The meaning of long-termism

​PGGM CEO Else Bos was interviewed by FCLT Global about sustainable long-term value creation. This is a shortened version of the interview.

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What does long-termism mean for PGGM? How do you define it?


It starts with our responsibility to provide pensions – the horizon of our obligations is more than 20 years into the future and so that long-term goal is what we are working towards.

Secondly, it is important for us to be generating long-term returns. That means we can take advantage of illiquidity and market cyclicality.

Thirdly, if we are going to pay pensions decades into the future then as an investor we should contribute to a world that is worth living in at that point. We talk about ‘turning savings into wealth’, as Keynes called it, and part of that wealth comes from contributing to a long-term sustainable environment. That means minimizing negative externalities in the portfolio and maximizing societal benefits where possible. We strongly believe that – over a longer horizon – you can contribute to societal wealth while generating market rate returns for the beneficiaries. It is a positive sum game.

The Netherlands has a rich history of engaged citizenship and I am sure that many of your beneficiaries care about the impact of their portfolio. How much is this specific to the Dutch context?


It is an old example, but there was a difficult television program a few years ago that looked at pension assets being invested in cluster munitions. Given that the bulk of our assets are managed on behalf of workers in the healthcare sector, this story upset our beneficiaries very much. This prompted a real and deep debate about how we want to invest our assets

Operating in the Netherlands means we are held accountable and asked to explain what we are doing and why we are doing it. That is not always easy, but because of the level of the debate we are always pushed to do things better and that helps us keep thinking about how we can be more responsible investors.

Long-termism also plays out in the Netherlands in a different way – we have a very prudent approach to managing the pensions system. We assume low future returns of just under 2%, which drives up our liabilities.

On average for the last decade Dutch pension plans have not been able to deliver indexation to cost of living increases. That is despite strong investment performance and coverage ratios of around 100%. That is dramatically different to other parts of the world which might have coverage ratios of 70% and use discount rates of over 7%. Too often people think about long-termism as only about assets, but if you are paying out too much today you are not thinking long-term about your liabilities. “Too often people think about long-termism as only about assets, but if you are paying out too much today you are not thinking long-term about your liabilities.“

What are some of the practical steps that you have taken to implement this long-term and responsible approach to investing?


First, we started with our investment beliefs – we believe that long-term investment and value creation is important, but also, as I said earlier, we think that societal returns can go together with financial returns, and that you can deliver the same or higher financial returns in the long-term.

Second, we have translated that into classifying a significant part of the portfolio for PFZW as an impact investing portfolio – partly in private assets, but also a portion in listed assets that are ‘investing in solutions’ and which are managed jointly in-house and through an external manager. We have four areas – water, climate, food, access to medicine – where we want to have impact, and link to Sustainable Development Goals. And on top of the financial results we are trying to measure the kWh of clean energy that we generated or safe drinking water we created.

Third, we have pushed for transparency – we need to know how companies and external asset managers are operating in depth. That means reporting broader data around material sustainability factors and long-term value creation. We have worked with Harvard and NYU on a ‘heatmap’ that identifies opportunities where there is mispricing due to illiquidity or externalities – we are now bringing this to the level of identifying where we can invest with impact in mind.

Fourth, we have invested in new research and collaboration with our peers to understand what needs to change in the investment value chain – FCLT Global  is a key part of this. We know we can only make the system more long-term oriented if we get a group of actors to think and act differently.

We sometimes get criticism that the senior team may believe in long-termism, but that once you go a few layers down the organization that belief wanes and the investment professional actually making an investment may not implement that long-term belief. Does that challenge resonate with you?

It may be true that some investment professionals may believe in long-termism less deeply, but they are looking for clarity on the expectations for their performance. And that is where the difficulties often lie. A long-term mandate – whether it is managed internally or externally – needs to be properly defined with the right metrics. What is the right way to measure risk? How do you identify a long-term opportunity? How should you report and measure performance? After all it is easy to measure annual performance versus a benchmark but if what you really want is a 20-year return then the people who made the original investment won’t be around by the end.

