Through the course of this year, Denmark’s Lønmodtagernes Dyrtidsfond (LD) will make new alternative investments to suit its maturing profile. In an interview from the fund’s headquarters in smart Copenhagen suburb Frederiksberg, chief financial officer Lars Wallberg explains that alternative credit is an area where he’s focused.

“We will be looking at different types of direct lending and trade finance in the illiquid, unlisted credit space,” Wallberg says. “Because it has to be an illiquidity that we can live with … we will be looking at five-year maturities.”

LD is a non-contributory pension scheme for Danish people that is based on cost-of-living allowances for workers, granted in 1980. Assets are now about €5.5 billion ($5.8 billion), but will decline by about 25 per cent over the next five years and 50 per cent over the coming 10. The fund is organised like a mutual fund, with one large, balanced unit-link investment option, LD Vælger (LD Discretionary Investments) that accounts for about 90 per cent of assets, along with a number of small, separate funds that members can choose as an alternative to the balanced fund.

LD favours a mix of passive and index investment to keep costs down, but the increased allocation to credit will be active.

“Passive doesn’t work because avoiding defaults in a downturn is key to successful investing in the credit space,” Wallberg says. “Passive investment here is simply too low a standard of risk management.”

Despite the fund’s maturity, it will still allocate 25 per cent to 30 per cent of its assets to equity. However, strategy throughout 2017 will also include continuing to scale down the legacy private-equity allocation.

“We are at the latter stages of our investment cycle and within the next five years the allocation to private equity will be close to zero,” Wallberg says.

Assets break into three groups

Investment falls into three large asset buckets. High-grade bonds, primarily comprising Danish government and mortgage-backed bonds and global inflation-linked bonds, account for about a third of the portfolio, in an allocation that returned 4 per cent in 2016.

“This was quite a good return for a secure investment class and given the low interest rates,” Wallberg says.

Another third of the fund is invested in credit, comprising assets such as senior loans, and high-yield and emerging market credit; this portion returned about 9 per cent last year. Finally, a little less than a third is invested in equity, with the small remainder in alternatives, including a mature private-equity allocation.

Although global equities did well through 2016, Danish shares, which account for a quarter of the public equity allocation, didn’t keep up. The allocation lost 2.8 per cent over the year, a turnaround from stunning gains of 37.5 per cent in 2015.

“The Danish equity market is characterised by around 20 large caps and some of these companies did badly,” Wallberg explains.

One of the worst offenders was the world’s largest insulin producer, Novo Nordisk. Last year, the pharmaceutical giant came under pressure to lower prices in its key US market, and faced greater competition from rivals.

LD outsources all of its asset management to third-party providers and keeps fees low by cultivating deliberate competition among managers.

“Keeping fees down is achieved by conducting public tenders where we ensure a lot of interest,” Wallberg says. “We don’t negotiate directly on fees with managers.”

Exposure to climate opportunities

One of LD’s best performers has been a climate and investment fund that sits in the main balanced fund. The allocation began in 2011, with an initial €100 million investment. It is the fund’s strategy for gaining exposure to climate opportunities that it has struggled to access because of its short-term horizon.

“We can’t invest in long-term climate infrastructure like wind or solar energy because these investments may have a 20- to 30-year horizon,” Wallberg says.

Instead, the fund has built an exposure to quoted companies that are developing climate change products and services.

LD’s equity and property investments have gradually reduced by about €3 billion ($2.3 billion) since 2004, due to the fund’s need for liquidity. Yet Wallberg still endeavours to maintain a long-term view in the portfolio, something particularly important to mute today’s noisy politics.

“I try not to be distracted by short-term events,” he says. “You can’t ignore what is out there, but you can’t be too focused on it either. Otherwise, you’d spend all your time discussing politics, rather than investing.”

Asset owners plan to put more pressure on fund managers’ fees in 2017, as they look to control costs in a low-return environment. As a consequence, managers need more innovative thinking around fee structures, according to the results of the third annual conexust1f.flywheelstaging.com/Casey Quirk Global CIO Sentiment Survey.

In an environment where chief investment officers cannot rely on markets to generate high returns, and also can’t control contribution levels, they are looking to what they can manipulate – costs.

In addition to fighting for a reduction in asset manager fees, asset owners also plan to insource more investments in 2017.

The survey showed, in particular, that efforts to reduce costs have put investment fees under pressure and have caused institutions to look for greater innovation in fee structures to align interests.

