Environment

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: Peter Verbaken, Head of APG’s Commodities Team, on the feasibility of the EU plan to make citizens pay for their carbon emissions.

Currently, an emissions trading system already exists in the EU for large companies in a number of sectors. To be allowed to emit carbon, these companies need certificates issued by Brussels. Companies can buy the certificates and, if desired, trade them with other companies. By issuing fewer and fewer of such certificates, resulting in a rise in the carbon price, the EU hopes to reduce total emissions from industry each year. Incidentally, consumers themselves do not have to buy certificates to fill up their cars or heat their homes. That responsibility lies with gas stations and energy suppliers. Because they will most likely pass this on to their customers, European consumers are likely to pay more for fossil fuels for cars and heating from 2027 onwards.

Greening
“The EU is moderately leading the way in this, in the sense that a carbon tax is imposed on consumers. It is thus the first attempt to ‘green’ consumer behavior through policy in this way,” Verbaken explains. One difference with the existing emissions trading system is that with that there is always a concern about whether industries are not moving their economic activities to countries that do not tax carbon emissions. That makes implementing the system complex. “With this variant for consumers you don’t have that concern, because it applies to the whole EU and people here still have to take out an energy contract or fill up their car or charge it. What also improves the practicability is that it only involves energy companies and gas stations that have to buy the certificates and then pass the cost on to the customer. The number of participants is thus limited.”

With measures like this, it is important to offer people an alternative, Verbaken argues. “And those alternatives are there. To offset the carbon tax on home heating, consumers can insulate their homes or buy a heat pump. In addition, owning an electric car is becoming easier and more affordable, and thus increasingly an alternative to the combustion engine car.” The question, however, is whether these alternatives are feasible for everyone. “That should be evident from the details of implementation. The establishment of the Social Climate Fund, which is part of the legislation, should at least ensure that even consumers with the lowest incomes can go green. Because in the end, that’s what you want. If everyone keeps doing the same thing and just pays for the allowances, you won’t achieve much. By the way, the proceeds from the emission rights sold are used for innovation and sustainability. They’ve done a good job of that in Brussels.”

Sensitivity
What does it mean for consumers? “Fuel for the car and energy for heating the home will become slightly more expensive. However, there are some caveats built into the legislation so that the impact on consumers does not become too extreme. This is partly due to the high price of energy last year. That is why the law will not take effect until 2027. Should energy bills be exceptionally high by then, the plan can be postponed for a year. And then there is the Social Climate Fund. In addition, Brussels is keeping open the possibility of making additional carbon allowances available in the event of a very high carbon price, which could reduce the high price somewhat.”

A possible sensitivity involved in directly taxing consumers’ carbon emissions is that at the same time there are companies and entire sectors that are not yet or only partially covered by the emissions trading system. Verbaken: “That is a bit of a political discussion, but in any case, it also has to do with the question of how simple or complicated the feasibility of such a system is. With the carbon tax for industry, there is a concern that companies will move to a place where there is no carbon tax. Then by importing the final product of such a company you would still be contributing to carbon emissions. The new legislation also tries to address this by introducing a so-called Carbon Border Adjustment Mechanism (CBAM). This should ensure that products shipped to the EU will still have to pay for carbon emissions at the border if these emissions have not been taxed sufficiently in the country of origin. Because its implementation is complicated, a trial will be set up in the coming years to show whether the CABM is feasible. This is not an issue with the consumer carbon tax, which is both feasible and practicable.”

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: chief economist Thijs Knaap on the implications for global trade of the Inflation Reduction Act: the law passed by the US Congress in the summer of 2022 to curb inflation. “When multilateralism breaks down, it's actually always bad for investment and trade.”

As part of the Inflation Reduction Act, $391 billion is set aside for spending on energy security and climate change. Of that amount, $270 billion is earmarked for subsidies and tax breaks, including for electric cars and renewable energy. This is on the condition that key components come from the US and assembly is also done there. This goes against the grain of the EU, among others. Because by spending billions to protect American industries, America is violating international trade treaties and creating an uneven playing field that disadvantages companies that do not produce in the U.S. This one-sided way of operating by the U.S. fits a pattern that has been emerging for some time, says Knaap. 

Crossroads

“After World War II, we built an effective legal system for world trade. In it, the World Trade Organization - the WTO - and, to a lesser extent, the International Monetary Fund (IMF) and the World Bank can use arbitration in disputes between countries, where large countries have to play by the same rules as small countries. This has worked well and provided globalization since the 1940s-50s. However, Americans have become less and less compliant with this system, and this development has been going on for a long time.”

There is now a belief among Americans that this model is no longer suitable for the next century, Knaap says.

“This is particularly because China has always played by the rules, but in doing so has been able to grow into a dangerous adversary very quickly - using American technology and American capital. The U.S. wants to stop that advance, and they cannot do that other than by torpedoing the entire system. That already happened under President Trump, who declared all kinds of trade measures against China that were illegal under WTO rules. But Biden is continuing that policy and, in addition, has added new ‘Buy American’ measures. In the past, arbitration would then take place between Europe and the U.S., with a judge reviewing measures for compliance with the trade agreement. But America is increasingly unwilling to abide by the judgment of non-U.S. judges. This movement toward greater sovereignty, by the way, is not limited to the US. Brexit is another example, and it has also become almost impossible to conclude new trade treaties with the Netherlands.

Money taken away

This is a breakdown of the multilateral system between countries, and according to Knaap, this is not without risk.

“If the EU starts protecting its industries as well, the global economy as a whole becomes less efficient. In that case, overcapacity will arise and that is never useful from an economic perspective. It is also a setback for APG as an investor. As an investor, you want some kind of legal guarantee that money cannot simply be taken from you. You used to have more resources for that. Now you depend on whether a local court wants to comply with an international treaty. That makes investing in that country less secure, limiting the global opportunities for us to invest pension money.”

Advocates of free trade

The idea that Europe will “repay the U.S. in equal measure” and thus world trade will increasingly fall into a downward spiral of protectionism is not entirely inconceivable, according to Knaap.  

"France in particular likes to conduct industrial policy (government support and stimulation of national industries, ed.) and are not particularly fond of free trade. The British were always the leader of the free trade bloc, but now that the U.K. is no longer a member of the EU, the Netherlands and perhaps the Scandinavian countries should take that role. The voice of free trade advocates has therefore become less influential, so it is quite possible that Europe will take countermeasures.”

At the same time, according to Knaap, there is certainly still room for new agreements between Europe and the U.S.

Better marriage

“China and the U.S. don’t actually talk; both sides just publish trade measures.  In that respect, the US and Europe have a better marriage, which leaves more room to accommodate each other. There is also a deal to be made, because the Americans need us in certain areas - for example, they want us to stop supplying chips to China. But then you end up with bilateral treaties between large countries or blocs. Multilateralism slowly but surely breaks down this way and you end up in a world in which large geopolitical blocs thwart each other or make deals. This is actually always bad for investment and trade, because you never know who will be in charge somewhere next year and what rules will apply then.”

Governments increasingly call on investors to contribute to the financing of sustainable development in emerging markets. APG’s pension fund clients want to contribute and have set targets for investments in the Sustainable Development Goals. To help them fulfil their ambitions, APG actively looks for Sustainable Development Investments (SDIs) and has launched the SDI Asset Owner Platform. In emerging markets, however, it can be challenging to find sustainable investment opportunities. Ronald Wuijster, CEO Asset Management at APG, calls on governments for help.

One of the challenges for investors is that there is often insufficient accurate and reliable information to assess whether companies are contributing to the SDGs. That is why APG joined forces with PGGM, AustralianSuper, and British Colombia Investment Management Corporation to establish the SDI Asset Owner Platform (SDI AOP) in 2020. The platform uses artificial intelligence to determine whether and how much companies contribute to the SDGs with their products and services.

In 2021, BlackRock – the world's largest asset manager – decided to use the platform’s data. The platform now represents over USD 10 trillion in assets under management. The SDI AOP is encouraging international investors to join the platform with the aim of making it a global standard for investing in the SDGs.

Finding investable SDI opportunities in emerging markets is challenging

Even with the data challenge being tackled, it can still be difficult to find investment opportunities in emerging markets which, ironically, offer most growth potential for sustainable development. Still, although availability is limited, we do see a trend of growing issuance of green bonds by different emerging market debt agencies. These bonds are earmarked to specific sustainable projects and/or have made their revenues conditional to achieving specific sustainable targets. We welcome this development, which is certainly of interest to us.

Another way of financing sustainable development is through private debt originated by Development Finance Institutions. We like this instrument, because it allows us to finance specific individual projects on the ground or to target specific regions, sectors or SDGs on behalf of our clients. However, the scalability we need is not always available. Also, these loans are buy-and-hold. That is not necessarily a problem as we are in it for the long term, but our clients may change their preferences over time and may ask for a change in the investment portfolio. More flexibility would help to allocate more capital to this investment category.

A flexible and scalable solution: ILX Management’s SDG-focused private credit fund

We need innovative solutions to attract private capital. This year, APG invested in a platform for loan participations in emerging markets, ILX Management’s new SDG-focused emerging market private loan fund. APG is the first investor in the fund, allocating USD 750 million on behalf of Dutch pension funds ABP and bpfBOUW.

The fund will pool loans from various DFIs, building a broad and diversified portfolio of medium and long-term finance to projects and companies with a focus on clean and renewable energy, sustainable industry and infrastructure, inclusive finance and food security. Potential investment examples include the development of port facilities, solar power farms, sustainable agriculture and loans to local businesses.

Investing in the fund allows us to invest in individual projects and to decide what we do and do not want to invest in, in line with our clients’ sustainability requirements. At the same time, we still benefit from the underlying DFIs’ long-standing track records in originating and managing private sector projects in emerging markets.

Equally important, the investment helps us to diversify and improve the risk profile of the emerging market debt portfolio. This is because private loan investments tend to have low volatility and a weak correlation with the more liquid credit investments that trade on public markets.

Hurdles: risk aversion and protection constructions

We depend on DFIs to make the loans available. However, there are a couple of hurdles to take. First of all, DFIs tend to find climate-related projects more risky. With our long-term approach we can play a role by taking over or sharing some of the risk. Governments in developed countries can also help stimulate this type of investments, for example by providing investors with a first-loss guarantee.

Second, some countries 0ffer quite a lot of sustainable investment opportunities, but these are not always accessible to DFIs as local banks want to keep these opportunities for themselves. The governments of such countries can help by opening up the market, unlocking private capital from foreign investors and speeding up the realization of climate ambitions.

We call on governments to help boost SDG investments in emerging markets

It is possible to scale up private investment in sustainable development opportunities in emerging markets. There are hurdles, but if institutional investors, Development Finance Institutions and governments work together, we can overcome them.

Inspire other facility clients and service providers to come up with sustainable solutions even faster. That was the idea behind the Sustainable FM Foundation organized by Facility Services and attended by over 60 interested parties from the facilities sector. Michiel Sluis (Product Manager at Facility Services) and Camiel Klein Tuente (Manager of FS Support) talk about what this day yielded.

APG Facility Services (FS) aims to have climate-neutral operations by 2030 at the latest. Based on this ambition, FS, with the help of Hospitality Group and PHI Factory, has drawn up sustainability specifications that challenge service providers to contribute to that ambition. These include catering and waste separation. And to share the knowledge gained, the Sustainable FM Foundation event took place in October.

What exactly did you organize?

Camiel: “On Tuesday, October 11, APG Facility Services, PHI Factory and Hospitality Group organized an inspiring and active event called Sustainable FM Foundation. Over 60 facility clients participated in our Amsterdam office Edge West. And that included some big names like Prorail, Nationale Nederlanden, ING, Saxion University and PWC.”

And what was your goal in this?

Michiel: “Making things sustainable on your own is fine, but making things sustainable together may go faster. And APG may not be quite ‘best in class’ yet, but we are leading the way within the Netherlands when it comes to making our services more sustainable. We wanted to share the knowledge we gained from the tenders for services in Edge West with our facilities colleagues so that we can take a step forward as a sector. In doing so, we also hope to encourage other clients to create more volume on the demand side and to encourage providers to move faster on sustainability.”

What did the day look like?

Michiel: “We had conversations with each other. Together we looked for ways to secure our sustainability ambition and specifications within our own facilities organization and in the contracts and cooperation with suppliers. This happened, for example, in break-out sessions. Questions that were central this day were: ‘How can we learn even more from each other?’, ‘How can we inspire each other?’ and ‘How can we form a collective to accelerate sustainable operations, including with the service providers?’”

Was it a successful event?

Camiel: “Definitely; we are very positive and excited! Together with the facilities professionals we have defined a common ambition: to accelerate to a fully regenerative FM in 2030 together. This goes even beyond our own ambitions of ‘circular and climate neutral operations by 2030’. This does indicate that there is a drive among most clients to accelerate with sustainability. In addition, we shared and discussed our own sustainability specifications.”

Michiel: “As organizers, it was great to experience how the participants encouraged each other to jointly take this step. We are also quite proud that our sustainability specifications are such a good match, including for other companies.”

That all sounds positive. How will you proceed now?

Camiel: “All the input has been enriched jointly with our partners and shared again with the sector this week. Every facilities organization can now accelerate sustainability on its own with our foundation and challenge the market to accelerate service sustainability. We did abandon the term Sustainable FM foundation. This is because we must continue to innovate and accelerate, and a foundation may suggest that we are ready. So, we prefer to speak of a springboard, by which we want to represent that you can keep moving forward.”

Michiel: “The Springboard Sustainable FM will continue with a sustainability community that aims to bring clients together and encourage inspiration and knowledge sharing. Themes such as circular economy, biodiversity and climate-positive services are going to be discussed here.”

What will our own APG staff notice about this and what can they themselves contribute to the ambitions?

Michiel: “We are not there yet. Just making our accommodation and contracts more sustainable does not mean that we are or will become truly sustainable. As employees, we may make the biggest impact. As described above, demand often determines supply. Services like sustainable catering at Edge West should also be tried. We received very positive feedback on the all-plant-based appetizers! To people involved in purchasing new materials or services, I would say: talk to PG Procurement Services and potential suppliers. There is already a lot of knowledge about sustainability within APG, and asking about it is the first step!”

At first glance, the worlds of APG Asset Management CEO Ronald Wuijster and Greenpeace Netherlands Executive Director Anna Schoemakers could not seem much farther apart. Still, it turns out they care deeply about the same topics. In a frank discussion, Ronald Wuijster explores what APG and Greenpeace can learn from each other and how they can each play their role in tackling two of the major challenges of our time: climate change and biodiversity loss.

At the time of writing, Anna Schoemakers is already traveling on the Rainbow Warrior III from Amsterdam to the COP27 climate conference in Sharm el-Sheikh in Egypt, picking up climate activists along the way. While she understands change takes time, she focuses on immediate action here and now. “Every day I work for a more green and peaceful future,” she says. “Climate and biodiversity are the issues closest to my heart.”

Ronald Wuijster uses a longer time horizon. His portfolio managers at APG aim to contribute to a sustainable world by integrating climate and biodiversity risk into investment decisions and investing in opportunities for the longer run. “To transition well, you need time. At the same time we do see that change is very urgent.”

Action here and now versus a longer-term transition

When asked about this dilemma, Schoemakers acknowledges that the transition from fossil fuels to renewable energy takes time, but she chooses not to focus on that message. To make people aware of the urgency, Greenpeace aims for immediate action. Take climate adaptation, for example, such as building dikes to protect countries against rising sea levels. “My personal mission is to stop taking fossil fuels out of the ground as our source of energy,” Schoemakers explains. “My more nuanced rational side thinks about adaptive strategies as well, but I would not bring them to the table first. I’m afraid that when I do that, companies and governments won’t see the urgency of having to change anymore. We need to keep the pressure on.”

Greenpeace does not have the decision making power or the money to shift things, says Schoemakers. “But we do have the people, the voice and our actions. This way, we make sure we get in the media and make room for the actors that do have the decision making power, so they can maneuver.”

As a long-term investor, APG has the opportunity to look for solutions in the long run. “We also see some adaptive strategies that can play a role,” says Wuijster. “Still, we see that time is running out. We need more time for a solid and smooth transition than we have. The risk of our approach is that things move too slowly, while the risk of Greenpeace’s approach is that we end up with energy shortages and all sorts of problems for human beings. Our dilemma is that if you focus on 2050, this is so far out that there’s no sense of urgency to change. What we do is engage with companies, to make sure they understand our requirement for them to contribute to the energy transition. And if they don’t, we will divest.”

A simple, clear message versus nuance and completeness

As chair of the World Economic Forum biodiversity initiative, Ronald comes across a whole range of academic definitions of biodiversity, such as diversity in landscapes, the number of species or even diversity in DNA. Here too, Greenpeace chooses to make complicated things simple, to reach as many people as they can. Schoemakers: “For us, biodiversity focuses on oceans and forests. In our messaging, we do not explain the whole complex issue and the longer timelines required. We keep our message simple: ‘Save the oceans’ or ‘Save the forest’. And then we count on our nature organizations, scientists and other organizations to identify and analyze the underlying issues.”