And that is why FCLT Global  is a great platform – these are complex questions that can only be solved by bringing asset owners, asset managers, corporates and regulators/supervisors together. I believe we are currently stuck in a paradigm based on Markowitz’s modern portfolio theory – mark to market and a volatility based view of risk are simply less relevant for long-term investors who do not need short-term liquidity.

Regulators are beginning to look at their role in supporting sustainable long-term value creation – much of this is around reporting (e.g., Reg FD reform in the US or investor carbon reporting in France). Do you think regulators should be doing more to define and focus on impact?

 
I don’t think regulators should try to define impact – each group of beneficiaries should develop their own view of what impact matters to them. But it is a huge help that governments have developed the Sustainable Development Goals as an umbrella framework for measurement. There are 17 goals and 169 targets so that provides something that aligns with the goals of most beneficiaries.

Regulators and supervisors have a big impact in how they hold trustees of pension funds to account – the questions they ask and the reporting that they require. The Dutch supervisor has started a couple of projects on environmental, social & governance topics which is a good sign. Too often investors say they can’t do more because the supervisory system is holding them back. I think the Dutch supervisor takes a very sophisticated position to challenge investors to tell them what needs to change in the regulatory regime to enable them to focus on sustainable long-term value creation.

That supervision also applies to corporates. I have recently been part of a new corporate governance code in the Netherlands and put long-term value creation and culture at the core of this. What we want from corporates to think about the dimensions and criteria that drive sustainable value creation, and then to explain to their owners how this aligns with long-term performance.

Stewardship is a big issue at the moment – but we have heard from some corporates that when it comes to the crunch moments – an approach by an activist investor who is focused on short-term value for example – long-term investors can be hard to find and seem to abandon their stewardship responsibilities. How are you thinking about this at PGGM?


There are dilemmas which we have not solved yet. Being a long-term investor does not mean that you’ll never sell your stake in a company. Key question here is: what is in the long-term interests of your beneficiaries? And how can you allocate their capital in the most productive way?

By discussing cases we are building our reasoning framework. Our primary responsibility is to create (long term) value for our beneficiaries. As a long term investor, we believe this value creation is done better by some companies than by others, and that over time we will harvest this “premium” in terms of higher and more stable returns. So there is the present value of this additional value creation. By engaging with the company, we can better understand and hopefully enhance this value creation process.

And then comes along the activist investor. Clearly, if this investor is bidding higher than the present value of the additional value creation by the long term company, it is not rational to hold on to the Long Term Company. So there may come a moment when you will sell in the interest of your beneficiaries. In terms of stewardship responsibilities, we feel it is important to develop a relationship with the long term companies we own and society at large where we show predictable and mutually understood behavior.

So we should have careful and understood reasoning in place about our behavior in crunch moments. Part of our learning curve is to develop this reasoning case by case.

What does the future look like for PGGM? What comes next?


We want to continue to build on our commitment to long-termism. That means building the theory and proof while simultaneously translating all this into practice. Both are slow processes. We try to make small but relevant steps, making sure that everybody in the value chain understands the “why” and the “how”.

We are expanding portfolios of impact investments, both on the listed side where we now manage 2.5 billion euro of assets with measurable positive impact, and on the private markets where we have built a lot of inhouse expertise and knowledge. We are working on better long term reporting, and better measurements.

In The Netherlands there is a growing community of pension funds and assets managers, also working together to further long-termism. We try to involve the academic community and see increasing signs of interest there.

I joined the C-suite at PGGM fifteen years ago and at that time these topics of long-termism and responsible investing were something that a handful of people with grey socks and long beards thought about. The rest of the investment world was laughing about it. Now this is becoming mainstream and the cutting edge is moving to topics like the ‘circular economy’. So we still have a long way to go, but we have already come a long way!

It is easy to be short-term about long-termism!


Yes, that is true! It is important to talk about beliefs and ambition, but then you need to put meat on the bones. If you don’t have much meat, you are in a dangerous zone where the idea and progress may die. So you need some faith and perseverance to get through it.

Chief Executive Officer

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