As institutional investors grapple with the need to incorporate environmental sustainability into their allocation decisions, Dutch superfunds PGGM, the €85bn pension scheme for healthcare and social workers and ABP, the €210bn plan for civil servants are, as so often, proving to be leading lights.
Together the funds have a socially aware membership that totals 4.6 million and keeps responsible investment issues at the top of their agendas.
Clean technology, in which the funds recently announced a joint €500m investment in unlisted companies – one of the largest ever such placements on the private equity market – is their latest contribution to fiduciary environmentalism.
It is the first time the two pension funds have jointly invested in venture capital and private equity based on sustainability.
As a result, the eyes of the world’s investors will be fixed on the strategy and outcome.
Marcel Jeucken, head of responsible investment at PGGM, says the first step for the fund was to revisit and refine its already comprehensive responsible investment policy.“In most of our investments to date, sustainability has always been seen in terms of equities. We wanted to broaden this out across our investments, including private equity.
“The next step was to look at exactly what the environmental, social and governance (ESG) integration was within our portfolios and then to ask whether we needed direct principles to apply to each asset class. We then looked at whether we could start specific mandates.”
In its public equity investments, PGGM has already made significant strides towards incorporating ESG with a climate change capital mandate for €160m and overlay mandates based on geopolitical factors for €250m of its assets.
For the move into private investment, Alpinvest, the private equity fund of funds manager, jointly owned by ABP and PGGM, was asked to carry out a market study and find out whether the funds could create an ESG mandate in renewable energy and clean technology.
The result was a proposed private equity fund of funds based on late stage investments that incorporates minimal thresholds for venture capital allocations.
It also also includes the potential for funds to hold a minority of its investments in conventional energy companies.
Jeucken explains: “Many of the private equity funds we know have these non-renewable allocations, so we have to work with that. However, we have a guideline that their investments must be at least 67% in clean tech and renewable energy. Part of the reason for this split is that there we are fiduciaries and we need to have good returns in what is still a very young sector. The other reason is the mix of private equity operators in the sector. Sometimes you see seasoned and well equipped private equity managers that have moved into the clean tech space. On the other side you have private equity funds focusing on clean tech with people who don’t necessarily have a private equity background. In the middle there are some managers that have both qualities. We had to find a balance.”
Jeucken says the question of fiduciary responsibility when making the investments was key. “Following our research, we felt that it would be against our fiduciary responsibility not to look at this area of renewable energy and clean technology. That’s not the same with everything we look at. However, because there is more venture capital in this mandate than we would normally have, we have to consider it a higher risk investment and therefore our expected returns are higher. We are running this as part of our regular private equity allocation, so the risk/reward criteria are monitored and judged accordingto our specific criteria for this asset class.”
Jeucken’s involvement as head of responsible investment will be to oversee investments with specialist knowledge on the environmental impacts of certain companies, which might not be picked up elsewhere: “We have a due diligence role because there are new technologies that look clean from the outside but are not so clean in the detail and may have serious side affects that we want to avoid.”
“We need to have good returns in what is still a very young sector.”
Alpinvest has yet to make its first investment for the fund of funds, but is not restricted geographically, although Jeucken believes that most of the investments will come in Europe and the US due to the maturity of the regions in clean technology.
He says it is still too early too tell when and in which funds Alpinvest will allocate, but says there will be a mix of traditional renewables such as clean fuel burns and wind ventures and more specialized, cutting-edge technology: “We believe there are adequate investment opportunities in the market and we have based the mandate on what we think should be feasible within a horizon of three years. At that point, we will look at the allocation and decide what whether we want to increase it. We could certainly be interested in doing more in this space. There is certainly more to come in related areas.”