For approximately 88% of the investment portfolio PGGM merely aims at avoiding negative social and environmental effects through exclusions, engagement and ESG integration. With 7% of the portfolio we are making a positive contribution to people and the planet through the Investments in Solutions (BiO) program, that we developed for PFZW. We established this using the framework of the Impact Management Project.
That framework carefully separates impact by the business (investee) from impact by the capital provider (investor). It also defines different degrees of impact. The hope is that this will bring about more clarity around what businesses and investors routinely claim as their ‘impact’.
The Impact Management Project (IMP) is a collaborative effort by over 700 organizations to arrive at shared fundamentals for measuring, managing and communicating impact. PGGM has been working with the IMP to map its portfolio in terms of its effects on people and planet, see this paper.
According to the IMP framework, all businesses – and therefore all of PGGM’s investments – have effects on people and planet, both positive and negative. The materiality of their net impact can be assessed along five dimensions:
- Relate to important positive or negative outcomes (WHAT).
- Are significant (HOW MUCH),
- Occur for underserved people or the planet (WHO),
- Whether our role makes the effect better or worse than is likely to occur anyway (CONTRIBUTION),
- The likelihood that the effect is different from our expectation (RISK)
In addition to the impact by the business, the IMP framework also gauges the ‘depth’ of impact from the perspective of the provider of capital. Investors’ contributions may include:
- Signal that impact matters. PGGM does this through normative exclusions and risk-based divestments.
- Engage actively. PGGM runs a large engagement program targeting selected companies and market participants.
- Grow new or undersupplied capital markets. PGGM does this for example by investing in specialist or relatively illiquid asset classes like infrastructure or structured credit.
- Provide flexible capital. PGGM cannot use this strategy as making concessions to risk-adjusted returns would conflict with our fiduciary duty.
The figure below shows PGGM’s investment portfolio as mapped against the axes of business impact (rated by the five dimensions) and the various levels of investor contribution.
Thus presented it becomes apparent that:
- The effects of 12% of PGGM’s portfolio cannot be established at all due to the very nature of the asset class and/or the almost total absence of data.
- For the bulk of the PGGM portfolio (81%), businesses try to avoid harm. In the absence of data this rests on the crucial assumption that these investments respond effectively to the various instruments PGGM wields to minimize negative impact (exclusions, engagement, ESG integration).
- 4.5% of the portfolio provides general benefits to people and/or the planet through our Investing in Solutions (BiO) program, which targets investments with measurable impact that relate to several SDG’s .
- Also through the BiO program, about 2.5% of the portfolio is aimed at making a significant contribution to positive outcome(s) for specific target groups or causes that are underserved, including climate and pollution.
Due to lack of data it is often difficult to assess in what column a certain business belongs. By participating in – and contributing to – the IMP, we encourage businesses and fellow investors to produce better data for a more comprehensive and accurate portfolio-wide overview of social and environmental impacts.
PGGM has just started an assessment of the positive impacts its portfolio has on the various Sustainable Development Goals. This will help us finding out what investments in the second column (prevent negative outcomes) should be moved to the third column (provide general benefits to people and the planet).
In working with the Impact Management Project PGGM helps its clients to more accurately communicate what difference the investments are making in the real economy, and precisely what our role has been in the process.