The chief investment officers of asset owners from 11 countries with combined assets under management of more than $2.2 trillion responded to the detailed survey, revealing their outlook for fees and risk management.

Investors cited low projected returns, along with increasing stakeholder pressure, as reasons for greater focus on costs. Poor manager performance was not a prominent reason for putting pressure on fees.

The clearly preferred means of lowering investment costs was through harder negotiation with external managers, with 77 per cent of respondents revealing this as their favoured option for reducing expenses.

Half of the respondents revealed they already get a discount from external managers, and 15 per cent said they receive a discount of more than 20 basis points. Some respondents said they received as much as a 25 per cent concession on fees. Even so, continued pressure on traditional asset-management fees was clear.

About half of respondents said they would allocate more to passive or smart beta strategies as a way of reducing costs, and 40 per cent said they would in-source more investment management. However, just 17 per cent said they would move out of high-fee asset classes, such as private equity, in an attempt to save.

Fees under heavy scrutiny

When funds did pay premium fees, the most common reasons they gave were limited product capacity and a lack of high-quality substitute managers, followed by strong service and value-add from managers. Tyler Cloherty, senior manager at Casey Quirk, said the top hedge funds and private-equity funds were not under pressure on fees and even had the potential to extend them.

“Investors have diverging appetites, they don’t want to pay more but they need to increase risk to meet hurdle rates. They are negotiating fees on traditional managers and assets and are spending on alternatives,” Cloherty explained.

Tony Skriba, senior consultant at the Casey Quirk Knowledge Centre, said in addition to reducing fees, asset owners are focused on alignment of interests.

“Investors are looking at performance fee preferences as a preferred model, and asset owners think managers don’t have enough skin in the game,” he said.

The survey revealed that performance fees were a focus for investors, particularly the large investors; 60 per cent of investors with more than $75 billion in assets preferred a performance-based structure with minimum management fees. Investors want innovation in fee structures, with a focus on retaining more of the gross value added.

“We are having more conversations in the market about how to think more innovatively about fee structures,” Cloherty said. “For managers, this is about revenue volatility. When we see people moving into performance fee structures, and reducing management fees, it’s usually about retaining clients. But some managers are looking at how to do that on a more systemic basis. This [requires] operational build out, so it will probably go to larger clients and mandates first.”

He said the most likely structure for institutional mandates will be a lower fixed fee with a performance fee on top, while mutual funds may consider implementing fulcrum fees.Casey Quirk said an ideal fee structure would probably be one where “managers get a hit on the downside” as well as benefiting from any upside.

Skriba said: “Managers need to alter incentives to show they’ll bear some of the risk as well as the upside.”

Managing risk – and expectations

In addition to wanting to reduce costs, large funds in the survey are overwhelmingly looking to lower their return expectations, with 80 per cent of funds having already reduced their return targets or planning to do so in the next year.

The return targets of the respondents varied from 2 per cent to 8.5 per cent, and 31.5 per cent of respondents revealed they were not confident of meeting this target in 2017. A further 42.6 per cent were uncertain of reaching this return target.

The conexust1f.flywheelstaging.com/Casey Quirk Global CIO Sentiment Survey also looked at risk-management techniques and found a heavy reliance on internal systems at most institutions.

While about 40 per cent of respondents did use one or more of BarraOne, MSCI, FactSet or tools provided by external managers or consultants, about 46 per cent used internally developed tools for risk management instead.

The funds are using a variety of risk-assessment techniques, including attribution against a benchmark, and a combination of conditional value at risk, standard deviation, volatility assessment, drawdown risk, sector exposures and tracking error.

Falling equity markets were cited as the biggest risk to investors’ portfolios in 2017, followed by geopolitical risks and rising interest rates.

Casey Quirk is a management consulting business specialising in investment management. It was bought by Deloitte last year.

 

It’s difficult sticking to long-term investment strategies when the political landscape is in a state of flux. Yet now, more than ever, investors need to stay focused on the long term and ignore short-term distractions. The latest report from data provider MSCI, 2017 ESG Trends to Watch, urges investors to act with vigilance and assert their influence as “owners rather than traders of an asset” in the year ahead.

“The year ahead has the potential to test institutions and portfolio companies that espouse a long-term orientation,” say report authors Linda-Eling Lee, global head of environmental, social and governance research at MSCI, and Matt Moscardi, head of financial sector research.

“The temptation to time the market in response to, or in anticipation of, real or rumoured events could prove too powerful a distraction for many. But for investors committed to the long term, 2017 may be the year to differentiate themselves from the pack and orient towards future decades.”