“Of course we also look at the science, and we do understand the complexity of, say, the energy transition and that you cannot simply cut off everyone and leave them in the cold, but that’s not our key message. We do not have the time or the place to explain this at length. That could be your role.”

When Wuijster asks her what she would advise APG, she answers with a smile: “Stay radical! And keep explaining the story. Why are we doing this? Why do we need more sustainability? And keep engaging as many companies as possible and don’t let them get away with endless planning and calculations. In the end it will deliver a better place to live.”

Current issues related to economy, (responsible) investment, pension and income: every week, an APG expert gives a clear answer to the question of the week. This time: Senior Portfolio Manager Infrastructure Viktor Filipan, on whether electricity grids will be used more efficiently if consumers receive a weekly forecast of the expected yield from solar and wind power.

How much more or less sun can we expect in the coming days, compared to what is normal for the time of year? And on which days will there be a lot of wind, so that our windmills will generate a lot of energy? Meteorologist Helga van Leur answers questions like these in a weekly Energy Weather Report on YouTube. It is supposed to encourage consumers to use a larger share of electricity at times when there is (too) much power supply (between 10 a.m. and 3 p.m.) and a smaller share of it when supply is scarcer (between 6 p.m. and 8 p.m.). Better for the environment, is the thought, because then the natural gas power plants will need to be turned on less often to cope with power shortages. And better for our wallets, because electricity is cheaper when there is a surplus supply. But will an energy weather report actually contribute to those two goals?

In a direct sense, there is no strong financial incentive for consumers to align energy consumption with renewable energy production, Filipan says. But if, as a society, we don’t take into account those moments of scarcity or surplus due to wind and solar power at all, it will eventually drive up the price of electricity – both during the day and in the evening.

Turning on the washing machine en masse
Filipan: “As a consumer, you now usually have a choice between single tariff and double tariff. With the latter, you pay more - the standard tariff - on weekdays from 7 a.m. to 9 p.m. or 11 p.m., depending on the region. At night, on weekends and holidays, you pay less - the off-peak tariff. That division between peak and off-peak hours is approximate. From that perspective, there is no material price incentive for individual consumers to adjust their electricity consumption any more than they already have been. Of course, there are those for whom environmental considerations are the primary reason for adjusting their electricity consumption. But based purely on that motive, people in the Netherlands won’t be turning on their washing machine en masse on days with lots of wind or sunshine.”

In a more indirect sense, however, individual consumers can benefit when solar and wind energy supply is taken into account, says Filipan.

Groningen
“It used to be relatively easy to equalize electricity supply and demand. But over the years, Dutch households have started to use more electricity for functions that fossil fuels were used for in the past. Examples include induction cooking, heating with heat pumps and charging electric cars. This is generally done in the evening, when the sun is often already gone and it is not always windy either. During those times, the demand for electricity increases sharply in a relatively short period of time - peak load. With the increasing electrification of our society and the increasing generation of renewable electricity, this peak load is getting increasingly higher and matching supply and demand on the power grid is getting even more complex. Over the next decade, this challenge will keep increasing.”

The more power demand is out of step with supply, the more expensive electricity becomes. Because it means the natural gas power plants will have to be turned on more often.

“When demand exceeds supply, primarily natural gas power plants are used to meet our electricity needs. But natural gas is expensive, and with the end of natural gas extraction approaching in Groningen, the Netherlands has become an importer rather than exporter of natural gas. If enough people charge their electric cars at times when wind and solar power are abundant, less natural gas will be needed in the Dutch energy mix and that mix will be less expensive. If we don’t do that en masse, we will all be paying higher prices for electricity.”

Wind parks halted
Besides scheduling electricity consumption, there are other ways to better match supply and demand. But those ways do have their limitations.

Filipan: “Storing power in large-scale batteries is somewhat on the rise and is being used by grid companies to reduce peak loads. You can also export electricity, although that is often not a solution to a surplus. Because when there is an oversupply of power in the Netherlands, a country like Germany also often has that. Sometimes switching off power generation is the only way to avoid overloading the grid. We are already doing that with wind farms. The greatly increased generation of solar energy in recent years also increases the risk of power surpluses. This is why some municipalities in the Netherlands are already no longer issuing permits for the construction of solar parks.”

We are also investigating how we can expand the networks to cope with the rising peak load, and more and more smart technologies are being developed to match supply and demand. APG is actively investing in companies that are developing such technology, such as Groendus (smart energy management for businesses) and Net2Grid (software for additional insight from smart meters).

A shame
Ultimately, smarter electricity consumption is one of the key elements in solving this problem. For the climate, but also for the consumer’s wallet.

Filipan: “It would be a shame if we all have to pay even higher rates because we need more natural gas to meet our energy demand. After all, you could have run that washing machine on cheaper renewable electricity in the afternoon, for example. An energy weather report contributes to awareness about this and in that sense, it can contribute to more efficient use of the electricity grid. This is a collective interest, which will also benefit you as an individual consumer in the long term.”

What does someone who focuses on climate data at a pension administrator actually do? Lucas Wouters has been working as a Climate Data Specialist in APG's GRIG (Global Responsible Investment & Governance) team for six months now. So we took this opportunity to learn more about what his work exactly entails and what challenges he faces.

The reason for Lucas’ interest in climate data is less abstract than you might think. It began in his childhood, watching the National Geographic television channel and leafing through the ‘Bosatlas’ (Dutch atlas, ed.). “I saw maps of the Netherlands with indications of where the water level could be in fifty years’ time. I really like that visual and tangible aspect, so that's what I focused on at college.” After his bachelor’s in Earth & Economy and master’s in Hydrology, he carried out research in a number of areas, for example, on the impact of hailstorms in the Netherlands and floods in Africa. He now focuses on climate data in the broadest sense of the word.

What does a Climate Data Specialist do exactly?

“Climate change brings both risks and opportunities for our investments. This is why APG wants to integrate climate and climate change data into our investment analyses. These data are incorporated into models, for example to calculate the probability of floods or hurricanes and their severity. But in order to assess how effective a model is, you have to know, for instance, the formulas and assumptions on which it is based. I often worked with these types of models during my studies. Colleagues responsible for making APG’s investments, ask me to assess the climate models they use for their specific asset class. This is how we monitor whether the models we are using are correct and correspond to the most common climate scenarios and latest scientific developments. You could consider it an additional check.”

How does this help a pension administrator?

“APG and its pension fund clients want their investments to contribute to the goals of the Paris Agreement to keep the global warming below 2 degrees, and preferably below 1.5 degrees. We could reach a tipping point at 2 degrees, with disastrous and irreversible consequences for humans, animals and nature. If you look at the damage caused by the recent floods in Pakistan, it makes you want to prevent similar and even more serious catastrophes from occurring in the future. That is one side of the equation. At the same time, you also want to protect your investments because climate change is a risk you have to take into account. Our investments will be impacted even with global warming of 1.5 degrees. The better the available data, the better we – as pension administrator and investor – are able to integrate climate risks into our investment analyses and act on these.”

So, an important part of your work consists of checking models. How do you find these models?

“The information generated by the models comes from data providers. They sometimes use data from NASA or ESA satellites and radar data from meteorological institutes or measuring stations from all over the world that show, for instance, the quantity of water available on earth at any given time. Data providers first analyze the data and then it comes to us and I assess the relevance of the information and estimate the climate risks. We also gather data ourselves through different (online) sources to conduct our own analyses.”

What kind of climate risks should we consider?

“There are physical risks, like droughts or floods, and transition risks. The latter are related to the transition we are currently going through from an economy that runs on fossil fuel to a more sustainable one. Adjustments are needed to realize this transition, such as the implementation of a fees structure linked to companies’ CO2 emissions. Measures like this can have consequences for the value of investments in such companies, for example in the case of a cement manufacturer emitting a lot of CO2.”

Can such models help predict, for example, whether the risk of hurricanes in the Caribbean is increasing?

“These types of models are only accurate to a certain degree, especially when it comes to hurricanes. Although there is a risk that the climate will become increasingly unstable with a higher chance of hurricanes, some research also shows that although the intensity is increasing, the frequency is decreasing. There are also scientific simulations that show that hurricanes could reach Europe more often. The seawater temperature is rising, which means hurricanes that form in the Caribbean can retain their intensity for a longer period of time. Models show that these hurricanes may be diverted to Europe more often, coming ashore in Ireland, for example, just as hurricane Ophelia did in 2017. Although there may be a greater likelihood of this happening and scientists understand the underlying mechanisms in a broad sense, it is still very difficult to make accurate predictions. That said, we see increasing confirmation that in some places on Earth, the weather is being influenced by climate change.”

How do you translate climate data from a model into a specific investment?

“Not all data sources and analyses can be translated directly into a certain type of investment. When I started working at APG six months ago, our Real Estate Team had already made use of two data providers to create a tool for their real estate investments. That tool is now also being used to evaluate investments in other areas such as infrastructure and the agricultural sector. These are all physical assets, involving a company with one building at one location, for instance. In such cases, our models can be used to assess how high the risks of flooding is at that specific location. When it comes to an investment in a company with hundreds of locations all over the world, things become a lot more difficult. Let's say one of the facilities is disrupted because of a forest fire: What effect would that have on the company as a whole? This requires in-depth analysis of the company’s supply chain risks or, for example, the transition risks in one specific country where the company operates, and what the effects of this would be on its valuation.”

Which asset classes do you deal with most frequently in your work?

“When it comes to the physical risk, I often work with real estate, infrastructure and investments in natural capital, such as commercial forests and agriculture. In these areas, it is also a little easier to determine whether climate risk could have consequences for the investments. For example, a forest fire in a commercial forest. Ultimately, extreme weather is a problem for every investment, but its impact more difficult to determine for some asset classes. In addition to the data on physical risks, there are also data on transition risks. For instance, we envisage a certain scenario in which the world has no choice but to make a transition to sustainable energy, otherwise the problem of climate change becomes even bigger. If a company doesn't care about this and doesn't set any climate goals, alarm bells start to ring for us, and that affects our willingness to invest.”

What are the challenges you face as a Climate Data Specialist?

“Working with data in different resolutions and timescales is already a challenge in itself, especially to make those data useful and available to people, such as portfolio managers, who need them for their work. This is compounded by the fact that the consequences of climate change are still uncertain in some areas. You can’t be absolutely certain that the likelihood of floods of a certain depth occurring is twice as high as it was last year, or that in an overall wetter Netherlands there may also still be certain areas that have become dryer. Another challenge is the fact that APG's activities also involve generating returns. We need to do this in order to provide a good pension in a sustainable world. These aspects also have to be considered and part of the way we do this is by pricing in the risk of climate change.”

And how is this done?

“You could argue that climate change is a risk for returns, but that argument doesn't always easily translate into a financial impact. It is a learning process. Portfolio managers look at the opportunities an investment offers and have a clear view on this. I often have a good idea of the risks that climate change poses for such an investment. In that sense, it can be sometimes be quite a challenge to align returns and climate risks.”

You started working at APG six months ago. What aspect of your work gives you most satisfaction?

“Evaluating the good and bad aspects of data providers and sources and sifting through the data until you come up with a clear recommendation. This also involves asking investors whether or not they have taken certain factors into account if they want to use the data to make an investment decision and thinking along with the investment teams about how the risks can be calculated. My recommendation often only partially determines whether a certain investment choice is made. It usually comes down to brainstorming about how to integrate the risks into the investment analyses. Another part of my work that I enjoy very much is answering questions from our pension fund clients. They may have certain ideas relating to their climate policy that we then assess in the context of the current market situation.”

If you look at the goal of limiting global warming to 1.5 degrees, where do we stand?

“According to the Intergovernmental Panel on Climate Change (IPCC)), given the current level of CO2 emissions, it is likely that global warming will exceed the 1.5 degree threshold between 2030 and 2050. The World Meteorological Organization (WMO) even predicts that there is a 50/50 chance of global warming temporarily rising by more than 1.5 degrees in the next five years. At the same time, there are also scientists who think we may well exceed the 2-degree threshold. When it comes to fighting climate change, there are two options: mitigation and adaptation. Mitigation means preventing climate change by eliminating further CO2 emissions. In the case of adaptation, you assume that some degree of global warming will occur as a result of human activity, but take measures to minimize the impact by, for example, building dykes or growing crops that are more resistant to extreme weather events. We will need a combination of both mitigation and adaptation to succeed. In any event, we’ll have to do our utmost to combat climate change. But while doing this, we must also be prepared for more extreme weather conditions throughout the world and try to limit the consequences as much as possible."

Asian companies emit a relatively large amount of CO2 compared to their Western counterparts. So if you can convince the ten companies with the largest emissions per Asian country to reduce their CO2 emissions, that will make a difference. And that is exactly what the Climate Focus 10 program is aimed at, which APG carries out on behalf of its pension fund clients. Yoo-Kyung (YK) Park, Head of Responsible Investment & Governance Asia Pacific, on Asia-Pacific's crucial role in global emissions reduction.

On September 15, 2022, Samsung Electronics announced its new environmental strategy and has joined the RE100 initiative. Samsung is the largest company in South Korea and, among other improvements, wants to aim for net-zero emissions by 2050. This is partly due to  APG’s engagement efforts through its Climate Focus 10 program.  The companies in this program are all active in CO2-intensive industries, such as chemicals, iron and steel, energy, telecom, semiconductors and consumer electronics. The aim of the program is to persuade the largest CO2-emitting companies in a country to reduce their CO2 footprint, with APG focusing on South Korea and Japan for the time being. Yoo-Kyung Park, who is South Korean herself, is responsible for the engagement with these companies. 

Why are the emissions of Asian companies so high, compared to American and European companies?

"There is not really a sense of urgency about climate change among many Asian companies. A significant proportion of Asia is made up of developing markets and, fundamentally, more focused on growth and less so on their climate impact. But given the scale of these companies and their climate impact, if we want to achieve net zero emissions globally by 2050, we simply need to have Asia-Pacific on board. Without these countries, we will not achieve that net-zero target." 

Why does APG choose to engage with South Korean and Japanese companies first?

"As OECD countries, Japan and South Korea have already developed markets, having gone through the process of industrialization and economic growth. As part of the OECD, in addition to economic performance they have also paid attention to non-economic indicators in the last decades. For example, education and healthcare, but also environment and sustainable development. Companies from OECD countries are therefore more receptive to calls from outside to become more sustainable than companies from emerging markets such as China and India, where the level of prosperity is lower. The emerging countries are the next step in our Climate Focus 10 program."

What does APG expect from the ten companies it engages with in South Korea?

"We want them to start by making a commitment to co2 emissions reduction. Just before the annual shareholders' meeting, we send the companies in question a letter addressed to the board. This letter contains questions like: Is your emission reduction target ambitious enough? Are you investing enough in this? Do you communicate sufficiently with shareholders about your emissions, so that they also understand the risks involved? We ask the companies to announce their emission reduction target at the subsequent shareholders' meeting. Six months later, we approach the company again to determine whether it has made progress. And we will continue this, and various other levels of engagement, until we see improvements."

What were the results of those efforts?

"All the companies in Korea that received a letter from APG in February 2022 have replied to it. A number of them, including Samsung, appeared to have made some progress. Hyundai Steel, for example, did not yet have a long-term target for its emissions reduction; now it does. LG Chemical previously only revealed scope 1 and scope 2 emissions, now also scope 3 (see box). This is important, because the greater the insight into emissions, the more a company can do about it. Posco Chemical did not yet have any emission reduction targets; now it wants to have net zero emissions by 2050 and has expressed an ambition for 2030."

These companies probably don't always welcome you with open arms. Is a letter and a conversation a year enough to convince them to reduce emissions?

"No. By themselves, South Korean companies do not take the subject seriously, at least not seriously enough. Especially if they have to make substantial investments to reduce their emissions, they do not take action – unless there’s a business threat right around the corner. So in order to create more pressure and urgency, we go public with our concerns. During the past shareholder season, I rolled out a media campaign  to local South Korean and international media which has certainly contributed to national awareness about CO2 emissions among the general public. If media attention doesn't help, we can also file a shareholder resolution as a last resort. But that is a method that we prefer not to use. We prefer to remain in dialogue.

Which companies in South-Korea are the most difficult to persuade of the necessity of emissions reduction?

"We mainly get a lot of pushback from companies that use a lot of electricity for their production process: steel producers and semiconductor manufacturers. There is only one electricity provider in South Korea and that is government-owned. Nearly 70% of their electricity is generated from fossil fuels – mainly coal. When we ask these companies to use more renewable energy, they point at the electricity provider and its monopoly position. They say: we can't use more renewable energy because we have no influence on the electricity company and there are no alternative, more sustainable suppliers of electricity."

And what is your answer to that?

"That we expect big players in an industry to try to reduce their energy consumption on the one hand, but also lobby the South Korean government to make the power generation of the state electricity company more sustainable."

How critical are South Korean asset managers of the companies they invest in, when it comes to emissions?

"When local asset managers hold South Korean companies to account for their emissions, they do so behind closed doors, not publicly. They relate to the Korean government in a different way than a foreign investor like APG. In that respect, I’m in a relatively favorable position: with APG – and its pension fund clients – I have a large asset manager behind me and I can make use of both means: a conversation behind closed doors and publicity."

