investing. Once this takes off, we are happy to get out of the way – we are not a data provider and don’t want to be”.

Challenges

Critics are quick to point to a myriad of complexities inherent in impact investment.

In liquid markets its difficult for investors to argue that their capital makes a difference to what a company does and doesn’t do given hundreds of other investors also hold the same security.

The idea of additionality, where investors aim to link the capital they provide to the impact it generates, is easier to support in private markets than in liquid markets. For example, infrastructure and private equity investors are closer to where the action is, have bigger stakes and more influence over what happens in terms of impact. Still, in today’s world of free money, additionally is a high bar even in private markets.

“With record low interest rates, it’s super hard to maintain that without you something would not have happened,” he says.

But if additionality and affecting corporate change is a bridge too far, impact investors can find success via other routes: simply demonstrating their alignment with companies that generate revenues from solutions to the SDGs.

“Aiming for impact through alignment is no trivial evolution,” he says.

Klop is heartened by the growing number of asset owners signalling to the market that impact matters and by impact leaders going further still, building SDG indexes and tilts towards companies that make a bigger contribution based on revenues to positive real-world outcomes.

Ultimately, he would like to be able to calculate the impact from each euro or dollar invested to truly put impact on a level with risk and return. But until then, constantly improving the measurement of real-world impacts is still encouraging.

Of course Klop has many other priorities alongside integrating impact in his new role where he leads an advisory unit guiding PGGMs different front office investment teams on all things sustainable. His work to better account for climate and ESG risk factors is just one example.

“It’s a big job because everyone wants to be sustainable these days,” he concludes. “I recall the days when people weren’t all that interested in responsible investment and thought it was just something that would make life difficult.”

New PRI chief outlines priorities