Owning the long game will combine with other key trends throughout 2017. More investors will mitigate their exposure to the physical risks of climate change, and push for improved stewardship from Asian companies. There will also be a jump in the adoption of the UN Sustainable Development Goals as a framework for investment, while China and India will continue to transition to low-carbon economies.

Short-termism and anticipated deregulation

The prospect of a new wave of deregulation is one area that could tempt short-termism from companies and investors. But policy is forged by forces that unfold over more than one election cycle.

Companies seemingly poised to benefit from softer regulation will, in fact, limit their sustainable growth trajectories because they will be hit by competitive disadvantage and the consequences of more lax governance in the long term. Lee and Moscardi ask: Will penalties be eliminated if regulation is relaxed? What will the long-term costs be when regulation is reinstated?

A mooted beneficiary of deregulation is US coal, a worry for those who have divested their US coal assets. Yet coal suffered because it couldn’t compete with cheaper gas, which many US utilities now use.

“What will the new (US) administration do to bring back coal? Will it stop fracking?” Lee asks. She concludes, “It will be difficult for coal to be resurgent.”

Investors also have the option to reduce, rather than divest, their coal assets; many have chosen to reweight their holdings to have exposure to the whole energy sector.

“The reweighting approach doesn’t require a take on timing.”

 

Physical risks will take prominence

Despite such concerns, Lee and Moscardi predict the risk focus will shift away from regulation in 2017.

“The regulatory focus obscures the more fundamental risk: weather patterns can impact assets in a physical way,” they state.

This year, investors should increasingly look at the impact of the physical risk of climate change on asset values. The experience of the US insurance market explains why. Many US homeowners have moved to government-subsidised insurance because private insurers will no longer bear the risks of an increase in the intensity of storms, or the rise of sea levels, on their own.

“Sea levels are rising. That is a fact,” Lee says. “Investors need to address these changes, regardless of who is at the helm in the US.”

Physical risk is definitely on the mind of France’s €36.3 billion ($41 billion) Fonds de Réserve pour les Retraites. The fund, which was created in 2001 to build reserves for the country’s public pension system, kicked off 2017 by identifying the risks arising from climate change in its portfolio, including physical dangers.

Elsewhere, Canada’s C$18 billion ($14.1 billion) OPTrust, which manages pension assets for former and current public-service employees in the state of Ontario, has just release detailed analysis of the potential risks to its investment portfolio from global warming. The analysis, prepared by consulting firm Mercer, predicts the fund’s investment returns could improve with modest warming, but will decrease if there is a major impact on global temperatures this century.

OPTrust states: “The physical impacts of climate change, such as extreme weather events and sea level rises, are expected to be relatively limited over the period to 2050. Nevertheless, the post-2050 implications should not be ignored.”

More stewardship in Asian capital markets

Expect increased stewardship in Asian markets through 2017, the MSCI authors state.

In an argument that contradicts conventional wisdom that sustainable investment in Asia lags behind that in Europe, six of the 14 countries that have developed stewardship codes since 2014 are in Asia. The codes, modelled after the UK Stewardship Code, set out principles that aim to improve engagement between investors and companies to increase long-term, risk-adjusted returns.

Progress in Japan has come from investment managers taking a more active role on ESG.

In a survey conducted by Japan’s giant Government Pension Investment Fund (GPIF), 60 per cent of its investee companies reported changes in their interactions with GPIF’s external managers. Elsewhere, Taiwan’s $46.7 billion Bureau of Labor Funds has committed $2.4 billion to socially responsible investments. However, the authors do flag Japan’s ageing working population, which is forecast to shrink 12 per cent in the next 10 years, as a worrying long-term risk for economic growth.

ESG grows up

This year will also mark a shift in the conversation – from how ESG matters to where it matters. Examples of the increasing sophistication of ESG strategies include research from Cambridge Associates showing that they make a stronger contribution to the performance of companies in emerging markets than to those in developed markets.

Barclays research showed strong management qualities are also likely to result in greater fiscal responsibility and fewer corporate credit downgrades.

Research also suggests that ESG and factor exposures have a relationship that can either enhance or interfere with investment goals. ESG can complement some defensive strategies that focus on lower volatility or higher quality companies. Conversely, adding ESG characteristics to a momentum strategy made for a “more difficult marriage”.