The Climate Focus 10 program runs until 2030. How optimistic are you about South Korean companies and their emissions reduction in the next 7-8 years?

"The top ten emitters in South Korea are made up entirely of multinationals. They are companies with global marketing and global supply chains. So they know very well what needs to be done when it comes to reducing emissions. The attitude of these companies has always been: we are not committed to emission targets, but we are working on it. We say: you first have to make a commitment to be able to do something about it. South Korean companies are just starting to arrive at that stage. The awareness is there, but progress is slow. The coming years will prove to what extent their commitments will be followed by actions.

Current issues related to economy, (responsible) investment, pension and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof, on the European Commission's crisis plan to meet the challenges of exploding natural gas and electricity prices. “The developments in the energy markets are hurting consumers, no matter what and there is nothing you can do about that. All you can do is spread out the pain.”

As the effects of sharply increased natural gas and electricity prices become painfully obvious to more and more citizens and companies, the European Commission (EC) launched a plan on Sept. 14, 2022. The three main measures in this energy emergency plan: a price cap for fixed-cost electricity producers, an additional tax on the profits of oil and gas companies and a mandate for EU member states to consume less energy. 

The proposal contains market interventions that were not thought possible in Europe until recently. The question therefore arises: how effective are the intended measures really? Olthof goes through them one by one.

Price cap on power

“For electricity from nuclear power plants, hydropower plants, solar farms, wind farms and lignite-coal power plants, the European Commission wants to apply a maximum output of 180 euros per megawatt hour. Such a price cap is in itself a logical step, since the cost of generating this electricity has hardly gone up - unlike electricity from gas-fired or coal-fired power plants. Meanwhile, the price of electricity has gone through the roof ten times over, leaving producers with fixed costs making excessive profits. It is understandable that the EC is creating a mechanism to skim them off and use that money for users who need it most.”

Member states may also set a price cap lower than 180 euros. That would give more air to customers who need a lot of electricity for their production process, such as aluminum producers.

“For a producer of electricity not generated via gas or coal, 180 euros is still an extremely good price. But for customers who use a lot of electricity for their production process, such as aluminum producers, that rate is disastrous for competitiveness. So a lower price ceiling is preferable, but also not so low that it discourages producers of renewable energy from making new investments in, for example, wind turbines and solar parks. That is also the reason why the EC did not want to set it too low.”

Extra taxes for oil and gas companies
It’s not just fixed-cost power producers that are the lucky ones in today's electricity market. So are oil and gas companies. The second measure in the EC plan is therefore to have these companies pay a third of their profits as a “solidarity contribution” and use the proceeds to relieve citizens and other companies. But again, Olthof says the dosage is important.

“Oil and gas companies are making a lot of money right now. The gas they extract elsewhere in the world and bring to Europe is suddenly worth five times as much here now. As a result, it is fairly easy to say that they can afford the extra tax. To a certain extent, it is logical to skim off their profits. But to compensate for the loss of Russian natural gas supply, we will have to look for alternative natural gas supplies in addition to expanding wind and solar energy. If Europe skims off the profits of oil and gas companies too much, it will no longer be attractive for them to invest in this search. To drill new gas fields, companies like Shell or BP will then choose the U.S. rather than the North Sea. As a result, less gas will come to Europe, and we do need that gas.”

Following the plan announced in mid-September, the EC is looking at whether it can intervene further in the natural gas market. However, it is still remains to be seen how that will play out, Olthof says. 

“On the international market, the gas price is determined by LNG. That is liquefied gas, which can be traded worldwide and sent anywhere by ship. Basically, those ships go where the price is highest. In recent years, the price for LNG moved along with the price of gas in Europe. When the price in Europe was very low because of an overcapacity of gas in the world, the LNG price was also at that low level. Now there is scarcity in the world gas market. The European gas price is sky-high and so is the price on the international market for LNG. Available LNG now goes to Europe, because even now it is the highest bidder. Proponents of a price cap for natural gas in Europe assume that an artificial price cut in Europe is bound to lead to a similar movement in the international LNG price - which Europe can then still buy that liquid gas for.”

But it is questionable whether that is the case, Olthof says. “If other buyers of LNG, such as Japan or Korea, are willing to pay more than the maximum price in Europe, then Europe will not get this gas. There will still be LNG coming to Europe on long-term contracts, but the portion not yet sold will go to Asia. Southern Europe is in favor of a European maximum price for gas but Northern Europe is not, so there is still a lot of wrangling and debate about that.”

Consume less electricity
The third measure in the EC’s energy emergency plan focuses on reducing electricity demand. Member states are asked to reduce consumption by 5 percent at times of peak electricity demand and to reduce total consumption by 10 percent in the long term.

Olthof: “How they achieve that 5 percent reduction is up to member states to decide. In any case, they are given the option of offering financial compensation to energy-intensive companies to shut down production at peak times. But for achieving the 10 percent target, not very many tools, rules or details have been disclosed yet.”

So the effectiveness of the energy contingency plan depends mainly on the dosage that member states choose to use in utilizing the tools put in their hands for this purpose? 

Olthof: “Yes. The EC in itself has proposed good measures to deal with this crisis, but from the perspective of energy-intensive companies it is not yet sufficient. These companies will have to wait and see if individual member states will do more, and how they will distribute the skimmed-off profits. Either way, developments in energy markets are hurting consumers, and there’s nothing you can do about that. All you can do is spread out the pain – as best you can.”

Current issues related to economics, (responsible) investment, pensions and income: every week, an APG expert gives a clear answer to the question of the week. This time: macroeconomist and senior strategist Charles Kalshoven on the positive flip side of massive consumer spending cuts. “The current situation, in which high inflation forces lower spending, has mainly shadow sides. But we cannot deny that there are also some bright spots.”

Particularly - but not only - due to the war in Ukraine, price levels have soared in the space of six months. Energy prices are at the top of the list and are prompting people in the Netherlands to drastically cut back on their spending. Total domestic consumption in June still showed an increase compared to the previous year, but the question is how long this growth will last. Inflation has risen further since then and it seems only a matter of time before consumer spending will decrease. Consumer confidence and willingness to buy fell to record lows in August.

Personnel leaving
For some, the increased price level is an inconvenience, but for others it can be the financial death blow, making a trip to the food bank unavoidable. Bad news for many businesses and consumers. But do consumer savings also offer advantages?  According to Kalshoven, they do, firstly because they prevent the economy from overheating, and secondly because the cause of those savings - mainly increased energy prices - can shift the energy transition into a higher gear. Moreover, high prices can introduce people to options they had never seriously considered before, and lead to more flexibility in dealing with future changes.

Kalshoven: “Macroeconomically, we are getting this inflation because the supply of some key products and services is not matching demand. Demand has recovered after Corona, but there is still a shortage of supply. This is due to the aftermath of lockdowns in China, for example, but also because staff in the hospitality industry or at Schiphol Airport have been leaving. But the most obvious reason is, of course, energy. Shortages - or the risk thereof - have caused prices to explode. If consumers save on energy, this will help to keep prices down. More generally, cutting spending will prevent the economy from overheating - and thus inflation - if there are bottlenecks on the supply side.”

Exorbitant loans
Less frequent visits to restaurants, for instance, may help to alleviate the shortage of hospitality staff - who left the sector in large numbers during the pandemic and did not return afterwards - becomes less acute, says Kalshoven. And there are other examples.

“The risk of a situation arising in which the demand for hospitality personnel far outstrips supply is reduced - and with it the risk of exorbitant wage increases. The same applies to the aviation sector. If people start flying less, the personnel shortage at Schiphol and other airports will also become less of a problem. But the biggest factor is, of course, energy. If people take shorter showers and lower the thermostat, the demand for energy drops. If those who can easily cope with the higher energy tariffs also reduce their consumption, they will help to replenish the gas reserves and keep the prices down. In so doing, they will be showing solidarity with the lower income groups, who simply cannot afford these high prices.”

Landlord

Lower energy consumption is obviously also better for the climate. High energy prices can also be a catalyst for the transition to sustainable energy. Part of this is really about saving energy, for example by insulating the house or taking a shower for a shorter period of time. 

Kalshoven: “This extremely expensive energy accelerates many people’s ambition to become more sustainable, provided they can afford it and it is possible in their home, for example. Not everyone has the means to invest in a heat pump or solar panels, for example, and for people who rent an old, draughty house from a landlord those options are not available anyway.”

The higher price level and less spending can also contribute to greater sustainability in another respect. 

“The fact that transport has also become more expensive can have a positive effect on the sale of seasonal and regional products, such as fruit and vegetables. A Dutch consumer, for example, may now be more inclined to opt for an apple grown in the Netherlands instead of one from New Zealand. And that in turn has a reducing effect on carbon emissions.”

“Mother of invention”
According to Kalshoven, the increased price level and lower spending pattern can also have a positive effect on your mind set.

“The fact that we are forced to change now makes us more flexible in the future. And necessity is the mother of invention. People who find themselves in deep financial difficulty because of rising prices are more likely to make biased choices. But for others, a need for change can also spur creativity and lead to choices that they will be happy with in retrospect. Large price increases can give someone just the push they need to try an alternative that they had never seriously considered before. If you have never cycled to work, you might try it now. And if it works out surprisingly well, you may find that you don’t want to go back to the old situation.”

Collective impoverishment
So we should see the high prices for energy and food, among other things, as a blessing in disguise? Kalshoven does not want to go that far.

“Whichever way you look at it, we are dealing with a collective impoverishment in the Netherlands. We used to be a gas-exporting country. But now we have to buy more gas from abroad, and because gas has become more expensive, that leads to a loss of terms of trade. At an individual level, the effects of this can be very dramatic. It is clear that the current situation, in which high inflation forces lower spending, has mainly downsides, but we cannot deny that there are also some bright spots.”

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Climate Data Specialist Lucas Wouters talks about the impact of prolonged drought on investments.

Extreme drought in Italy’s Po Valley, forest fires throughout the Mediterranean and historically low water levels in the Rhine. All of Europe is suffering from a precipitation deficit this summer. And the drought is not incidental. “It’s not a question of if the drought will get worse than it is now, in the long- term; it’s a given that it will,” says Wouters. “About 20% of the carbon we are emitting now will still be in the air in a thousand years. So our current emissions will still have a long-lasting effect on future temperature increases, with all the consequences that will entail. Droughts will last longer and be more severe.” 

Agriculture

Climate change will lead to increasing droughts in certain parts of the world, which will affect water supplies, among other things, Wouters argues. “And that in turn has consequences for agricultural production, as well as for industries that depend on a stable water supply to produce consumer goods and materials, for example, and for the energy sector, which uses a lot of water to cool power plants or to generate energy with steam turbines or hydropower. Such impacts will in turn affect the entire economy, making the increasing drought a potential risk for investors.” According to a study done by the World Bank, drought could lead to a loss of 6 percent of gross domestic product in certain countries by 2050. That would involve water shortages and the consequences of that, such as crop failures. A long-term investor like APG therefore looks at the potential impact of climate factors, including drought, in all its investments, and analyzes the potential risks and returns.

A tangible example is investments in agriculture and forestry, grouped together at APG under the heading Private Natural Capital. “In agriculture, the presence of reliable water sources is a key indicator of a good harvest,” Wouters says. “That’s why, for potential investments, we assess whether there is enough capacity in the surrounding area to secure sufficient water for the intended operations. In addition, innovation with respect to irrigation is an important aspect in protecting the harvest. In Romania, we are investing in a project that involves working with local parties to repair, improve and expand irrigation networks, which often also save water and energy.

APG also urges managers of land that is invested in to cover any climate risks. “In agriculture, for example, this involves leaving land fallow as little as possible, thus preventing evaporation. This improves the quality of the soil, so that it can absorb more water. The crops to be grown are also determined by the water that is available in the longer term. In forestry we expect the managers to have fire extinguishing facilities in place, in case persistent drought leads to forest fires. We also want fire prevention to be taken into account in the management and layout of forests. We use climate scenarios to assess potential investments. We won’t take on investments in which the impact of climate change is too great.

Adaptation

To counteract the negative effects of drought on investments, APG encourages companies to do more to adapt. This can be done, for example, by creating on-site water reservoirs around properties and farms. APG also works with external data sources to monitor climate change and the consequences thereof. Wouters: “Our real estate team, for example, has developed a method that measures physical climate risks for our investments. In this way, we want to make the real estate we invest in more climate-resistant.” For its pension fund clients, APG invests in the American company Xylem. This company offers solutions that promote efficient water use and so prevent water scarcity. Examples include the transport, purification and reuse of water. Closer to home, APG invests in a number of green bonds issued by the Nederlandse Waterschapbank (Netherlands Water Boards Bank), which include water bonds. This sustainable water bank uses the proceeds to better prepare the Netherlands for the consequences of climate change by financing projects and companies that focus on flood risk, water management, water quality and biodiversity.

Water

Due to increasing drought, it is becoming increasingly important to conserve water. This offers interesting opportunities for investments in, for example, water technology companies and water treatment plants, Wouters explains. “In the Netherlands, we have high quality drinking water; in many other countries there is a shortage. Of all the water on earth, 97 percent is salty and most of the remaining water is frozen, as in glaciers. Technologies already exist to desalinate seawater, but the technology is still very expensive and the process still uses a lot of energy. If a company succeeded in converting part of that 97 percent salt water into drinking water more efficiently, it will have struck gold.”

There are also opportunities to invest in techniques that make water use in buildings more efficient. “APG invests in The Student Hotel, on behalf of our fund client ABP. The showers there have meters so that hotel guests can see exactly how much water they are using. This encourages guests to take shorter showers and thus use less water. That is a small contribution to the solution, of course, but it does indicate that there are opportunities to contribute to combating drought through our investments.”

Investors have an important role to play in conserving biodiversity. Instead of waiting for regulations, investors should develop standards together and put pressure on companies. This is what Ronald Wuijster, CEO Asset Management at APG and chairman of the World Economic Forum's Biodiversity Finance Steering Committee, is advocating.

This week, nearly 2,500 international politicians, CEOs, journalists and intellectuals are gathering in Davos, Switzerland, for the annual meeting of the World Economic Forum. Their common goal is to address the world’s economic and social problems.

Long term

I am attending for the first time this year. The World Economic Forum’s risk reports are widely circulated and show, year after year, that climate and biodiversity risks are increasing. For me, this is a great opportunity to get an inside look at the organization behind those reports. It is also a great opportunity to get a feel for the changing geopolitical relationships. Global developments such as deglobalization, rearmament and inflation can have important consequences for our investments. In Davos I will have the opportunity to discuss these developments with colleagues, for example, in the meetings with Focusing Capital on the Long Term (FCLT) and the Global Investors for Sustainable Development (GISD) Alliance. As a board member of these organizations, I am committed to investing in long-term sustainable development.

As a long-term investor, our investment horizon is infinite. Our clients are Dutch pension funds, and we want to ensure good pensions in a livable world. That world is increasingly threatened by a decline in biodiversity. That was also one of the motivations for me to accept the role as chair of the World Economic Forum’s Biodiversity Finance Steering Committee. Not necessarily because I am a biodiversity expert, but because I want to mobilize investors and companies to jointly address the problem of biodiversity loss. Because it is precisely this joint effort that is needed.

Biodiversity: what can investors do? 4 steps

A lot has been written about the urgency and complexity of biodiversity loss. The question is: what can we do about it? International agreements and regulations by governments and regulators can help, in the sense that they can act as a big stick. But a plethora of new rules and regulations also encourages box-ticking. Regulations do not bring about the kind of fundamental change that is needed to ensure that companies have a “nature-positive impact”. That change has to come from within the financial sector.

Step 1: Developing common standards together

To achieve this change, I see four concrete steps. The first, crucial step is to develop common standards to assess how our investments contribute positively or negatively to biodiversity. How they are exposed to biodiversity risks. And how we get the data to measure it.  At APG, we are already involved in the development of a number of such standards. For example, we are affiliated with the Taskforce on Nature-related Financial Disclosures (TNFD) and we collaborate with the Partnership for Biodiversity Accounting Financials (PBAF). In addition, we recently signed the Finance for Biodiversity Pledge, in which we agreed to protect and restore biodiversity.

Step 2: Identifying risks

Once the standards are in place, it will be easier to clearly identify the biodiversity risks in our investment portfolios, set targets and report on them. That is the second step. Based on the work that is already in place, we have already made a biodiversity footprint of our investments at APG.

Step 3: Achieving positive change through engagement

To reduce risks and bring about positive change, we put pressure on companies through engagement - step 3. We are tightening our criteria for companies with respect to biodiversity. The transformation of the food chain will largely have to come from the companies that are currently active in it. This makes engagement with these companies even more important.  Given the complexity of the issue, it is important not only to use our own influence, but also to collaborate with other investors.

Step 4: Investing in solutions

Finally, we want to actively invest in solutions that contribute to the protection of biodiversity. For example, we have invested in a large production forest in Chile. This forest is being managed sustainably and has the FSC (Forest Stewardship Council) label. We hope to see more of these kinds of investment opportunities. Public-private partnerships can play an important role in this. The government and pension investors then pull together to make important and substantial investments. We already do this internationally, but in the Netherlands, the opportunities are limited. For several years, ABP and APG have therefore been taking the initiative to talk to government bodies and other pension administrators about more opportunities for public-private partnerships.

