ABP’s total responsible investment strategy

Rob Lake, senior portfolio manager for environmental, social and governance at ABP, the €221bn ($311bn) pension fund for Dutch civil servants, talks clean tech, engagement and cluster bombs.

Responsible Investor: Can you outline how ABP approaches responsible investment?
Rob Lake: ABP has been working on sustainability issues for a long time, and certainly for a long time before I was here. Initially this involved a lot of academic research looking at financial performance and evidence of links between the financial performance of funds and the sustainability quality of the underlying companies to build up the understanding of the underlying issues. That led to a decision on the most recent three-year investment plan, put in place towards the end of last year, to start to incorporate systematically environmental, social and governance issues right across ABP’s mainstream investment processes. The position that I now have is to work out how we do that and put the flesh on the bones of that commitment.

Responsible Investor: How does this work in practice?
Rob Lake: You can imagine that getting to grips with a portfolio like ABP’s is quite a task, so we’ve started with a particular, but not exclusive focus on two of ABP’s internal equity portfolios: one is the fundamental stock selection fund – a bottom up stock picking fund, the other is the global thematic fund – a top down, theme-driven investment fund, and those two together total €22bn. I’m working intensively with the portfolio managers and looking company by company and sector by sector at the relevant ESG factors and then through a process of intensive dialogue with the portfoliomanagers working out what the investment implications are.
Responsible Investor: What is the philosophy behind ABP’s responsible investment strategy?
Rob Lake: The fundamental reason behind it is that ABP wants to improve and increase its risk adjusted financial return, so it’s a way of doing ABP’s core business better. ABP exists to make investments to pay its pensions and we want to find better ways to do that.
The concept of social responsibility for an institution like ABP is relevant as well. In a context where issues of great public concern are finding their way into the business and investment world, in the way that governments respond to issues like climate change, for example, it creates a lot of very fertile ground for looking at sustainable issue in a financial context.

Responsible Investor: Is there any difference between the responsible investment strategy for in-house and externally managed assets?
Rob Lake: ABP is slightly unusual as a pension fund in that 80% of the money is managed in-house and 20% by external managers. So in the first instance, we’re looking at the 80% and concentrating on internal funds. We have a commitment to start to roll out the approach we are developing internally to other asset classes beyond equities and then to external managers in due course. So, in principle we would expect external managers to follow a similar approach to what we are
doing in-house. And we are already applying the same exclusion principles to external managers as we do to the internal portfolios.
We’ve excluded companies that make anti-personnel landmines and cluster bombs from internal portfolios and we’ve asked external managers to do the same.
Responsible Investor: Does the fund have specific sustainability related investments?
Rob Lake: We’ve got a number of investments that are financially attractive because of the way that sustainability issues now work in the market. We’ve got around €500m in carbon funds, for example, with opportunities created by the fact that companies now have to pay a price to emit carbon. People have set up carbon funds that invest in projects in developing countries usually, often China, Brazil and Mexico, to reduce carbon dioxide emissions and to sell in the market the resulting credits. We’ve got €250m in a private equity mandate invested in clean technology jointly with PGGM and we’ve just announced a new investment in renewable energy infrastructure. We’re seeking to capitalise on these existing strongly sustainability driven opportunities that are now coming into the market because of the ways that the issues work.

Responsible Investor: How do you look at other asset classes such as bonds or alternative assets in responsible investment terms?
Rob Lake: There are attractive investment returns to be had, so a clean tech private equity mandate for €250m is capitalising on existing opportunities created by strong policy incentives and subsidies, for example, for clean technology. That’s a clear-cut investment opportunity.We’re also talking to Alpinvest, our private equity manager jointly owned with PGGM, about wider issues. Clearly the question of the transparency of private equity managers has very been a subject of public discussion in recent months, so we are having discussions with them about how they, in turn, deal with the people running the funds that they invest money in. Over time, through discussion rather than coming in with a heavy hammer, we can develop approaches to responsible investment in the way that they work.
Similarly with hedge funds there are already attractive investment opportunities being identified and exploited by some of the hedge funds we put money into in renewable energy and emerging markets for example.
The commitment that we have made to look at all asset classes means that we will over time we will be seeking ways to develop the same approach right across all asset classes including hedge funds.
Responsible Investor: How does ABP balance fiduciary duty fit with responsible investment?
Rob Lake: ABP has made a commitment to explore the relevance of sustainability issues to its investment management operations. But it still has an overriding obligation under Dutch and European law, which is couched in financial terms. ABP exists to make investments and pay people’s pensions and we can’t simply abandon that objective. Our interest in sustainability is seen very much in the context of that overriding financial obligation that we have in law.
There are, some would argue, things that need to be invested in, to help solve the world’s problems, but those things are not currently financially attractive. People
come to us sometimes with investment opportunities that they’d like us to put our beneficiaries money into, but they don’t offer sufficiently attractive rates of return and we can’t relax the financial rules in the interests of pursuing purely sustainability driven objectives.
What determines the financial attractiveness of many business models or types of asset is very strongly linked to policy and regulation: if companies faced tougher limits on their carbon dioxide emissions or there were stronger incentives for energy efficiency then a whole panoply of attractive new investment opportunities might open up. In that sense we are very interested in the policy environment and we are starting to have discussions with policy makers about exactly those things.
One thing in the policy arena that we’ve been involved in just recently has been a letter, under the auspices of the institutional investors group on climate change, was a letter to the G8 group of countries ahead of the summit that they held in June, where they were talking about future climate change policy.
We, together with other investors, wanted to make the point that it is very much in our interest to have a clear, predictable, transparent and strong policy framework on climate change, because the value of existing investments that we have made in carbon funds and renewable energy could be adversely affeceted by inappropriate changes to carbon policy, and clearly we don’t want that. Equally, stronger climate change policies could create new attractive investment opportunities that we would like to exploit.
Responsible Investor: Does ABP have a specific engagement programme with companies it invests in?Rob Lake: We’re starting to do this much more than ABP has done in the past. Some of that is an organic part of the investment analysis, so to understand what a company is doing on environmental and social issues, the best way to find out is to talk to the company. The process of active questioning makes it clear that large investor cares about these things and that creates a certain amount of pressure on a company. Beyond that we are also developing ways to exercise influence more directly. We already actively vote on shareholder resolutions in the US and we are developing discussions with companies closer to home in Europe also.
Responsible Investor: You’ve also been looking at timber investments – does that fit in with your responsible investment approach?
Rob Lake: ABP has now decided to start investing in forestry. The fund manager is starting to look at opportunities. In that context we are looking at how we can develop an approach to certification, so we think about how we ensure there is a level of environmental quality in the forestry investments that ABP makes, so it goes back to the cross-cutting responsible commitment that ABP has made across the board. Forestry is no exception.