Blending factor exposures and ESG is one strategy recently adopted by HSBC Bank Pension Scheme, the fund for the HSBC Group’s UK employees. Its new multi-factor global equities index fund incorporates a climate tilt with the four factors: value, low volatility, quality and size. The fund’s bias is towards smaller, not larger companies. The climate element to the index tips away from exposure to carbon emissions and positively towards green revenue.

Sustainable development goals on the rise

Expect more investors to use the UN’s sustainable development goals as a framework for responsible investment throughout 2017. Relating to challenges around climate, poverty, healthcare and education, the SDGs require an estimated annual $5 trillion to $7 trillion by 2030.

“We will all hear a lot more about SDGs, even though they were not designed with the private sector in mind,” Lee says.

A coalition of European investors has already made an explicit commitment to use the SDGs as the reference framework for an increasing number of investments. Dutch fund PGGM, which manages pension assets worth €205.8 billion, has already invested €10 billion in line with four SDG themes – climate, food security, water scarcity and health – and is targeting €20 billion by 2020.

Transitions in China and India

China and India will continue to transition to low-carbon economies. China is laying the foundations for a green financial system with initiatives including subsidies for loans that finance renewable energy, guidelines from the People’s Bank of China that govern issuance of green bonds, tradeable environmental indices, and a national carbon trading scheme.

“If China is to attract global capital, it needs to meet global standards,” Lee says. In 2017, global investors will be able to take “a serious look” at allocating investment, she predicts.

India is aiming to lower the emissions intensity of its gross domestic product by up to 35 per cent, compared with 2005 levels, by 2030. It also wants to quadruple renewable energy capacity in the next five years. Renewable energy has been deemed a priority lending sector for banks, and the Securities and Exchange Board of India has issued voluntary green bond guidelines.

It’s too early to declare that these economies will take on the mantle of global leadership in the transition to a low-carbon economy. But their transitions make up just one of the exciting trends of 2017.

The United Kingdom’s National Employment Savings Trust (NEST) is preparing to introduce an active global high-yield bond fund. The new mandate will add to the existing ‘building blocks’ that underpin the scheme’s default NEST retirement date funds, and some of its alternative fund choices.

The multi-employer defined contribution fund, launched just five years ago, looks after more than £1.4 billion ($1.8 billion) on behalf of 4.1 million members and is set to grow considerably as auto-enrolment gathers pace.

“High-yield bonds can offer attractive returns in an otherwise low-yielding fixed income environment,” says chief investment officer Mark Fawcett, who has been in the role since NEST’s outset.

“Procuring a high-yield bond fund will also further diversify our members’ portfolios. By including this asset class in our building-block mandates, we will be joining the growing number of institutional investors holding high yield.”

There are nearly 50 retirement date funds in NEST’s default strategy. It accounts for the bulk of members and their assets, which are divided into three investment strategies depending on their age.

For young savers in the foundation phase, strategy is low risk, aiming for returns that match inflation and encourage saving. The growth phase, typically lasting 30 years, targets returns of inflation plus 3 per cent in a diversified strategy. The consolidation phase invests in inflation-matching assets to de-risk.

The active bond allocation marks a departure from NEST’s general preference for passive management. Its commitment to passive is based on an investment belief that indexed management, where available, is often more efficient than active management. It is also part of NEST’s need to control costs in line with its 0.3 per cent annual management charge.

High yield, and a handful of other allocations, are the exception, Fawcett explains.

“We need to believe that active managers are likely to improve the risk-adjusted returns relative to the index in any given asset class,” he says.

“Thus, we have elected to use active in credit markets where indices are less well constructed and we believe active managers can manage default risk. Hence, for investment-grade credit, emerging market debt and (in the future) high yield, we use active managers. Also, in some asset classes, such as direct real estate, passive management is clearly not an investable option.”

ESG criteria in the mix

For equity markets, NEST generally uses passive management, although Fawcett stresses that the fund does “select thoughtfully” which index to track.

For developed markets, it uses just market-cap weighted, whereas for emerging markets it tracks two alternatively constructed indices.

NEST made its first allocations to alternative indices through two emerging market equity mandates in 2014. One fund weights companies according to certain fundamentals; the other screens out stocks on the basis of certain environmental, social and governance (ESG) criteria.

NEST’s new bond mandate will have to incorporate ESG criteria, now integrated across all the retirement date entities and other fund choices.

Far-reaching ESG objectives are outlined in the pension provider’s inaugural responsible investment report, titled Working for Change, published mid last year.