If we, as long-term investors, take up our roles and join forces, I am convinced that we can make a significant contribution to the preservation of biodiversity. My proposal for a four-step plan is a first step, which I am happy to discuss with fellow investors. Let’s get started.

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: Jan-Willem Ruisbroek, head of infrastructure investment strategy at APG, on when renewable energy can be stored for later use.

Last weekend it happened both days: the Netherlands produced more solar and wind energy than was used, weatherman Gerrit Hiemstra tweeted. The energy surplus went abroad, because storage of wind and solar energy is still difficult. This raises the question of when we will be able to start storing it.

Solar energy
“Solar energy storage is already happening,” Ruisbroek says. “For example, APG is investing in some solar parks in Nevada and California, where there is a predictable pattern of solar power generation and consumption. At the solar farm, there are a number of large batteries that store the excess energy. Such a battery is the size of a shipping container and looks like a kind of server room. During the day, energy is stored in them that people can use in the evening when they come home and the sun is no longer shining. The challenge lies in scaling up the use of these kinds of batteries. They are still relatively expensive, but they are rapidly becoming cheaper. In about five to ten years, they may be so cheap that you can put a small version in your garage. Then the excess energy generated by your solar panels will not be fed back into the grid, but can be stored in your own battery. That consumer product is going to come anyway. At present, there is a huge hype about solar panels, and in five or ten years' time there will be a hype about batteries. So, we can already store solar energy, but it is not yet being done on a large scale and the costs are still relatively high.”

Wind energy
It will also be possible to store wind energy within about five years, Ruisbroek expects. “But it is likely that with wind this will be in the form of large-scale hydrogen projects. Large offshore wind farms are being built now. These consist of gigantic turbines, about as tall as the Eiffel Tower. They produce an enormous amount of energy. When that comes ashore, it has to be stored when there is an excess of energy. And wind is a very good source for turning water into hydrogen, which can store energy and be released as energy again after combustion. Shell and Gasunie are currently building a hydrogen power station in Groningen. It will use energy from wind turbines to produce hydrogen. This is done on an industrial scale and, unlike a battery for solar energy, is not suitable for private use. The big challenge for hydrogen is that there is not yet a large infrastructure for transporting it, although the existing pipelines for natural gas may be a solution.” 

Last weekend, the Netherlands had more than enough generated solar and wind energy. The question is whether that is the rule or the exception. “It didn’t surprise me that the days with excess energy were on the weekend, because a lot of industry is closed then so demand is lower. A lot of solar and wind farms still need to be built to meet the total demand for energy. Currently, only a small percentage of the total energy supply consists of renewable energy. In addition to the development of battery technology, many more wind turbines and solar parks will have to be built in the Netherlands. There are presently a number of large offshore wind farms that supply some 4 gigawatts of energy. By 2030, an additional 20 gigawatts will be generated and by 2050 the total should be 70 gigawatts. There are plans to build more as quickly as possible, but these are also needed to meet demand. Because a great deal of energy is needed.”

European network
In addition to investments in battery technology and hydrogen power plants, a lot of money is currently being invested in so-called interconnectors. These are connections between countries through which excess sustainable energy is transported to neighboring countries. “The Netherlands has these connections with England and the Scandinavian countries, among others. In order to ensure that the surplus of energy generated in Europe arrives at the place where there is a demand for it, many connections are needed between the national high-voltage networks. There is already a European network in place, which enabled the Netherlands to export its energy surplus last weekend, but it is now being further expanded.”

Larger scale
The storage of solar energy in a battery is already possible on a small scale, as the solar parks in America show. According to Ruisbroek, it is now mainly a question of applying it on a larger scale, so that the batteries become cheaper and eventually also affordable for private individuals. Conversion of wind energy into hydrogen for storage purposes, on the other hand, is still in the start-up phase. “For now, that is a matter of making it work in practice before it can be rolled out further. So actually, the development towards storing wind energy is a step behind the development towards storing solar energy.”

Current issues related to economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof talks about the consequences of the high price of natural gas for the EU’s green ambitions.

The increase in the price of natural gas, which started last fall, due to increasing demand from industry, has become much more critical because of the war in Ukraine. The war and the high price of natural gas are reasons for the EU to quickly become less dependent on natural gas from Russia. Brussels therefore announced on Tuesday that the EU is going to have to be able to manage without natural gas from Russia before 2030. This REPowerEU plan is a tightening of the so-called Green Deal and the Fit for 55 plan, which aims to reduce carbon emissions by 55 percent by 2030. An even more ambitious climate plan, therefore, and a turning point in European energy policy.

“The Fit for 55 plan was already very ambitious, especially in these times of high energy prices, high inflation and a shortage of labor and materials,” Olthof said. So, is an even tighter target realistic? “It is realistic in the sense that the need is there, and need supersedes law. Such a tightening is also necessary because Moscow can decide to turn off the natural gas tap at any moment. The situation in Ukraine and the high natural gas prices are all the more reason to implement the Green Deal and the Fit for 55 plan more quickly and to focus even more on renewable energy.”

Investments
One of the concrete measures in the REPowerEU plan is to shorten procedures for the construction of wind farms and solar panels. A welcome measure, according to OIthof. “But this will only succeed if the bureaucracy around permits is reduced, because companies that want to invest in this often run into that. If, for example, a high-voltage cable has to be laid, especially on land, it often takes years before all the required procedures have been completed. In and of itself this is a good thing, because people do need to have a say in the matter and not everyone wants a high-voltage pylon in their backyard. But one way or the other, this type of infrastructure is necessary, especially if we want to move away from fossil fuels, and particularly from natural gas from Russia, even sooner. It is therefore important that, where possible, without losing sight of the interests of local residents, procedures of this kind are actually relaxed so that investments in the energy transition can get off the ground more easily.”

The REPowerEU plan increases the likelihood that the European Commission will achieve its green ambitions. But accelerating green ambitions alone will not get Europe off Russian natural gas this year. “That really requires emergency measures, and certainly to keep energy bills somewhat affordable,” Olthof argues. “For example, the plan provides for the coordinated and mandatory rapid replenishment of stocks in natural gas storage facilities in Western Europe. There is also talk of temporarily re-regulating energy prices. Countries could pay for this by imposing additional taxes on high profits of some electricity companies that are not dependent on natural gas. And by using the high revenues from the sale of carbon emission rights.”

Coal
Another emergency measure could be to keep a coal plant open longer, even though the intention is to close it down as soon as possible, Olthof says. “After all, the targets for reducing carbon emissions have to be met one way or another. If in Europe, we were to keep the coal plants open a year longer, the extra emissions would have to be compensated for in some other way in order to keep global warming to a maximum of 1.5 degrees. And that was already an ambitious goal before the war in Ukraine. In addition, 46 percent of Europe’s coal imports also comes from Russia, so that may not reduce our dependence either. So, the REPower EU plan does not explicitly provide for keeping coal plants open longer, nor does it propose an easing of the issue of emission allowances. So, it seems that the European Commission at least wants to prevent the short-term emergency plan from jeopardizing the green ambitions, in order to, at the same time, push the realization of the ambitions closer in the longer term.”

In conclusion, Olthof sees the high price of natural gas as a clear incentive for Europe’s green ambitions. “The fact that this sharp rise in the price of natural gas is partly the result of our dependence on Russia, naturally increases the urgency of getting rid of fossil fuels immensely. And particularly from Russia. That urgency is very clear. In the short term, with fairly distributed burdens, so as to avoid problems if Moscow turns off the tap. But also in the longer term, so that we will never again have to depend on Russia for our energy.” 

APG became the latest member of SkyNRG Board Now program today, which sees the Dutch pension provider committing to a 10-year sustainable aviation fuel (SAF) partnership.

Through the partnership, the firm will be tackling their emissions from business travel and contribute to the development of the sustainable aviation fuel market. APG is among the first pension providers to make such commitments to sustainable aviation fuel in Europe, and the first asset manager to join Board Now.

Read full press release here.

In a letter to CEOs and chairs, APG is calling on large South Korean companies and major carbon emitters to step up their efforts to combat climate change. On behalf of its pension fund clients, APG urges ambitious climate and carbon reduction strategies and commitments.

The letter has been sent to ten large South Korean companies in which APG invests, including Samsung Electronics, Hyundai Steel and LG Chem, a large (petro)chemical company. Despite being large carbon emitters, none of these companies is in scope of Climate Action 100+. This investor-led initiative aims to ensure the world’s largest corporate greenhouse gas emitters take necessary action on climate change.

‘Demonstrate ambition and leadership’

“Climate change is the single biggest challenge the world is facing,” says Yoo-Kyung (YK) Park, Head of Responsible Investment & Governance Asia Pacific. “These companies are important to the Korean economy and the global supply chain. Transforming them into low carbon businesses is critical to the goal of climate crisis mitigation.”

APG calls on the selected companies to evaluate their existing climate change strategies and carbon reduction targets and make sure these are ‘sufficiently ambitious’. The companies are also urged to communicate on their challenges related to climate change and the energy transition with long-term investors and to take their suggestions into careful consideration. The letter states it is important for companies to demonstrate ‘consistent and decisive leadership’ in addressing climate change.

Focus on bulk users of fossil fuels

APG’s largest client ABP announced in October 2021 it will stop investing in fossil fuel producers. The civil service pension fund wants to focus its engagement efforts on bulk users of fossil fuels, such as utility companies and car manufacturers. APG’s engagement with these ten large Korean companies – none of which is a fossil fuel producer - fits in with this approach.

What's the color of energy? That is the question now that the European Commission has proposed to temporarily label natural gas and nuclear energy as sustainable. Johan Barnard (Head International Public Affairs) and Claudia Kruse (Managing Director Global Responsible Investment & Governance) talk about the importance of a taxonomy on a scientific basis.

What exactly is this taxonomy?
"The taxonomy is an EU tool that defines which economic activities can and can't be classified as climate sustainable," says Barnard. "Brussels is trying to combat greenwashing with this. Big investors such as APG can use this classification to show their stakeholders how many sustainable investments they make. It is the explicit intention that the list of sustainable economic activities has a scientific basis."

And gas and nuclear power are not on this list now?
Barnard: "When drawing up the list, the European Commission deliberately left two subjects out of consideration: namely the generation of energy with natural gas and nuclear energy. There was a fear that a political joust would ensue over these subjects. On December 31, 2021, the Commission nevertheless made an additional proposal to put gas and nuclear energy on the green (sustainable) list, temporarily and subject to conditions. At the request of the Commission, two groups of experts looked into this: the independent Sustainable Finance Platform on the one hand and experts from the Member States on the other. The Sustainable Finance Platform issued a negative advice on Monday, January 24."

What are the arguments for and against the inclusion of gas and nuclear energy?
"Advocates of nuclear power, including France, want it on the green list," Barnard says. "This is because nuclear energy hardly leads to CO2 emissions. Opponents of nuclear energy point to environmental damage from discharging cooling water, the safety risks and the problem of nuclear waste. On the basis of the do no significant harm principle of the taxonomy, the Sustainable Finance platform concludes that nuclear energy has to be excluded from the green list. According to the Commission, the temporary labeling of gas as sustainable is necessary in order to be able to phase out energy sources in the short term that are even more CO2 intensive, such as lignite or coal. A less stringent limit for CO2 emissions would then apply to gas compared to renewable energy sources. The Sustainable Finance Platform believes there is no reason to deviate from the general CO2 limit and points out that the supply of renewable energy is already increasing strongly, so alternatives will indeed be available."

What is APG's position on this?
"APG is a strong believer in science determining which economic activities contribute to sustainability and which do not," Kruse says. "The Federation of the Dutch Pension Funds explained this position on behalf of the Dutch pension sector in an article in December. We must have a sound basis in the discussion about sustainability with our stakeholders, in particular the participants of the pension funds. We therefore follow the Federation of the Dutch Pension Funds in its appeal to the Commission to take the scientifically substantiated advice of the Sustainable Finance Platform to heart."

The Platform also proposes to include an additional category in the taxonomy. What is APG's position on this?
Barnard: "The Platform does indeed suggest introducing a so-called orange or amber category, just like the Federation of the Dutch Pension Funds did before. This would then contain a list of economic activities that are not fully sustainable, but that do play an important role in the transition to sustainable energy. We think that's a better solution than including gas and nuclear energy on the green list, which dilutes it."

Does the outcome of the discussion still have an impact on APG's investments?
Kruse: "Not in general. The discussion is about whether an economic activity in which an investment is made can be marked as sustainable or not. The taxonomy leaves investors free to invest in economic activities that are considered sustainable or non-sustainable. In making that choice, we use our investment criteria and those of our fund clients to assess whether an investment is sustainable and responsible and also performs adequately financially. It can get tricky with the green bonds issued by the European Commission itself. If gas is on the green list, then these green bonds could also include investments in a fossil fuel. In that case, there is a chance these no longer fit in with the investment policy of our fund clients."

Update: February 3, 2022

Final proposal
On 2 February, the European Commission presented its final proposal. This shows that it does not comply with the advice of the Sustainable Finance Platform. The Commission maintains its wish that energy generation with natural gas should be subject to a less stringent CO2 emission limit than other energy sources. The Commission also disregards the Platform's criticism that it’s not certain that nuclear energy complies with the so-called 'do no significant harm' principle. Barnard: "The Commission thus ignores the wish of many climate, environmental and nature conservation organisations, governments, banks and institutional investors - including APG - that when considering whether or not an economic activity is sustainable, a scientific basis is needed."

Consequences
If this proposal enters into force unchanged, it will in any case have an important impact on the reporting of companies. "They must state whether their green-labeled activities include power generation with natural gas or nuclear power," Barnard said. "This will hopefully allow investors who wish to do so to avoid unintentionally investing in natural gas or nuclear energy."

APG will study the Commission's proposal in more detail in the coming period and discuss it with its fund clients. All in all, the proposal detracts from the benefit of taxonomy, Barnard argues. "That was that you can easily determine whether an economic activity is green or not. Unfortunately, that would now become unnecessarily more complicated if this proposal goes through."

Topical issues in the field of economy, (responsible) investment, pension and income: every week, one of APG's experts provides a clear answer to this week's question. This episode: equity investor Martijn Olthof on the increasing energy costs and the energy transition. “The transition is currently not carried out in an ideal way.”

The switch to and the supply of renewable energy is far from in line with the demand for energy. That has an upward effect on the price of fossil fuels and contributes to inflation. To what extent has the energy transition anything to do with that?

The current extreme increase in the costs of gas and electricity is largely caused by matters that don't have anything to do with the energy transition, Olthof says. “People are sometimes trying to attribute the acute problem we experience at the moment to the transition, but I believe that's way too easy and also unfair. Moreover, we don't have any other choice but to switch to renewable energy, that is to say if we want to limit global warning to a maximum of 1.5 degree. The energy transition will be costing a great deal of money in the long-term, that's a fact. But that's not the reason why gas is nearly four times as expensive now as it was prior to Corona. The high energy costs are caused, among other things, by a frosty winter last year in Asia, less investments in gas production, the rapidly increasing demand in periods with less Corona infections, a higher supplement on CO₂ and because less gas is derived from Russia.

Demand and supply
Switching to clean energy is therefore not the underlying cause of the current peak in energy costs. However, it does lead to the question what the transition still has in store for us. “The tricky thing is that we are always looking for a solution that seems easy, but is not necessarily ideal,” Olthof says. “An example is that the blame for the climate change is easily imposed on the energy companies these days, as these companies are the ones producing those polluting fossil fuels. If society demands that those companies produce less, people believe the problem will resolve itself. And so energy companies are forced to produce less fossil fuels by referring the matter to the court, as we witnessed happening to Shell recently.”

According to the International Energy Agency (IEA), the decreasing investments in oil and gas currently are the only part of the energy transition that's going well. The supply of fossil fuels may be decreasing, but that is not the case for the demand for energy. That demand remains undiminished. And the current supply of clean energy cannot compensate for the lower supply of fossil fuels. “Too much demand and too little supply of energy creates scarcity which results in high energy costs. It is my opinion that, due to the major focus on the supply-side and too little attention for the demand-side, the transition is currently not carried out in an ideal way. Even though it is also more difficult to lower the demand for energy as that affects every citizen.” 

Plans
Olthof expects the energy transition is going to cost a great deal of money in any event. “Oil and gas are simply very efficient fuels, both in terms of transport costs and energy density. Switching to renewable energy is costly. In order to accelerate that transition, the polluting fossil fuels should become more expensive, for example by increasing the supplement on CO₂ . “We already have a supplement on CO₂ in Europe but that's not high enough yet to be the decisive factor. Moreover, that supplement does not apply to aviation and shipping. Without these types of measures we just have to wait until renewable energy naturally becomes cheaper than fossil energy. And that's the big problem. The IEA also clearly states that the current policy falls short. The EU may take the lead establishing plans to reduce the CO₂ emissions, but those plans immediately face resistance. Because those plans affect citizens directly in their wallet. But if we continue to put off the energy transition, the consequences of climate change will only become bigger.” 

