Impact-investing: from millions to billions
In 2016, PGGM gave full throttle to impact investing: by developing a broadly-based impact investing standard, formulating an objective measurement method and by growing our portfolio of impact investments.
We have reported on this in our new PGGM Annual Responsible Investment Report 2016. In a relatively short period, impact investing – we use the term Investing in Solutions, because the investments must make a positive contribution to some of the world’s greatest challenges – has acquired a permanent position in the investment policies of an increasing number of institutional investors. Thus, impact investing has gone from millions to billions, and will undoubtedly reach tens of billions in the future.
To date, PGGM on behalf of its clients has invested 11.3 billion euros in solutions for climate, health care, food security and water scarcity. In 2016, we made 2.8 billion euros worth of new investments. The aim of our largest client, PFZW, is to have 20 billion euros invested in solutions by 2020.
The progress we are making did not come about overnight. As early as 2012 and 2013, we were in discussions with PFZW and other parties about method and implementation of solution-oriented investments. We wanted to do more than simply manage the risks in the portfolio and remove any potentially negative side-effects of investments. Would we be able to invest our clients’ capital, providing a good financial return and, at the same time, contributing to a liveable world?
Looking back, we can conclude that we have made some good steps forward. For example, with the development of a standard for investments which have tangible positive impact and market rate returns. Together with other institutional investors we defined such investments, based on the United Nations’ Sustainable Development Goals (SDGs), which cover the themes PFZW had already selected earlier on (i.e. climate, health care, food security and water scarcity).
Subsequently, in cooperation with APG, we classified valid solutions and compiled criteria for the label ‘Sustainable Development Investment’ (SDI), a concept we presented at the annual Principles for Responsible Investment (PRI) conference. By standardising definitions and methodology, pension funds will be able to scale up their impact investments.
As PGGM, we want to clearly communicate to pension funds and their participants how their capital has tangibly contributed to the world. Therefore, we must be able to measure the impact of such investments effectively. In 2016, in cooperation with UBS, Harvard University and the City University of New York, we took steps in this respect.
By measuring the impact, we are also contributing to the development of a more general standard for all investments based on the Sustainable Development Goals that we hope will acquire international traction. Increasingly, it is a matter of looking for an approach which combines credibility with practicability for investors who, first and foremost, have to ensure a sufficient return on the pension assets.
Meanwhile, we are halfway through the period PFZW has set itself for the achievement of a fourfold increase in Investing in Solutions. Part of these investments we were able to realize in the Netherlands, and we can see opportunities for the coming years, particularly given the energy transition our country is currently going through.
However, as we become more familiar with this subject matter, new questions will arise. Will we be able to generate a greater positive impact with the investments than we do now? Should we be looking for impact investments on the large, liquid markets, or primarily on the smaller private markets? Can we raise the level of risk management when investments also come with certain negative externalities?
Together with other parties, including academics, governments and peers, we are trying to find an answer to these questions and PGGM is determined to continue playing an important role in the development of impact investing; we are convinced that, by combining financial return with a demonstrably positive impact on the world, a great deal of value is still to be found in the management of pension capital.
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