“Considering [ESG] risks and opportunities, combined with being an active investor, is part of how we make the most of members’ pots,” Fawcett explains. “Integrating ESG into our investment processes is one of the means we deploy to grow members’ money over the long term.”

The report highlights four key aims.

Better risk-adjusted return: Targeting an improvement in ESG performance where there is evidence that doing so can lower the amount of risk needed in order to achieve a return.

Better functioning markets: Working to improve how markets operate and are regulated in jurisdictions where NEST invests.

Support long-term wealth creation: Encouraging the companies NEST invests in to deliver sustainable and stable performance to support good returns for members over many years.

Manage reputational risks: Protecting NEST’s reputation and increasing members’ trust by encouraging companies to act in ways members can feel confident about.

With these key aims in mind, NEST went on to identify its most important ESG risks, Fawcett explains. So far, these include how companies treat the environment, addressed through focusing on companies’ greenhouse gas emissions; how companies interact with others, tackled through a focus on conduct, culture, and staff reward; and how companies lead and organise themselves, addressed through a focus on audit and dividends that contribute to public and investor confidence and trust.

Long-term partnerships with fund managers

NEST has also built a reputation for nurturing long-term manager relationships, something Fawcett believes lies at the heart of successful investment strategy.

“Fostering long-term partnerships with our fund managers is crucial to establishing mutually beneficial commercial terms and providing for a stable framework for our asset allocation decisions. We want to avoid the destructive feedback loop of hiring managers at the top of a performance cycle and firing them at the bottom. It is precisely this behaviour that encourages investment managers to take inappropriate short-term risks and charge higher fees for short-term revenues. Of course, there is a difference between low cost and value for money – NEST’s focus is very much on the latter, subject to our fee budget.”

The fund’s internal team comprises a small but skilled group responsible for managing core aspects of the investment strategy, from asset allocation and risk management to the development of ESG and the responsible investment policy.

Large funds continue to dominate global pension assets. The Willis Towers Watson Global Pension Assets Study 2017 found that total pension assets at the end of 2016 were $36.435 trillion. The world’s largest 300 pension funds now account for 42.5 per cent of that. The largest 20 funds alone account for 17 per cent.

The largest pension markets in the world, by total assets, are the US, UK, Japan, Australia and Canada.

The US dominates with $22.48 trillion, followed by the UK with $2.86 trillion, Japan with $2.80 trillion, Australia with $1.58 trillion and Canada with $1.57 trillion.

The largest seven markets, which also includes the Netherlands and Switzerland, account for 91.7 per cent of the world’s total pension assets.

Over the last 10 years, the Hong Kong market has experienced the fastest growth, with a compound annual growth rate of 7.8 per cent for the decade. It was followed by the Australian market, with a rate of 6.9 per cent, and the US at 4.9 per cent. Three of the largest 22 markets experienced negative growth over the last decade (France, Japan and Spain).

In the US, the top 10 pension funds represent 8.5 per cent of total assets, but the top 10 Japanese funds represent 63.7 per cent of total assets in that market. The distortion is due primarily to the Government Pension Investment Fund, which represents 43.5 per cent of Japan’s pension assets. In the UK, the top 10 pension funds represent 16.2 per cent of total assets.

In terms of asset allocation, real estate and other alternatives have been the biggest winners over the last 10 years, with an increase in allocation from 4 per cent to 24 per cent across the largest seven pension markets in that time period.

In the 2017 report, Australia, the UK and US have above-average allocations to equities, while the Netherlands and Japan have above-average allocations to bonds.

The home bias in equities has fallen over the past decade, from 68.7 per cent to 42.8 per cent across the largest seven markets.

Defined contribution assets continue to make up more and more of the market, now accounting for 48.4 per cent, up from 41.1 per cent in 2006. Australia and the US have the largest proportion of defined contribution assets, with 87.0 per cent and 60.1 per cent, respectively.

The report states there are six factors that are growing in influence on pension fund development.

They are:

  • Improvements in governance

Risk-management focus

Pension design towards a defined contribution model

Pressure for talent

New value chain. A more effective value chain will emerge, with the use of passive and smart beta leading to modest fee compression.

ESG and stranded assets. The move towards more integrated approaches to managing ESG factors and exercising better stewardship over ownership is gathering pace. This will require the support of increased disclosure, measurement and analysis of extra-financial factors.

Two of the Netherlands’ largest fund managers, PGGM and APG, are developing investment strategies designed to help boost the United Nations’ sustainable development goals (SDGs).