Hasty conclusion
The question remains how much the transition to renewable energy will be costing exactly. “If the transition is carried out properly, the costs will be lower than when we continue to follow the same path: with hasty conclusions,” Olthof says. “By that I mean solutions as the ones we see at the moment and that are mainly aimed at the supply-side. Think about pressuring companies to produce less or to invest in (currently) unprofitable alternatives. But I don't think that is the way to solve the problem. The solution lies in lowering the demand for fossil energy and in making investments in clean alternatives more attractive, meaning the supply of the latter will increase. And that will cost money. But if politicians don’t make those choices convincing enough, the problem will only get bigger over time. And with that, the resistance from society. Eventually, that may lead to us having to live with the catastrophic consequences of global warning exceeding 1.5 degrees.”

Olthof: “What has to happen in my opinion, is for politicians to take action and to implement unpopular measures that cost money. Not an easy message, but an important one. The question is how we are going to do this in such a way that the costs and the effects on inflation and economy stay as limited as possible and that the burden is divided as fairly as possible. If the policy remains the same, the impact will become so big that it will undermine the support for the energy transition. The current policy causes us to head towards global warming by roughly 2.6 degrees. The consequences thereof in the financial, social and civil field are vastly outweighing a high energy bill.”

It was a good thing that the urgency of global CO₂ reduction was placed high on the agenda again in ‘Glasgow'. But it is all by far not fast enough for Derk Welling. As a Senior Responsible Investment & Governance Specialist he and his colleagues verify every real estate investment made by APG on sustainable criteria. And that is a major challenge.

“Of course it's a good thing the world is forcing us again to face the facts of having to reduce the global CO₂ emission really very quickly,” says Welling looking back on the international climate summit in Glasgow. But if you ask him point blank, things are going far too slowly. “APG is convinced that we shouldn't wait for new regulations to be implemented, but that we have to assume the challenge ourselves and take our corporate social responsibility. That is also what people expect from us. It is a pity that we meanwhile have such an enormous number of global environmental standards in the field of real estate, some two hundred all together. This means people do not see the wood for the trees anymore. Moreover, such a large number of standards gives rise to divergent interpretations and, as a result, in greenwashing. We really need unequivocalness. That is the reason why we partly initiated a standard such as the Carbon Real Estate Monitor. That standard shows the amount of CO₂ and kWh a country is allowed to emit or consume annually per square meter per type of real estate up to 2050 in order to remain within the objectives of the Paris Climate Agreement. This CRREM aims at the establishment of a global standard used to measure to what extent a real estate object meets the Paris Climate Agreement.”

What is the contribution of real estate worldwide to the climate problem?

“It is definitely one of the most polluting industries. That is why it has our full attention. Buildings are globally responsible for approximately 30 percent of the overall CO₂ emission. And account for 40 percent of the energy demand! Fortunately, the awareness of truly having to do something about it now is increasing. Also within APG. When I started working here four years ago, our Global Responsible Investment & Governance team had thirteen employees and has meanwhile expanded to 28. And that is highly necessary, as we verify all investment plans in different sustainable criteria. That is part of the policy of APG and its customers: we assess every investment based on risks, returns, costs and ESG. These factors are also mutually influencing. Some real estate investments also increase in value as sustainability increases.”

How does APG ensure that it continues to make progress when it comes to sustainability?

“We have been using the Global Real Estate Sustainability Benchmark (GRESB) since 2009, a commonly used standard for the assessment of real estate investments. That standard was developed by APG in 2009, together with a number of other organizations. GRESB is perfectly suited to measure the sustainability performance of real estate investments. More than 55 percent of our real estate investments are meanwhile scoring four or the maximum five stars. Maybe even more important is that we make participation in GRESB mandatory for any new investments. As of last year, we also commit to the CRREMM, the standard we developed in collaboration with PGGM and other investors. Through so-called pathways, or CO₂ reduction pathways, it is possible to see how much energy a building is allowed to consume. This is a way to reverse-calculate if and when the insulation in a building should be improved.”

What are the benefits of the above for APG as an investor in concrete terms?

“Well, it allows us, for instance, to set requirements in advance for the real estate we are willing to invest in. For our investment VIA Outlets, among other things known for Batavia Stad, we have paid a lot of attention to the sustainability performance and imposed some requirements in that respect. VIA Outlets is now challenging the clothing stores in their outlets to make their business operations more sustainable. This is a way, as an investor, to contribute to the process of companies integrating sustainability into their processes. It should further be added that in practice we often work together with other investors which means we sometimes also have to convince those other parties. We are, in principle, never the sole investor in a fund.”

So, APG wants to see the sustainability performance of real estate in which an investment is made or not made. Are the building owners or the managers or tenants of all of those buildings cooperating adequately when it comes to providing the proper sustainability data?

“That is indeed a challenge. We often hear that parties have no insight into the energy consumption of buildings. That is way too easy for me. From own experience, I know it sometimes requires having to go to much greater lengths. In some countries data on energy consumption by private tenants and companies are considered too privacy sensitive. That to me is one of the reasons to make an increasing use of certified data in the future. Not just at portfolio level, but even at building level. A daunting task as APG is globally investing in about one hundred thousand buildings.” 

This means you strive for insight into all the climate effects of each of those buildings. Surely, that is an impossible task?

“Yet, we have already come a long way. We have created a database containing the geo-coordinates of all the buildings we invest in. Our asset managers provide a quarterly update on those data. We are able to zoom in up to street level. We then look locally into the influence of climate change. Think of tornadoes, floods and forest fires; disasters caused by climate change that can damage or destroy the properties.

In addition to these physical risks, we are now also expanding the database with the CO₂ emission and the kWh energy consumption per square meter of the building. This provides us with a proper overview of the climate risks in our portfolio. We also use these data to engage in conversations with the local manager and the real estate companies to see whether they share our vision. This to understand to what extent they are working on making the portfolio Paris proof and whether they also take into account the physical consequences of climate change.” 

Isn't it true that real estate owners will also be able to trade CO₂ rights soon?

“Yes, preparatory work is currently undertaken in European context. In such Emission Trading Scheme real estate owners, given a certain CO₂ limit, will be able to purchase rights to emit more CO₂ where needed. If one emits less than the rights obtained, it will be possible to sell those rights. This means the polluter will pay the bill. We obviously want to prevent us from ending up in that situation with regard to our real estate investments.”

By what long-term megatrends is APG guided when selecting real estate investments?

“In addition to the climate developments, we are of course also looking at the trends in the field of demography and technology. People live longer, live at home for longer; that increases the demand for care homes and facilities for senior citizens. A migration into cities is witnessed in many countries. At the same time, Corona makes others look for the space available in rural areas. The question where people want to live, work and shop eventually determines the demand for buildings. Besides that, technological trends such as digitization and e-commerce are of major influence. The latter trends increase the demand for distribution centers and data centers for example, in which we also invest. We follow the trends in innovation, such as increasingly more efficient solar panels on building facades.”    

Do you already abstain from real estate in areas that are threatened first by the rising sea levels?

“We have identified the extent to which all buildings we have invested in are exposed to climate change. For that purpose, we look at nine different risks at building level. In the event of major risks, we want to know whether possible floods for instance have been considered. These risks are also taken into account for the anticipated returns. In addition, we are currently investigating how countries and cities are handling climate adaptation. We also want to start considering those country risks. The reason we invest is to offer a stable pension to the 4.7 million Dutch people who have their pension invested through us. We invest globally, so if there is a hurricane or flood in the United States can also have an impact on our investments.”

Do such climate actions also offer new investment opportunities?
“Absolutely. We invest, among other things, in a fund focusing on making older offices more sustainable. That is a good and responsible investment as the CO2 emission is reduced and we generate a good return. In other words: the energy transition imposes a risk on the one hand, but also offers opportunities on the other hand.”

What does APG do to encourage the pension industry in making real estate investments more responsible?
“Well, increasingly more is happening at the moment and as an investor of pension funds, we can play a booster-role towards sustainability. We are also regularly approached by other pension funds and administrators asking us about our strategy. These other parties like to learn from us, as we are considered a frontrunner in this area. We are happy to share our knowledge and experiences, because we accomplish a whole lot more together. Moreover, we sometimes bump into one another as joint investors in a certain real estate investment. The more time we spend together, the larger the flywheel effect. There is still a lot of work to be done in making real estate more sustainable, but we are definitely moving into the right direction.”

The report by the United Nations’ IPCC, Intergovernmental Panel on Climate Change, underscores the rapid, human-induced increase of global warming. If we don't take action now, temperatures could rise by nearly six degrees Celsius towards the end of this century. If we do act now, the goals of the Paris Agreement are still achievable. Large companies and investors can make a difference. The question is: Are we currently doing enough to turn the tide? According to Joost Slabbekoorn, senior responsible investment & governance manager at APG, at least we're on the right track. “We have long seen the need to take action and that's exactly what we're doing."

The conclusions drawn by the UN report don't really tell us something new: Humans “unequivocally” play a role in climate change, the earth has warmed by more than 1 degree in 100 years (much faster than before), the effects of climate change are felt all over the world, and temperatures will definitely continue to rise in the next 30 years. Whether that's by 1.5 degrees in the best-case scenario or 5.7 degrees in the worst-case scenario depends entirely on the actions we take globally.

Reassessing policies

“Yes, the IPCC report makes for very uncomfortable reading," says Slabbekoorn, the person who, together with his team, is responsible for implementing sustainable and responsible investment policy for the ABP pension fund, among others. “But actually, we already knew that things haven't been going well." We have known about climate change for some time. It's with good reason that our focus has grown substantially in recent years in terms of sustainable and responsible investment policies for fund clients such as ABP. But sometimes you know that our approach must and can be more effective, says Slabbekoorn. Conclusions such as those drawn by the IPCC report may then actually be decisive for revising policy. "That's what ABP did recently. We realized that accelerating the energy transition is the only option – and current policies do not adequately make that happen. That's why we’re setting our climate ambitions higher in 2022." ABP is taking this issue very seriously. A panel of scientists at universities is helping us create these improved policies. 

Fossil fuel

In addition, APG, along with 32 other large investors, collaborated on the “Net Zero Investment Framework” – a framework that provides guidance on how to tackle climate change. “It's exactly these types of initiatives – as well as our engagement efforts – that allow us to contribute to a liveable world by using our influence as investors to encourage companies to make more sustainable decisions.” But as Slabbekoorn emphasizes, one doesn't make an impact on their own. “As an influential pension investor, I think we have an obligation to do everything within our power. But everyone must do their part.” One option that climate organizations often propose is moving away from investments in fossil fuels. Does the IPCC report mean that APG will advise its clients to completely stop investing in fossil fuels? "Not necessarily," says Slabbekoorn “Ideally, the fossil fuel industry also needs to be part of the solution. But oil and energy companies will need to accelerate their transition from fossil fuels to renewable energy in the coming years. We are paying close attention to their actions in this regard. If things aren't moving fast enough for us, or we lose confidence, we will stop investing in fossil fuels.”

Mapping out risks

One of the report's other conclusions is that the effects of climate change can be seen all over the world. The floods in Limburg (the Netherlands), Belgium, and Germany are a case in point, and these sorts of phenomena are also influencing APG's investments. “Changing weather conditions are already impacting our investments. In any case, temperatures will continue to rise. This means that climate change will continue to affect our investments. That's why, for our real estate investments, we're already mapping out risks in case of floods, droughts, forest fires, or rising sea levels. We have also developed a dashboard that shows us the physical risks of climate change by country,” says Slabbekoorn.

Ray of hope

“The report, or rather the report's conclusions, truly impact the way we invest. We are taking the right steps, but there is always room for development," says Slabbekoorn, who, despite the report's bleak message, also sees a ray of hope. “The report also states that we can still meet the climate goals by 2050. But to achieve those, we'll really need to get moving.”

Current topics with regard to the economy, responsible investment, pension and income: every week, an expert at APG provides a clear answer to the “Question of the week”. This week: Asset Management professional Steve Goossens discusses the impact of climate change and environmental disasters on real estate investments.

Hundreds of millions of euros: this amount alone represents the damage caused to the city of Valkenburg when the surrounding region was hit by severe floods in mid-July. This says a lot about the total financial impact of the flooding – and environmental disasters in general. Due to climate change, crises like this are becoming more frequent as well as more severe. With all the consequences – and damage – that this entails. To what extent does this affect investments in both the short and long term?

“The impact of climate change on investments is bigger than you might think,” says Goossens, who works in the real estate asset class. And he should know. Together with his team and co-workers from the Responsible Investment Team, he has been focusing on climate-related risks concerning the investments made by APG’s fund clients for more than two years now, primarily for his own department: real estate investments. “If at all possible, the data I collect will also be used in relation to investments in other areas, such as infrastructure.” After all, the impact of natural disasters is not limited to real estate alone. Goossens also examines risks associated with floods, forest fires, droughts, or rising sea levels in relation to real estate, for example. “Look at Amsterdam: droughts have been causing the piles on which the city is built to be exposed above water level for long periods of time. This, in turn, causes the wood to rot and the ground to subside more quickly. This is accompanied by an enormous investment task, which has a direct impact on some real estate investments in Amsterdam and the surrounding area.”

Direct and indirect risks

Goossens distinguishes between two types of risks related to climate change on investments: direct and indirect risks. The subsidence in Amsterdam, the flood damage in Limburg, as well as the devastating effect of forest fires on homes elsewhere in the world are all examples of the direct impact that climate change has on investments. “This is quite easy to explain: investment properties suffer damage and part of the costs in relation to this will always be borne by the investor. That, in turn, affects an investor’s returns: the higher the costs, the lower the return.”

Then there is indirect damage: “When a disaster occurs, stores may need to stay closed or hotels may not be able to receive guests, which brings certain costs with it. A natural disaster may also force people to move. Not only that: insurance contributions, for example, will also be subject to considerable increases in response to environmental disasters, or certain types of environmental disasters will no longer be covered by insurance. Property owners pay the price of this. Insurers, like us, estimate the risk of disasters like these and base their prices on that. You can count on insurance contributions becoming much higher in the future.”

Transition risk

Goossens therefore also draws up risk estimates for the investments APG makes for its funds. This is urgently needed, because it enables estimates to be made of the financial consequences of climate change in the longer term. Investors take this into account when estimating the value of an investment. At least as important is what is referred to as the transition risk: “This is the risk of rising costs in response to the energy transition. In other words: what additional investments are needed to achieve the goals of the climate agreement? Better insulation or new heating systems are examples of this. Climate change is causing the Earth to heat up faster. If we want to combat this and limit the ensuing rise in temperature to 1.5 degrees, as stated in the agreement, this will bring certain costs with it.”

Legislation & Regulations

According to Goossens, how much money and which investments are needed in the coming years also depends on legislation and regulations. The requirements set by governments for energy labels is a significant factor in this. “We have no influence on that, but we do know what the ultimate goal is for 2050 and that we need to keep reducing the amount of CO₂ we emit.” APG and other large investors have developed the global CRREM standard to measure the transition risk and, in doing so, gain a clear overview of that ultimate goal. This provides insight into whether a real estate investment complies with the Paris Agreement. An office building in the Netherlands complies with the climate agreement if it consumes no more than 14 kWh/m² of energy, for example. CRREM is stricter with regard to this than the Dutch Green Building Council (the network organization for sustainable construction practices), which applies 50 kWh/m2 as a standard, says Goossens. “Aside from that, the CRREM standard is scientifically substantiated. By applying this standard, we go much further than other organizations in the sector."

“Our calculations allow us to estimate what it will take to meet the goals at individual investment level. We then examine the various aspects involved in relation to our long-term real estate investment plans.” Goossens believes that these additional investments are necessary. “The alternative is that the Earth will heat up by more than 2 degrees and that even more environmental disasters will occur. The damage caused by that is many times greater than the cost of accommodating the energy transition.”

The Rolling Stones, Bruce Springsteen, Coldplay and Pink: they all performed here. The Malieveld was their outdoor concert hall. That said, protesting trade unions also regularly take over the “Haagse grasveld,” the famous field in The Hague. There’s no doubt that Tuur Elzinga has also left many footprints in that field. His history with the trade union movement stretches back to 2002, when he was appointed as a policy officer at the Netherlands Trade Union Confederation. Almost twenty years on, he is now chairman of the trade union and employers’ and employees’ organizations since March 10 of this year, to be precise. He also represented the Socialist Party (SP) in the Upper House of the Senate for nine years. This means that he is as familiar with the green polders of the Netherlands as the green benches of the Senate.

Getting fat on the bones

Elzinga believes that things need to change in the Netherlands. In his opinion, the pandemic is a tipping point: the market-driven approach that has gone too far must make way for a revaluation of society. The pandemic has revealed how indispensable certain sectors are to our society, like health care, education and childcare.. “It is precisely those vital sectors that have fallen behind in recent years,” Elzinga reckons. Schools, hospitals and kindergartens have been run like businesses, and cut backs have been the order of the day. This has led to a shortage of ICU capacity, protective equipment and staff during the pandemic. “We need to get fat back on the bones again; we need proper reserves. That may not be very efficient, but it stops the whole of society from grinding to a halt when times get tough.”

