Many pension funds are willing to take meaningful steps in impact investing. This was aptly demonstrated by PFZW's recent decision to withdraw more than 14 billion euros in invested capital from a large American asset manager to invest it more sustainably elsewhere. But how and where do you invest more sustainably?
The discussion about impact investing often revolves around additionality: are you, as an investor, making a demonstrable difference? In private markets, this is relatively straightforward. Without a loan or investment, a project such as a wind farm or microfinance usually cannot get off the ground. In public markets, the situation is different: buying a share on the stock exchange does not in itself create new impact capacity or solutions. Without the issue of shares, there is no financial additionality.
Why impact investors should include public markets in their scope
Nevertheless, it would be far too simplistic to write off the public market. "We really need to dispel the myth that listed companies cannot have an impact. With strict selection criteria, a clear benchmark and active shareholding, you can indeed be additional. Precisely because the products and services of large companies have so much influence. We cannot do it with private markets alone," says Managing Director Hadewych Kuiper.
Impact through engagement
Engagement is crucial to achieving impact. Kuiper: "Buying a share does not offer any additionality in itself. As an investor, however, through dialogue, demanding improvements and, if necessary, escalation you can make a considerable difference. This is also evident from our experience."
To emphasise her point, Kuiper cites Triodos Investment Management's activities in the field of child welfare, based in part on the Child-Lens Framework developed in cooperation with UNICEF. "The welfare of children is closely linked to the flexibility that employers offer parents. That is why we engage in discussions with companies about family-friendly policies, such as childcare at work. This is how you achieve concrete, meaningful impact."
Impact investing also means that some companies will be left out, says Ronald Waals, Business Development Manager Institutional Markets. “Take Tesla, for example. That company clearly contributes to the energy transition, but due to its treatment of employees and trade unions, and its executive remuneration policy, it does not meet our social impact criteria. So it is excluded. Impact is about the big picture.”
Active selection and exclusion
Kuiper argues that a Theory of Change (ToC) can be a useful tool for funds working on the implementation of an impact strategy. “In a ToC, you define the problem you want to tackle, the activities you will undertake to do so, and the impact you expect to achieve. That may sound theoretical, but it forces you to make concrete choices and it enables accountability.”
This translation must then lead to hard criteria. "A list of exclusions does not yet constitute impact," says Kuiper. "You have to actively select, based on hard criteria, and exclude. But you also see the ToC reflected in the final investment portfolio: a limited number of names and a relatively low turnover. Ultimately, the difference lies in the daily investment decisions you make, not only based on risk and return but also on impact."
A credible impact strategy also requires a robust measurement system. "Impact is dynamic," says Kuiper. "What is sustainable today may be obsolete tomorrow. You need a so-called impact management cycle: strategy, measurement, evaluation and adjustment. This enables you to stay relevant and up to date."
Fixation on relative performance
Waals notices that pension funds encounter challenges when they want to make the transition from impact vision to strategy. A major bottleneck is the focus on relative returns compared to the large, broad indices. Many boards are reluctant to deviate from such a broad index in order to avoid critical questions about tracking error and performance.
Waals notes that for an impact portfolio, it is better to opt for an 'impact index'. "After all, the purpose of a benchmark is to measure the performance of the manager. If your objective is to make impact, should that not be based on a benchmark that reflects this?" Triodos Investment Management has developed a Global Impact Benchmark for this purpose. Only companies that derive at least 25% of their turnover from SDG-related activities are included. "This universe generates 65% positive impact, compared to 25% in the MSCI World," says Waals.
Ultimately, he adds, it is about the absolute return you achieve in relation to your objectives. "A global impact portfolio can yield an average of 7%, with a tracking error of 5. Is that really so different from a private debt allocation that yields 5% above Euribor?"
Sustainability risks apply to everyone
Finally, Waals indicates that all pension funds will ultimately have to deal with sustainability risks. Even funds without an explicit impact portfolio will eventually have to demonstrate how resilient their portfolios are to these risks.
Waals: "The Dutch central bank DNB is increasingly asking for indicators for climate, nature and social risks. Even with a broad index, you will be faced with these questions. It therefore makes sense to invest in companies that are well prepared to manage these risks."
Kuiper: "The great thing is that companies that offer solutions often also better manage their own risks in this area. Sustainable investing therefore pays off twice: you achieve impact and you limit your risk exposure at the same time."
This interview was published earlier (in Dutch) in Pensioen Pro.