APG manages €436 billion ($465.8 billion) on behalf of 4.5 million Dutch pension scheme members; PGGM manages pension assets worth €205.8 billion. Both believe institutional private capital is critical to developing the UN’s 17 ambitious SDGs, and are working alongside other Dutch financial institutions towards that end.

The UN SDGs are linked to challenges around climate, poverty, healthcare and education, and will require an estimated annual $5 trillion-$7 trillion by 2030.

In line with a growing belief amongst other global investors, the Dutch managers argue that investing in consideration of the greatest challenges of the age is not only of societal importance, but also in the best interest of their beneficiaries and investors.

The Dutch initiative is groundbreaking both for pushing a national SDG investment agenda and for uniting the country’s pension funds, insurance firms and banks around the shared goal.

The initial consultation process, completed last year, took six months and brought together more than 70 investors, government representatives and expert practitioners. In their resulting report, titled Building Highways to SDG Investing, the signatories offer concrete ways to accelerate and scale SDG investment at home and abroad.

“I hope this will mark the development of a new mind set in the financial sector, just like 10 years ago, when the idea started to take root that institutional capital should be invested responsibly,” says PGGM chief executive Else Bos.

“I am, personally, very keen on this development, as I am convinced the SDGs’ contribution to a more stable world, and hence to a stronger and more sustainable economy, will ultimately help us generate better returns for our clients.”

A pioneer for new strategies

PGGM has already invested €10 billion in line with four SDGs themes – climate, food security, water scarcity and health – and is targeting €20 billion by 2020.

It’s a fixed goal that casts PGGM in a leadership role around SDG investment. The manager is duly pioneering new strategies, including how best to apply SDG investment to public markets through active strategies. It has built up an SDG-based “solutions” portfolio, with three-quarters of the current €10 billion allocation in liquid equities and bonds. Investments are drawn from a universe of 350 listed companies that contribute positively to PGGM’s selected four SDG themes.

The universe includes big conglomerates that are acknowledged “transformational leaders”, or others that may have only a small part of their business involved in solutions, but still have a big impact, like Unilever and wind turbine manufacturer GE.

Smaller companies with specific lines of business related to the four themes are also in the universe, says Piet Klop, senior adviser, responsible investment at PGGM.

“Our internal team and an external fund manager have picked about 70 companies from this universe for our equities ‘solutions’ portfolio,” Klop says. “I believe this initiative sets us apart from other impact funds because it shows you can have an impact through listed equities.”

The companies in the universe are selected according to their positive impact and commitment to measuring that impact.

“We are careful not to claim that we generate impact ourselves, but this way we support those companies that do generate an impact and measure their results,” Klop says. He notes that persuading companies in the universe to report impact is an ongoing challenge.

Active strategy costly but worth it

“Rome wasn’t built in a day. Some companies are more willing than others to carry out impact accounting,” he explains.

Yet PGGM’s ability to measure the non-financial return of its solutions portfolio is a vital requirement of its biggest client, Dutch healthcare fund PFZW. It’s also the key reason for the active strategy.

“If you want to make allocations to selected themes, there is, as yet, no option other than active management,” Klop says. “The [indices] available are not what our client is looking for because the impact data is not available. Our client needs to communicate impact to beneficiaries.”

The active solutions strategy accounts for about 5 per cent of PGGM’s public-equity allocation, where the manager overwhelmingly favours passive strategies. The fund has about €55 billion in passive equity allocations. Although the active allocation is expensive, Klop says the returns are promising.

“We carefully keep track with the broader market index, and believe we can match this in the long run,” he says. “Even when energy companies and financials, which are largely absent in our universe, are getting a boost, like they have since the US election.”

When it comes to SDG investment in private markets, the Dutch pension managers highlight the importance of so-called blended finance. Here, the idea is that the Dutch Government and other institutions invest alongside private capital to share risk.

It is co-operation that will help generate SDG investment that would not have happened otherwise. Blended finance would bring an increase in awareness of SDG investment, along with policy support, guidance through government bureaucracies and financial structuring expertise. It would also act as a catalyst to bring in other investors.

“In private markets, blended finance may help fund opportunities earlier in the investment chain, so we can tap more,” Klop says.

PGGM and APG’s initiative will soon prove how viable SDG-focused investments are. With any luck, they hope their strategy will encourage other investors to use this kind of sustainability as a lens in their investment decisions, too.

“You can have a measurable impact at market-rate returns,” Klop says.