Fears for the future 

The pandemic has also widened the gap between the poor – those with few prospects – and the rich. The Netherlands has become more prosperous in recent decades, but not everyone has benefited from this. The flexible labor market has put permanent jobs at risk and wages have not risen enough in line with profits. “Inequality has widened, and imbalances have occurred,” Elzinga tells us. Not to mention the climate crisis, from which there is no escape, both literally and figuratively, as we face extreme weather, forest fires and floods across the planet. Elzinga points out that this leads to unrest. “People are concerned about their own future and that of generations down the line. As a country, your sole aim may be to make as much money as possible, but what kind of home will we be leaving to our children and grandchildren if social cohesion is under pressure and our planet is being eroded?”

Plus another one million permanent jobs

Fortunately, the pandemic has also prompted politicians – from left to right – and some employers to realize that the Netherlands of Tomorrow demands change, believes Elzinga. He believes that we can start rebuilding the country without delay. We already have the blue print: broad-based prosperity for the whole of the Dutch population. That is the approach underlying the Social and Economic Council’s draft advice that trade unions and employers presented together this spring: a package of measures for the new cabinet. First and foremost, the labor market must be reformed: we must return to more permanent contracts, instead of flexible employment. Elzinga would like to see at least another one million permanent jobs. “People need job and income security. They want bread on the table, they must be able to pay the bills and have enough disposable income for their leisure time.”

The climate change price tag

Broad-based prosperity also calls for greater investments in public funds for vital sectors, like health care and education. For example, better terms of employment must stop the trend of having unmotivated employees: it may be more enticing to get out of bed in the mornings and take up the task of teaching if wages rise and work-related pressure is reduced. More must also be invested in the quality of public services, such as the Employee Insurance Agency, the tax authorities – here we have in mind the childcare benefit scandal – and yes, also pension administration. Elzinga says, “Better performance from institutions may also help to close the current gap in confidence.” For the long term, there needs to be substantial investment in tackling climate change. “We have to stop procrastinating and start addressing the issue. The longer we kick the can down the road, the higher the price tag will be.” So we need more funds to accelerate the energy transition, while at the same time being socially accountable by helping people who lose their jobs to get other work.  

Strong government required

Given the long societal wish list, the government can no longer keep its distance, Elzinga believes. Since the eighties, the maxim in The Hague has been: strong market forces, small government. “A market is a good for ensuring that there is enough to round, but you can’t leave everything to market forces,” Elzinga reckons. “We are now faced with the mess that the mantra of liberalization, privatization and deregulation has left us in.” Rebuilding the Netherlands calls for a stronger state, one that actively helps shape the society of the future through public participations and targeted investments, and legislation and regulation must ensure that market participants accept their social responsibility. This need for a government with a firm hand on the rudder does not stop at the borders. For example, Elzinga welcomes the G7 plan for a global minimum tax rate of 15 percent for multinationals. It will make tax avoidance through tax havens more difficult because it will put an end to competition among countries that lure foreign investors by having the lowest tax rates.

Tech giants

It is also crucial to have international regulations that curb the influence of Big Tech and Big Data. Elzinga adds, “Big tech companies are capitalizing on data that we as consumers are producing ourselves. They are using existing digital infrastructure, without giving anything in return.” The same is true of multinationals that are getting patents for innovations that they were not solely responsible for conceiving. After all, their smart employees are educated at publicly funded universities and draw on the body of knowledge that our knowledge-based society has accrued in centuries past-. We are standing on the shoulders of giants. “Data, knowledge, but also for example raw materials and energy sources such as the sun and wind and ultimately our entire planet: it belongs to all of us. What gives a handful of companies the right to claim ownership? Why should managers and shareholders be allowed to become wealthy beyond description from it, while employees and the rest of society have to make do with the crumbs?” says Elzinga.

“Give employees control”

The pyramid must be turned upside down. That doesn’t call for revolution; instead it calls for a radical change in direction, through gradual, democratic means, according to Elzinga. He believes that the first tentative steps down this new path have been taken. Governments are slowly starting to take back their traditional role, companies are taking more responsibility for their environment and consumers, citizens and major investors are more inclined to hold them to account. The next step is to give employees and society a real say, Elzinga argues. “'Give those people who come up with all those innovative ideas a voice, the ones that do the real work, who are the actual rightful owners of companies’ products and services: all of us, in other words. Who’s the boss? Who decides? As it stands now, they are managers and shareholders; in the future we should all be able to be in charge.”

From shareholder return to social gains

In recent years, Elzinga has been conducting the negotiations for the pension agreement on behalf of employers’ and employees’ organizations of the Netherlands Trade Union Confederation. It’s a historic agreement; designed to keep old-age provisions affordable going forward, without abandoning the principle of solidarity. “In the new system, the contributions you have accrued are reflected more directly in your own pension accrual, but we will still ensure that people who are not so fortunate in their careers will also be able to have a good pension, and we will spread the risks across the generations.” That said, Elzinga believes that the pension discussion is far from over. If interest rates remain this low in the coming years and investment returns structurally decline in the future, as predicted, then it will not be possible to keep the promise of an indexed-linked pension and the trust gap in society will widen. Pension funds could then take the next step: from shareholder return to social gains.

Pension benefits in kind? 

Elzinga explains, “Pension funds should examine the needs people have later in life. Do they then only need money? Or would they rather have a nice place to live, good care and quality of life? Invest in that directly as a pension fund; put pension money into new kinds of housing for senior citizens, good care for the elderly and restoring social infrastructure, so that it is to hand when people need it.” This would be a type of pension in kind. And why only invest in provisions for old age? Pension funds can also be used to improve today’s society. Here we have in mind investments in the tight housing market – which mainly affects young generations – or in good education, for a robust Netherlands of Tomorrow. Elzinga adds, “Pension funds have major assets and that means they bear a huge responsibility, for the Netherlands of today and the future.” 

An end to strikes

During the pension agreement negotiations, the Netherlands Trade Union Confederation, together with the National Federation of Christian Trade Unions in the Netherlands and the Trade Union for Professionals, halted train traffic for a day to apply pressure for a slower rise in the state pension age. What does Elzinga think: will there still be strikes in the Netherlands of Tomorrow? “I suspect so. In the meantime, there will be conflicts of interest between employers and their workforces. But I hope that one day it will no longer be necessary to strike: if employees are given a real say, they can be part of the decision-making process and conflicts of interest will become a thing of the past. If you are the boss, there’s no need for you to strike.” So the Malieveld of the future will be solely for the successors of The Stones and Coldplay, in other words: the ultimate festival grounds? Elzinga laughs, “Yes, that’s where we’ll gather to simply have a good time, do stuff we enjoy or celebrate together, for example, the great pension system that we have in the Netherlands.”      

Current issues around economics, (responsible) investment, pensions and income: every week an APG expert gives a clear answer to the question of the week. This time: equity investor Martijn Olthof, on the impact of a stricter climate policy and higher carbon prices on the equity markets.

Fit for 55. That’s the name of the plan launched by the European Commission on July 14 to reduce European emissions by 55% by 2030. An important part of that plan is the revision of the Emissions Trading System (ETS). Companies that cause emissions must compensate for them through the purchase of carbon emission rights. They can do this within the ETS.

The general expectation is that Fit for 55 will lead to higher and more widely applied prices for carbon emissions in Europe. To meet the Paris targets, it will have to, despite the large increase we have already seen this year. But higher prices for emissions lead to higher costs for companies. There is speculation here and there that this will lead to falling stock markets. Justified?

Winners and losers

According to Olthof, this reasoning is much too short-sighted. “It's clear that the price of carbon emissions has to go up considerably for it to really make a difference. And in most Paris scenarios that will happen. But you really can’t predict that a rise in the price of carbon will lead to a certain fall in stock markets. It depends on so many more factors. What you will see is that there will be winners and losers among companies.”

Whether a company becomes a “winner” or “loser” depends on a number of factors. “Companies that do not make the switch to zero emissions in time and provide a product for which a more sustainable alternative exists are going to suffer from a high carbon price. Their product will simply be too expensive compared to the alternative. Coal-fired power plants, for example. The customer can also turn to companies that supply green energy, with zero emissions. These energy companies incur fewer costs and can therefore supply their products more cheaply. But if you are a cement company, for example - which causes considerable emissions - there are currently few alternatives for your product. Those kinds of companies can largely pass the cost of a higher carbon price on to the customer. As a result, they suffer less quickly and less directly when emission allowances become more expensive.”        

Beneficiary

Yet Olthof says it is still difficult to predict exactly which companies will benefit from a high price for carbon emission rights. “There are simply too many uncertainties about how the energy transition will unfold. Whether there is an alternative for a certain product and at what price depends very much on technological developments. It is difficult to predict these in the long term.” 

It may not seem like it at first, but it is precisely the fossil companies that can benefit from clear policies like Fit for 55. The beauty of Fit for 55 is that it offers clarity to many companies that are crying out for these kinds of measures. For example, there will be more support for green fuels. If the carbon price also rises, companies will have a double incentive to produce biokerosene, for example. That is what companies want, because then they know for sure that there is a market for it. Many oil companies also say they are in favor of a high and stable carbon price. Only then will the capture and storage of carbon become profitable. What is needed is a healthy combination of various policy measures. That means, for example, that you require airlines to use a minimum percentage of biokerosene or other green fuel. If you also ensure a higher carbon price, among other things, and apply it more broadly to more sectors, companies will take steps towards new technologies. Because they have more certainty that they will also earn back the large investments required for this.”

Vigorous counter measures

And even if a higher carbon price pushes down stock prices, you can ask how bad that is, Olthof says. “What’s the alternative? If you get catastrophic climate change, or harsh government intervention because the Paris goals are not met, that might be much worse for the stock market. To meet those goals, massive investments are needed. The government must then ensure that it is attractive enough for the private sector to make those investments. With a sharp and clear climate policy, it can ensure that.” 

A consortium led by APG has acquired a 50% interest in Stockholm Exergi Holding AB. With close to 10 TWh in yearly energy sales and an annual turnover of almost €700 million, Stockholm Exergi (700 employees) is the largest supplier of district heating in Sweden. The company is an industry leader in sustainability and has the ambition to become climate positive by 2025.

The consortium also comprises of PGGM, Alecta, Keva and AXA Investment Managers. APG has acquired the 20% stake on behalf of pension fund client ABP, which wants to further shape its climate- and responsible investing ambitions. The consortium has bought the 50% stake from the Finnish energy group Fortum. Stockholm Exergi's 800,000 customers are concentrated in the Stockholm municipality. The remaining 50% stake is owned by the City of Stockholm.

Standout
Carlo Maddalena, Senior Portfolio Manager at APG: “The Stockholm Exergi investment is an excellent fit with APG’s infrastructure strategy and with its strong sustainability focus, it is at the core of the energy transition.”

According to Maddalena, Stockholm Exergi's fundamentals are very strong. “High temperature-driven heating requirements in Sweden, an AAA-rated country, cause district heating consumption per capita to be amongst the highest in the European Union. This makes district heating a nationally important core infrastructure for Sweden. In addition, Stockholm Exergi also supplies electricity to the local grid, which resolves many of its current capacity issues. The transaction was a unique opportunity to acquire a leading sizeable utility business in Scandinavia. Investments of this quality are scarce in the region."

International role model
The company's sustainability goals are very ambitious. "Stockholm Exergi has transformed itself to a fossil-free energy supplier and wants to become climate positive by 2025. To this end, it has already developed a number of projects, which are still at an early stage. This strategy is aligned to the commitment of the City of Stockholm towards becoming an international sustainability role model. As such, Stockholm Exergi plays an important role in these local – and national – climate ambitions."

The APG deal team that worked on the transaction was composed of Carlo Maddalena, Bart Saenen, Jan Jacob van Wulfften Palthe, Marjolaine Lopes and Silvan Koortens.

Read the Press Release.

APG publishes Responsible Investment Report

In 2020, APG has once again made great strides when it comes to responsible investing. By continuously improving, we can continue to meet the growing sustainable ambitions of our pension funds, as shown in our Responsible Investment Report (Dutch; English version expected in July) published today.

Responsible investing is one of APG’s strategic pillars. In their preface, Annette Mosman (CEO), and Ronald Wuijster (board member responsible for asset management) note that the Covid crisis has accelerated the increased attention for responsible investing. "Not only among NGOs, but also in the media and among the participants of the pension funds for which we work. We listen carefully, because we realize that our right to exist derives from the participants. It is for them that we work towards a good pension."

Investing in sustainable development

By the end of 2020, we had invested over €90 billion on behalf of our pension funds in companies and projects that contribute to the Sustainable Development Goals (SDGs). These were drawn up by the United Nations in 2015 to create a better and sustainable world. Our pension funds ABP and bpfBOUW both have a target for investing in the SDGs. A significant part of our investments in the SDGs (€12.2 billion) consists of labeled bonds. These are bonds issued by companies, governments and organizations to finance green, social or sustainable projects.

In 2020, APG, together with three international investors, established the SDI Asset Owner Platform to stimulate investing in the Sustainable Development Goals. Our ambition is to make this a global standard. In this way, we - together with other responsible investors - can contribute to goals such as sustainable cities and communities, affordable and clean energy and climate action.

Combating the Covid-crisis

By the end of 2020, APG had invested more than € 1 billion in so-called Covid bonds on behalf of pension fund clients. The proceeds of these bonds are used to combat the pandemic and the impact of the lockdown on people and businesses. Examples include the expansion of health care services, employment retention programs and support for SMEs.

In 2020, we also urged companies – both individually and together with other large investors – to mitigate the social consequences of the crisis and put employees’ health first. According to the U.S. organization Responsible Asset Allocation Initiative, APG is among the global asset managers that do the most to address the effects of the pandemic.

Global warming and the energy transition

The carbon footprint of our equity investments decreased by 39% against the 2015 base year. All our pension funds have a carbon reduction target. This year, for the first time, we also publish the carbon footprint of our corporate bonds, real estate and private equity investments (57% of the total portfolio). By 2022 at the latest, our pension funds will link these to 2030 climate targets. APG has contributed to a framework for reporting carbon impact as well as an overview of methods used by the Dutch financial sector for measuring the carbon footprint.

At the end of 2020, we invested €15.9 billion on behalf of our pension funds in the Sustainable Development Goal 'Affordable and Clean Energy' (SDG 7). By investing in this goal, we reduce climate risks in our investment portfolio and contribute to the energy transition.

Impact on risk and return

In 2020, we developed a method that provides insight into the effect of including (taking sustainability aspects into account in each investment decision) and excluding investments on the return of the equity portfolio. Over the past two years, the effect has been marginally positive. We do note that we can only make statements about the long term if we have measured over a longer period of time. In 2021, we will also develop methods to assess the impact of other instruments for sustainable and responsible investing on risk and return, such as carbon footprint reduction and investing in the SDGs.

Our own business operations

Although APG can achieve the greatest impact with the investments we manage for our pension funds, we also take into account our own business operations. We can only set a high bar for companies in which we invest, if we do the same for ourselves. In this way, we also motivate employees to consider sustainability in their daily work and choices. By 2030, APG wants to have a demonstrably climate-neutral business. In order to enable decision-making on our sustainable ambitions, we will establish a Sustainability Board under the leadership of CEO Annette Mosman. More on this in our annual report.

Sustainable future

APG invests over €570 billion on behalf of its pension fund clients ABP (government and education), bpfBOUW (construction), SPW (housing associations) and PPF APG, the pension fund of our own employees. Our pension funds have strengthened their responsible investing ambitions and objectives. ABP announced its new policy in 2020; bpfBOUW and SPW have recently done so. In line with our clients’ increasing ambitions, APG continues to develop in the area of responsible investing. We want to 'work together on your sustainable future'. A future with a good and affordable pension, in a sustainable, livable and inclusive society. That is what we are committed to, now and in the future.

APG is investing in over eighty thousand hectares of FSC-certified Chilean production forest. How do you arrive at such an investment? What does the market look like? And how does logging relate to sustainability? Six questions for Vittor Cancian, Senior Portfolio Manager Natural Resources at APG.

 
Why is APG investing in timberland?

“For an investor with sustainability ambitions, timberland is attractive because responsibly managed forests make a demonstrable contribution to achieving the Sustainable Development Goals. After all, trees absorb CO2 and FSC-certified timberland contributes to biodiversity.” 

From a return and risk perspective, timberland is a good investment for a pension fund because the return grows with the general price level. It therefore offers a natural hedge against inflation. Pension funds aim to have pensions grow in line with inflation as much as possible. So, it helps if the return on your investments also rises with the general price level.

Another advantage of timberland is that it adds diversification to your overall investment portfolio. The prices do not move much with developments in financial markets, as is the case with shares or bonds. So, if stock markets give slightly lower returns for a while, this need not apply to timberland investments. These two advantages – a hedge against inflation and diversification - also apply to farmland investments, for that matter.

The beauty of timberland is also that, depending on the market price of wood, you can delay or speed up the decision to cut trees. If in a certain year the price of wood is too low, you can wait for a better time to sell. The advantage is that the trees will continue to grow in the meantime, increasing their economic value. Or you can sell sooner if the price is right.