Responsible Investor: The fund has been critical in the past of the pharmaceutical industry. Can you explain why?
RL: The work we have done on the pharmaceutical industry has been done through Pharma Futures, which is a dialogue between a couple of large pension funds, including ABP and a group of senior executives form the leading pharmaceutical companies. It’s a civilised
discussion rather than an aggressive campaign and we talk about the industry’s strategy and business model. As part of the discussion, questions about the research and development pipeline and the success of research and about the business model in developing countries, including the extent to which those drugs are available to poor
people in developing countries. In the report published by Pharma Futures and endorsed by ABP, we have been critical of the pharmaceutical industry’s failure to produce interesting new drugs and the failure to deal with reputational issues that have arisen in the context of developing countries. Where we think there is a strong relationship between social or environmental issues and a company’s business prospects, then we see it as an obligation to talk to the company about that. We don’t have a target list of sectors that we are going to analyse in that way, but in the natural process of reviewing our investments, we talk about particular sectors and issues that come up such as supply chain issues in supermarkets. We don’t always see it as an objective to go out and express strong criticism of a particular industry.

Responsible Investor: ABP recently announced that it would vote all of its global shares. Whay are you doing this and how will it work?
Rob Lake: We’ve decided to vote all of our shares as a matter of investor responsibility. When you buy shares in a company you acquire rights and with those rights come responsibilities we think. The decision to vote all our shares and in certain cases of high priority companies where we have a particularly significant shareholding, torecall lent stock to vote, we see as a matter of investor responsibility. We have staff that are responsible for doing that. We buy in advice on voting issues from some of the proxy voting advisory services, but we do all the voting ourselves and our external managers and the mandates we have with them are set up in a way that we do the voting and they don’t.
Responsible Investor: The fund was caught up recently over criticism about its investment in companies producing cluster bombs. How did the fund react?
Rob Lake: First of all it is important to say that it is absolutely legitimate and proper for people to be concerned about these issues and to be able to ask questions about them.
ABP manages other peoples money and so it is perfectly legitimate and the right thing for people to be able to find out for us how we manage their money. We publish the complete list of 4,500 list companies that we invest in worldwide and they can been seen on the web. On the specific question about cluster bombs, ABP has got a very diverse membership base: everyone who works in the health ministry for example, as well as everyone in the armed forces in Holland, so it’s difficult for us to find a clear reference point about what we should exclude from the portfolio. We’ve decided to use Dutch and international law to give us some clarity. On that basis we have excluded companies that make anti-personnel landmines that are illegal under international law. We’ve also decided to exclude companies that make cluster bombs. They are not yet illegal, but negotiations that the Dutch government is taking part in have started towards an international concention to ban cluster bombs.

We think that gives us a clear basis on exclusions and on the strength of those decisions we have excluded between 12-15 companies form the portfolios. We’re also reviewing our exclusions policy more generally to try to establish whether there are other companies and industries that we ought to exclude. It’s also very important to see the question of exclusion in the wider context of what ABP thinks it means to be a responsible investment institution. We would argue very strongly that all the work we do to identify the sustainability issues relevant to investing in listed equities, understanding carbon emissions in the context of utilities or looking at specific sustainability related investment opportunities, the work we do engaging with companies, voting, all of those things are part of the multi-faceted picture of responsibility from ABP’s perspective. Exclusion is important because people have very strong views about particular industries, but it is only one part of being
responsible from our point of view.”Responsible Investor: You recently increased your stake in Triodos, the Dutch sustainable bank. Why?
Rob Lake: We’ve just increased our stake in Triodos. We also have stakes in Innovest and Governance Metrics International: research providers in ESG – ES and G respectively. That reflects the fact that ABP thinks these things are now extremely relevant factors to investment decision making and to the business world. Triodos is a very successful business capitalising on the fact that consumers care about sustainability. ABP is seeking to capitalise on those trends throughout or across a broad range of things that it does, including strategic stakes of the kind we are talking about here as well as listed equities and all the other asset classes.