Would it not be even more sustainable to leave those trees growing in the forest?

“We only invest in production forests. That implies that at some point you also decide to cut the trees down. All our investments in timberland are managed in accordance with the FSC or a comparable quality mark. You only get this certification if you manage forests in a sustainable way. This includes the obligation to plant a new tree for every one that you cut down.

An older tree represents a higher economic value than a young tree. In addition, the CO2 absorption of older trees is flattened because they no longer grow as much. So, from a financial point of view, but also looking at the reduced CO2 absorption, it makes sense to cut down these trees and sell the wood.  Young trees, on the other hand, grow fast and need CO2 to do so. Selective felling and replanting therefore keeps the lungs of the earth vital. FSC certification also requires that you take care of biodiversity and pay attention to the social and economic impact on the area in which you operate.”

Wood construction is on the rise. Doesn't that also make a sustainability contribution?

If you start using wood construction as an alternative to concrete and cement, it definitely provides a sustainability advantage. The CO2 absorbed by trees is stored for a long time. The production of concrete and cement, on the other hand, produces a relatively large amount of CO2 emissions. If you really included that in the price, there would be a more financially favorable business case for wood construction.

We are seeing a development to build more with wood. In 2019, the world’s tallest wooden building opened in Norway (the Mjøstårnet in Brumunddal has 18 floors and is 85.4 meters high, ed.). In Amsterdam Oost, Hotel Jakarta is a good example. By 2025, one in five new houses in Amsterdam must be made of wood. But the construction industry is quite conservative.  The transition to more wood and less concrete will not happen overnight.

Exactly what kind of wood are we talking about and where is APG investing?

“In our timberland investments, we are dealing primarily with two wood types: softwood – such as, for example, Radiata Pine in Chile, Australia and New Zealand, and Douglas Fir in the US – and hardwood. The latter is primarily Eucalyptus but also other types, like Black Cherry and American oak for the furniture industry. Softwood is used primarily in construction. Eucalyptus wood is also used in the pulp & paper industry.

Will there be more investments like the one in Chile?

“That is our expectation. We are now moving towards a strategy in which we want to expand the current 1.8 billion Euros in timberland and agriculture to 3-5 billion Euros. The rest of the Natural Resources portfolio will gradually be phased out in a responsible way.

To find these kinds of investments, we doubled our team. These new people are based in Hong Kong or New York. It is important that they are close to the market. They have to feel the local dynamics and have their own local network. This is not only important for selecting the right investments, but it is also easier to manage such investments if you are close by. COVID-19 makes this a little more difficult at the moment, but we normally always go and have a look on site if we have our eye on an investment such as in Chile. We want to see the organization, the management and all the other aspects you want to assess to see what we are getting into.”

One of APG's co-investors in the Chilean forest said he had been looking for a promising investment of this size for almost a decade. Is there enough timberland to be found that meets your requirements, to be able to invest those extra billions?

“Yes, but opportunities to invest in timberland and access to the market vary from country to country. Australia and New Zealand, for example, have a well-developed timberland sector, with sufficient scope. Those markets are easily accessible for an investor and offer enough opportunities. In other countries it is a bit more difficult because the markets there are not yet so developed. In countries like that you often have to be more proactive and create a certain structure in order to be able to invest in timberland. Our investment in Chile is a good example. Together with two other parties, we set up a joint venture that acquired this production forest from Arauco.

Chile also has a well-developed timberland sector, but it is mainly owned by a few large companies that supply wood products to the construction industry - for example, MDF or OSB (both pressed from residual wood, ed.). To be assured of sufficient wood for their production, they also want to own the forests. So, they are reluctant to sell them. Arauco is one of those companies. But now the situation arises that these companies need capital to further invest in new production facilities. In order to get that, they sell sections of their forests to large institutional investors - often with the obligation to deliver a certain part of the wood to them annually. At the prevailing market price, of course. A great opportunity, in other words. The scope - this joint venture will be Chile’s third-largest timber producer - and the quality of the FSC forests Arauco have brought to the market are special, so the competition for this transaction was fierce. APG started investing in timberland back in 2007 so we are experienced in this sector by now. The same goes for our partners. We were therefore able to form a strong consortium fairly quickly and strike while the iron was hot.”

Imagine: you are 14 years old and get the opportunity to take the reins at APG for half a day. Chayma Charafi, a student at Sintermeertencollege in Heerlen, seized that opportunity with both hands. As part of the national initiative “Tomorrow’s Boss”, Growth Factory “boss” Anne-Marie Le Doux handed over her chair to Chayma. Virtually, that is. But it didn’t make the day any less special. And instructive, for APG too. “We can seriously learn a lot from how young people view pensions.”

“Now that I’ve gotten to know a few of the people that work here, I no longer think of pensions as boring,” Chayma exclaims enthusiastically at the end of the morning program. A nice by-product of the assignment that morning: finding an answer to the question of how APG can make the learning programs on complex issues such as pensions and investments more attractive to young employees. Anne-Marie Le Doux and some other coworkers are helping Chayma this morning to make her temporary new role as memorable as possible.

More images, less text

“I expect to learn a lot today and am looking forward to it,” Chayma posted on APG’s Facebook and Linkedin account in the morning. And that mission seems to have succeeded. In fact, Chayma is also teaching APG a lot. In her presentation, she comes up with a number of apt recommendations to better reach young APG employees. “Use more images and less text. I’m seeing this in the teaching materials at our school, too. We enjoy watching interesting videos with a good storyline much more than having to read a long, boring piece of text.” This is a big eye-opener for the people Chayma hangs out with that morning. Anne-Marie: “That really is today’s theme: if you make learning fun, it also gets absorbed better. At APG we are sometimes inclined to take our work far too seriously. And that is reflected in the way we communicate about it or provide information. Chayma makes us realize that it is not effective to make things too heavy. Because in learning programs for young employees, they just don’t even absorb that.”

Colleagues in videos

Other recommendations from the student? “Make more use of social media to refer to interesting information or channels. It’s really not a bad thing if it’s not all created by APG itself, but I do think it’s a good idea to have employees who have a lot of knowledge about pensions and investing tell you about it in videos.” Birte van Ouwerkerk, who helped with the presentation, notes that Chayma’s generation thinks much more in images. “We still need to create that image in our minds, whereas young people, they just get it right away. That’s very valuable.” 

Impressed

As Chayma talks, you can see the people she worked with smile. Raban van Deursen: “We can seriously learn a lot by looking at our work through the eyes of a 14-year-old. When we asked Chayma how young people would look at retirement, her immediate response was: have you asked them yourself?” Ronald van Hengel was also impressed by the young boss’ analyses that morning: “Young people really have a different outlook. Sharper even. And that keeps us alert. I’m impressed by how quickly she understood the ‘problem’ and went to work on it.”

Get to work

Tomorrow’s Boss is an initiative by JINC for schoolchildren from disadvantaged neighborhoods who could use a helping hand to get a fair(er) chance on the labor market. According to Anne-Marie, Chayma doesn’t really need that support: “I met Chayma a few times before and got to know her as a super enterprising type. She just gets to work and gets things done! We adults can also learn something from that.”

Being educational is great, of course, but what is the real point of Tomorrow’s Boss? Being the boss of course! Did you enjoy that? “I think it worked out quite well to be in charge. I was able to come up with my own ideas and also implement them,” Chayma says. When asked if she will be working at APG soon? “Who knows. Someday.”

Right now, the focus is on the things that really matter to a teenager: taking pictures, playing sports and having dinner with girlfriends. Right you are, Chayma.

Cooperation aims to contribute to restoring biodiversity

APG – on behalf of its pension fund clients – supports the Partnership for Biodiversity Accounting Professionals (PBAF). The financial institutions in this partnership will develop a shared methodology for measuring and reporting the impact of their investments on biodiversity. Through their investments these financial institutions can take targeted action to protect biodiversity.

PBAF is an initiative of ASN Bank and a number of founding partners. Today it was announced that fifteen more financial institutions have either joined the platform or expressed their support. Their shared ambition is to measure their impact on biodiversity, be transparent about their impact reporting and to set targets to improve their ecological footprint.

Joint approach

Roel Nozeman, Senior Advisor Biodiversity at ASN Bank and chairman of the partnership, is excited about the new partners joining the platform. “A growing number of financial institutions realize that loss of biodiversity poses a major threat both to society and to the economy, and that we need action now. Through our investments, we can limit the damage to ecosystems and contribute to the protection and restoration of nature. To do so, we have to adopt a common approach to measuring our impact and using data. We will join hands with all new partners to continue developing that common approach.”

Biodiversity loss
Biodiversity refers to the variety of life on earth and to ecosystems, i.e. the systems that sustain this life, such as forests, soils and oceans. As it stands, the planet’s biodiversity is rapidly declining. This is bad news for nature but also for our future prosperity. Many economic sectors are dependent on the variety of plants, animals and insects in the world, either directly or indirectly. Examples are agriculture and fishing, but also (chemical) industries, real estate and transport. 

APG has sold the South Korean utility KEPCO. Despite our strong objections, the company continued to plan for new coal-fired power plants. In 2020, APG sold its stake in eight companies because they had plans for new or larger coal-fired power plants.

APG decided to sell its stake in Korean Electricity Power Company (KEPCO) after the company gave the green light to the construction of new coal-fired power plants in Indonesia and Vietnam. In line with the sustainable ambitions and goals of its pension fund clients, APG strongly opposed this plan. Companies need to stop planning new coal-fired power stations and to develop a strategy to greatly reduce greenhouse gas (GHG) emissions. 

Sustainability specialist Yoo-Kyung (YK) Park of APG Asset Management says it is 'disappointing' that KEPCO has not canceled its expansion plans. ‘The decision on the new coal-fired power plants was a litmus test for the company’s commitment to the Paris Agreement and join global efforts to combat climate change. The construction of these coal-fired power plants deepens the climate crisis and worsens the company's profitability in the long run'.

Pulling out all the stops

On behalf of its pension fund clients, APG usually first engages with companies that have plans for new coal-fired power stations. That’s also what happened at KEPCO. YK: ‘We pulled out all the stops to change the company’s mind. We wrote letters to management, increased the pressure in the media and worked together with civic organizations. Because 51% of KEPCO is owned by the Korean government, we also liaised with other investors to approach the government on its responsibility. Unfortunately, that didn’t work out’.

Coal accounts for 38% (Netherlands 9%) of electricity generated worldwide. Burning coal leads to relatively high GHG-emissions, in particular CO₂. The vast majority of coal-fired power stations are located in Asia. The growing economies in the region are making extensive use of coal-fired power plants to meet their increasing need for electricity. In the US and Europe, the importance of coal-fired electricity is declining sharply.

Exit due to coal expansion

Including KEPCO, APG sold eight companies with more than 90 gigawatts of coal-fired capacity in 2020 because they had plans to expand coal-fired power stations. The total annual CO₂-emissions of these companies - all located in Asia - is 624 million tons.

Earlier, investors including APG succeeded in persuading a number of large financial institutions in South Korea to stop financing new coal-fired power plants and to sharpen their climate ambitions. That’s an important step, YK says. ‘South Korea is a signatory to the Paris Climate Agreement. But despite many promises, the country is still one of world’s largest carbon emitters . Through pressure on the financiers of coal-fired power plants, we are trying to change that’.

Climate neutral in 2050

APG’s largest client, civil service pension fund ABP, aims for a climate neutral portfolio by 2050, in line with the Paris climate agreement. This means that CO₂ emissions related to the investments are to be reduced to net zero. ABP’s responsible investment policy includes targets that work towards this ambition (including phase out of coal mines and tar sands by 2025, no direct investments in coal for the production of electricity without carbon capture in OECD countries by 2030, and investing € 15 billion in the Sustainable Development Goal ‘Affordable & clean energy’). APG’s other asset management clients - bpfBOUW, SPW and PPF APG – also have climate targets, including a 40% reduction of their portfolios’ carbon footprint by 2025 (compared to 2015).

Pension provider wants to be the best in class in sustainability

APG has made the commitment to be "best in class" in the field of sustainability. To give substance to this a number of steps will be taken in the coming years. For example, there is a CO2 reduction plan with the aim of having APG demonstrably climate-neutral operations by 2030.

There will also be an approach to sustainable purchasing and a Sustainability Board. This borad prepares the many decisions that will be needed in the near future to fulfill the sustainability ambition.

Livable world

APG takes these steps for people, the environment and society, explains Sustainability Office Loek Dalmeijer. “We want our pension participants to live in good health in a sustainable society in which they can be an integral part.”APGdoes this through the investments we make on behalf of the funds, but also by making our own business operations more sustainable and more inclusive and by taking responsibility in our supply chain.

Situation

“Our building in Amsterdam (Edge West) will receive the highest possible sustainability standard and work is also being done on sustainability in Heerlen”, explains Dalmeijer de current situation at APG. “We have achieved the target for 2020, set in 2018, to at least meet the requirements that we as an investor set for our investments. APG has also caught up on sustainable business operations, diversity & inclusion and mobility. But that doesn't mean we're there yet.”

From the inside

If you want to be best in class, you really have to be the front runner. This means that "people, the environment and society" must be part of every decision we make. Is that not possible within your work or department? Then get help to remove the barriers that lie there. A Sustainability Office was recently set up for this purpose under the leadership of Loek Dalmeijer.

Step-by-step

There are already many initiatives to reduce our environmental footprint. We bundle these and go one step further. “First of all, we are working towards energy-neutral accommodation. The move to Basisweg 10 is an important step in this. We are also investigating whether we can get rid of gas in Heerlen and we will soon determine the requirements that we will set for our offices in New York and Hong Kong.”

“Second, we will do everything we can to reduce CO2 emissions caused by transport movements. We are making environmentally friendly travel more attractive, flying less and investigating whether we can fly on more sustainable biokerosene for the flights that are really necessary.

Third, we involve our suppliers and colleagues in this objective. Because reducing CO2 emissions from our paper consumption, or that is caused by not properly separating our waste for reuse, is only possible if everyone makes a contribution. As a final step, we will continue to offset our remaining emissions. This share will decrease, if we are successful on the various measures.”

Investing in fossil energy: for how long? That was one of the themes during the investor panel at BRN Zakendoen this week. According to Thijs Knaap, senior strategist at APG Asset Management, it is neither realistic nor sensible for a pension fund such as ABP (with APG as administrator) to leave fossil fuels in the short term. Because: "It is better to have a Dutch pension fund at the table than a shareholder who is less concerned with the environment."

Moreover, it is also unrealistic for economic reasons. 80 percent of the economy obtains energy directly or indirectly from those fossil fuels. We are in a transition to something that is not yet there. "Should you stop investing in airports, trucks?"

Knaap emphasized that ABP listens very carefully to the participants. “We share the concerns. ABP has a solid sustainable investment policy. And everyone has the same long-term goal: a climate-neutral economy.”

The comparison with the divestment of 4 billion euros in fossil fuels recently announced by the PFZW pension fund is flawed, says Knaap. “That is about futures trading. Not about stocks. That's a different strategy.”

Labeled bonds

In addition to investments in fossil fuels, there was also talk of an interesting new trend in investor circles: the so-called "labeled bonds". According to Knaap, 2020 is “a good year for bonds like this. Bonds usually don't have much movement; they are a kind of tradable debt. But there are bonds with a label, where the person who issues them determines in advance what they should be spent on. For green or social goals, for example. Those labels are becoming popular, with € 304 billion already spent this year. More than in 2019. ”

Knaap referred to the so-called SURE Bonds that are issued by the EU. They are used to protect jobs within the EU. APG recently invested 170 million euros in these SURE bonds. Knaap: “It is an interesting development, because the investor in debt, which is normally a remote investor, has more and more influence on policy. Because he or she can choose to put the correct labels on his bonds.” He cites the ECB as an example. “Previously, the ECB bought bonds and that was a neutral monetary operation. But you see that more and more labeled bonds are being bought there too. From the right parties with the right labels. In this way, investors have a little influence on what happens in the world.”

APG Asset Management in Leaders Group of Principles for Responsible Investment

Principles for Responsible Investment (PRI) has recognized APG Asset Management as one of the leaders in responsible investing. Including APG AM in its 2020 Leaders’ Group, PRI specifically acknowledges APG’s excellent disclosure and advanced efforts in climate reporting.

APG has been reporting on climate risks and opportunities for years, in line with the recommendations of the Task force on Climate-related Financial Disclosures (TCFD). “For our clients, we work to achieve targets such as carbon reduction and investments in SDG 7: Affordable and clean energy,” says Joost Slabbekoorn, Responsible Investment Specialist at APG AM.  “Being included in the PRI 2020 Leaders’ Group is an important acknowledgement of our work.”

Climate reporting

Launched in 2006, PRI is a global association of over 3,000 asset owners, asset managers and companies that seek to promote responsible investing. Every year, PRI identifies a group of leaders (not ranked) in a specific area of responsible investing. This year’s theme is climate reporting. The 2020 Leaders Group consists of 36 asset owners and investment managers.  

PRI chose the climate reporting theme as many of its signatories consider climate change to be one of the most material ESG risks. “As climate-related risks and opportunities are set to grow in the coming years, it is increasingly important for investors to incorporate them into their view of the future,” says Slabbekoorn. To assess signatories’ climate work, PRI examined, among other things, whether they have a board-approved implementation plan to manage material climate risks and opportunities, how they use scenario analysis and whether they are working towards specific climate-related targets.

Inspiring peers to raise the bar

With the selection of the Leaders Group, PRI aims to inspire other signatories to follow the leaders’ best practices. “I congratulate APG Asset Management for qualifying for the 2020 Leaders’ Group, and recognize your excellent disclosure and advanced efforts in climate reporting,” says Fiona Reynolds, PRI’s CEO. “I hope this recognition can help APG Asset Management and our entire signatory base to keep raising the bar in responsible investment.”

Read more in the PRI 2020 Leaders’ Group report.

More information on APG’s climate work can be found in our Verslag Verantwoord Beleggen​​​.

APG increases its ambition significantly, not only in terms of sustainability but also in the field of healthy office buildings for APG employees: both at the new premises in Amsterdam and in Heerlen.

The person entering the new premises of APG “Edge West” at the Basisweg 10 will immediately notice it: stairs. Not tucked away somewhere in a draughty staircase like in many offices, but in plain sight which implicitly says: “We are going to skip the elevator for today”. The daylight shining through the glass roof provides a bright-green color to the large trees and living walls. Water taps are to be found within a range of thirty meters on the APG office floors. Standing tables are placed here and there, tempting you to get out of your office chair once in a while.

Health and well-being at the office continue to be important themes for APG. Even now the workplace at home has proven its worth as an alternative due to corona. Marga Petridean, Facility Service contract manager housing at APG: “What we have learned from the corona crisis, is that working from home may be a good alternative, but also that the office continues to be an important place to come together and to get inspired. One thing we know for certain at APG: once the employees return to the office, health and well-being are paramount. A healthy and pleasant working environment contributes to the well-being of our colleagues and ensures for people to be happy to work at APG.”

The themes are taken very seriously by APG, according to Marga. A number of years ago, a certificate for well-being and health was introduced: the WELL Building Standard. Marga: “The design of our renewed office in Amsterdam makes us aim for the so-called WELL Gold certificate for the interior, in addition to the WELL Platinum certificate for the building shell which will be awarded to Edge West as one of the few offices in the Netherlands.”

After publishing this article, APG came to the realization that to achieve a healthy working environment in line with APG's vision it is sufficient to operate the interior WELL guidelines for our office buildings in Amsterdam and Heerlen without gaining certification. APG none the less acknowledges the value of the WELL standard and will continue to pursue it, but no longer with the ultimate goal of obtaining the certificate. However, it remains the intention to obtain the WELL platinum certificate for the shell building.

Certificate

APG has asked CBRE Development Services to have the new office Edge Amsterdam West meet the requirements of the certificate. The building already has a high ambition with sustainability certification BREEAM Outstanding. So, what is the reason for yet another certificate? Zaida Thepass, Sustainability Consultant at CBRE: “In order to achieve the WELL certificate, measurements are actually taken within the building itself to assess whether you fulfil the requirements set for air quality, acoustics and lighting, for example. It is the first certification aimed specifically at the health and well-being of the users of a building. That is what distinguishes this certificate from many other quality labels. This standard was established after seven years of research and developed in cooperation with physicians, scientists and real estate professionals.”

It is much more than just a piece of paper, Marga emphasizes. “By meeting the criteria of WELL, we contribute to a higher level of well-being, better performances and a lower level of sick leave. The corona crisis has made us focus even more on air quality. So, we are very pleased that this is already incorporated in the WELL certification.”

We will also apply WELL to the building in Heerlen, Marga underlines. “As the building in Heerlen involves an existing construction, we have to conduct further research to what extent we are able to give shape and substance to the APG ambition with regard to WELL. That does not always have to be complicated. We already took a few well-being measures in Heerlen by, for example, removing the coffee machines from the workplace. That is a way of stimulating employees to walk more and to make quite a few steps in a day in a simple and unnoticed manner.”

The current corona crisis should not be a reason for companies and governments to weaken or abandon their sustainability ambitions. In fact, sustainability is a powerful tool to get out of that crisis.

This is stated in the so-called Green Recovery Statement that MVO Nederland has published today. Several large companies, including APG, support the statement.

There are large, green and social investment plans at both national and European level that also offer opportunities for economic recovery. The Green Deal presented last year is an example of this. Millions of green jobs can be created by investing in sustainability on a large scale. Both public and private investments are needed to get that job driver going, the statement says.

Ambitions

The crisis should also not be used for the Dutch economy, for example to weaken the ambitions of the climate agreement, the collective states in the statement. By investing in sustainable innovations now, we can build a competitive advantage in the Netherlands and thus also a solid revenue model for our economy.

The objectives formulated in the statement have many interfaces with APG's sustainability policy, which was presented in May. APG believes that pensions are about living, living and living together. Taking care of pensions for 5 million households is in itself already a very sustainable core activity. We live together in a world that we deal with responsibly. One of the four pillars of that ambition is to contribute to the sustainable development of ‘Corporate Netherlands’. Another ambition is to be an international leader in the field of sustainable investment. With this leading position, APG can also make an important contribution to combating the current crisis. For example, APG invests heavily on behalf of pension fund clients in Covid-19 bonds. The proceeds from such bonds are used, among other things, to fund emergency health measures and to support small and medium-sized enterprises in affected countries.

Critical

Critically looking at yourself is also part of that new sustainability policy. Practice what you preach. APG therefore takes a step forward in its own business operations. Earlier this year, APG joined the Anders Reizen coalition, a coalition of more than fifty large organizations in the Netherlands that wants to halve the CO2 emissions from business travel by 2030. APG has expressed its promise to look critically at its own travel policy.

In addition, the collective says in the statement that it sees the EU emissions trading system (ETS) as an important means of achieving its climate ambitions. That position is also fully in line with that of APG. The pension provider recently made a plea for the CO2 pricing together with the ABP pension fund.

In short, sustainability is woven into who we are as APG and what we do, emphasizes CEO Gerard van Olphen. “Supporting this initiative underlines APG's vision. The Covid-19 period has brought dark times, but also the realization that choices have to be made that create new opportunities. Choices that are good for the economy and sensible for the climate and humanity.”

Eyes on Climate Agreement while stimulate economy during corona

Earlier this year, APG joined the coalition Anders Reizen, a coalition of over fifty big organizations in the Netherlands that want to cut the CO2 emissions of business travel in half by 2030. This ambition and fine-tuning our own ambition with respect to sustainability led us to take a critical look at our current mobility policy in 2020. That’s what APG was doing when the corona crisis broke out and the majority of APG employees started to work from home and stopped traveling altogether.

This will not slow down the development of the new mobility plan, however, but instead, provides new insights that will be incorporated into the plan. Not just for the immediate future, but certainly also in the long run.

Currently there is still a lot of working from home at APG. This is not going to change until September, following the RIVM guidelines. At some point, a period will probably follow where increasingly more employees will start traveling to work again. As a participant of Anders Reizen, APG feels responsible for showing the right example. And that means that APG intends for their employees to travel to work in a healthy, safe and sustainable way, when traveling is permitted again. Limiting and spreading out mobility is the top priority in this.

This is exactly what the members of the coalition have agreed on. This approach will prevent crowding on the road, in public transport and at the office. The participating employees will focus on using their bicycles as a healthy and sustainable alternative. They also agreed to keep air travel to a minimum. It is expected that will be on-going until at least the end of this year.

The majority of the employees involved will be adjusting their mobility policy in response to the corona measures and are looking for a healthy balance between working remotely and meeting at the office. People are asking each other questions like “What will our new way of working and traveling look like?”, “How do we prevent going back to old patterns?” and “Is part of the solution to keep working from home, either completely or partially?” In this way, companies are helping each other to evaluate new experiences with work and travel flexibility and to permanently incorporate them into the new, sustainable normal.

Today, Anders Reizen is launching a media campaign to keep business travel to a minimum, even after the period of intensively working from home is over. To that end, there is an article in the Financieel Dagblad today, in which the Coalition Anders Reizen makes a statement about traveling in compliance with the corona measures. 

A growing number of airlines, energy providers and other carbon-intensive companies pledge to reduce CO2 emissions to net-zero by 2050 or earlier. But how does that work? In addition to decarbonizing their businesses, companies increasingly invest in enhancing the ‘carbon sink’ function of natural ecosystems. While not new, the larger scale and professionalism of such Nature-based solutions (NbS) potentially makes them more attractive for investors like APG, says Jos Lemmens.

Nestlé, ThyssenKrupp, Volkswagen, Repsol and BP: these are just some examples of the many companies that have recently announced their ambition to reduce their net carbon emissions to zero by 2050 at the latest. Although details vary, these companies’ approaches have one thing in common; they rely partly on increasing ‘negative emissions’ by boosting the ability of natural ecosystems to sequester greenhouse gasses (GHGs).

Nature-based solutions (NbS) – as these initiatives are called – have been around for some time, says Jos Lemmens, Senior Portfolio Manager of the Natural Resources Fund at APG Asset Management, co-managing a portfolio of productive timberland and farmland assets. “Often these have been associated with carbon credits markets, but there are other ways in which contributions to sequester GHSs can be made. For instance by integrating nature-based solutions in the acquisition and maintenance of farmland and productive timberland. We know that natural ecosystems are excellent carbon sinks. They have the potential to sequester 30% of global CO₂ emissions. In order to fully realize that potential, natural ecosystems need to be preserved, improved and expanded.”

APG, on behalf of its pension fund clients, invests in forests and agricultural land. When properly managed, these assets can sequester more carbon in the trees and soil, increasing the intrinsic value of the natural resource. In this way, the interests of stakeholders – investors, operators and local communities - can be aligned.

Tipping point

Prior to the corona crisis, Jos addressed a high-level conference co-organized by APG, where researchers, investors, companies and policymakers explored ways to make nature-based solutions (NbS) scalable and investable. “The market seems be at a tipping point”, says Jos. “Initiatives are still small-scale. But with large companies entering this market, existing developers can benefit from the financing, marketing and risk management capabilities that these new players bring along.”

One of the takeaways of the conference was that tackling climate change requires betting on many horses. Duncan van Bergen, VP Nature-based Solutions at Shell, for instance, explained that Shell is not only taking steps to reduce the carbon intensity of its products, but is now also investing $ 300 million a year in NbS. Many companies have announced plans to plant trees or (re)develop wetlands, in addition to their carbon reduction schemes. It is now generally accepted that keeping the rise of global temperatures well below 2 degrees requires large ‘negative emissions’.

Building an investment case

Scaling up NbS projects in terms of size and professionalism potentially makes them attractive for large investors like APG, says Jos. “It is not a matter of simply planting some trees but of using NbS to build up a sound investment case. In the long run, profitability can only be sustained if the land - our investment’s capital base - is well managed and shielded against degeneration. Investments in natural resources need to be sustainable to be commercially viable in the long term, and vice versa.”

The conference demonstrated the need for all involved – including companies, offerors of NbS, and investors – to pool their strengths to further develop this market. “When it comes to investing in natural resources, sustainability is not peripheral but the core of what we are doing. As a large investor, we have the opportunity to have an impact, even if only a little, with each of the many euros that we invest.”

APG recently signed up with Anders Reizen. This is a coalition of some 50 organizations with the common ambition of halving carbon emissions from business travel by 2030 (compared to 2016). By joining this coalition, APG plans to make use of the experience of other companies to halve the emissions of its own business travel per employee by 2030.

Business travel refers to commuting and other travel used by the employer, including air travel.

More sustainable travel

Gerard van Olphen, CEO of APG, is clear about the organization's potential for sustainable mobility: "As a large, sustainable and responsible investor we must of course do the same as what we expect of other companies. We're simply not sustainable enough yet. That's why we'll be adjusting our mobility policy this year. Translated into practice this means reducing car use by encouraging the use of public transport and taking a critical look at our parking policy, for example. We plan to make the lease car fleet more sustainable, and to reduce the amount of air travel. This might mean that some employees have to change how they commute."

APG employs a total of around 3,000 people, many of whom work in Heerlen and Amsterdam, and some in New York and Hong Kong. There is room to make mobility more sustainable there, too. Van Olphen: “We want to avoid unnecessary travel as much as possible, both at home and abroad. Merging our Amsterdam locations into one modern, energy-neutral building near Sloterdijk station is in itself a step in the right direction - for the environment, but it also in the considerable saving in accommodation expenses."

Liveable world

Signing the 'Dutch Business Sustainable Mobility Pledge' forms the starting point for APG also to fulfil its social responsibility through its own mobility policy. Van Olphen: “For APG, pension means more than money alone. We take responsibility for securing a good income for our parents and our children. Now, and in the near and distant future. And we want them to enjoy that income in a pleasant, liveable world."

APG among participants of Global Mining and Tailings Safety Init

APG, on behalf of its pension fund clients, has acquired an indirect 41.1% interest in Alpha Trains, the leading passenger train and locomotive leasing company in Continental Europe. Alpha Trains provides rolling stock to train and locomotive operators under leases, which provides train operators with the flexibility to respond dynamically and commercially to opportunities presented in the rail transport market, independent of long-term investment considerations. The majority of the fleet is electric, making a significant contribution to the decarbonisation of Europe’s transport sector.

Peter Branner, CIO of APG, about this investement: “As a long-term responsible pension investor, we are continuously looking for attractive investments that help us realise stable returns for ABP and the other pension fund clients we work for, while at the same time contributing to a sustainable world. The investment in Alpha Trains Group perfectly fits our investment strategy: Alpha Trains’ fleet of mostly electric trains and locomotives promotes sustainable, low carbon mass transport within Europe while also offering access to a long-term business model with strong growth and resilient cash flows.”

About Alpha Trains

The Alpha Trains portfolio consists of more than 800 passenger trains and locomotives on lease across Continental Europe (including Germany, France, Italy, Spain and Benelux) where it is the market leader amongst the privately-owned rolling stock lessors.
Alpha Trains participates in the annual GRESB survey – a leading Environmental, Social and Governance (ESG) benchmark for infrastructure investments across the world – and has been ranked first among their peers in the global diversified infrastructure funds and rolling stock asset class categories, respectively.

See press release

Today, APG chairman of the board Gerard van Olphen has sign an agreement in The Hague under which the Dutch financial sector will commit to the targets of the Climate Agreement and the Paris Agreement.

He comes back to this idea several times during the interview: this is a unique commitment. It is the only one of its kind. ‘Pension funds, insurance companies, banks and asset managers are voluntarily committed to this approach and will be transparent in their accountability to society. This commitment on the part of the financial sector will have a truly enormous impact. After all, the sector makes up 80-90% of the money in the Netherlands. The signatories to this agreement today represent €3 trillion. This makes the Dutch financial sector a catalyst for and promoter of the transition that the Netherlands has to undertake. We are shaping the future. Contributing to the achievement. And yes, I am very proud of that.’

Of course, as Van Olphen also knows, industrial companies themselves have to make their factories cleaner. ‘We can't do that for them. They will have to reduce their carbon emissions themselves. But the fact that when we assess industry business cases we are not only evaluating financial feasibility but also compliance with the Paris targets, which means that polluting or less ambitious initiatives in the field of CO2 reduction will have more difficulty in obtaining funding than plans that really contribute to sustainability.’

The uniqueness of the joint declaration has not escaped the notice of neighboring countries either. In Brussels, in London, at the G20: the finance minister, sector representatives or Gerard van Olphen himself will discuss this commitment on various foreign venues in the near future. The international financial community welcomes this typically Dutch “polder manifesto”. Van Olphen: ‘The financial sector in many countries is more inclined to support climate agreements than to help shape them.’

What is it that makes this document so special?
‘In the financial sector, you are primarily responsible for other people’s money, so you have to have a solid risk/return profile. You can't tell people that their pensions will be lower because we have to finance the energy transition. But this is a huge commitment, and I would almost say it is catalytic. This is because we intend to determine and report on the CO2 impact of all the relevant investments we make. We will then agree on reductions in line with the Paris targets. In other words, 49% lower C02 emissions by 2030. And we will hold ourselves publicly accountable for this in the framework of a national accountability system. Once a year, as a consequence of the climate agreement, the minister consults Parliament with a view to explaining: are we doing enough in the area of the climate? Will we achieve our targets? This commitment is integral to that.’

You are proud of the commitment involved, but not entirely satisfied. Why is that?
‘When I was invited to be the chairman of the Financing Task Force, the scenario was that we wanted to bring a climate agreement to the Lower House before the parliamentary recess in 2018. The Netherlands intends to make rapid progress on the energy transition. That turned out to be a more difficult process than we thought. Initially, five primary committees were involved. Initially, financing was intended to play a supporting role, in the same way as the labor market. Our vision was that at the level of the primary committees - transport, agriculture, construction, electricity, industry - a great deal was already happening, and they would be coming to the financing committee with very specific investment questions. Such as: ‘we are planning to build a light rail from the Randstad to Schiphol, we need hydrogen power stations or we need large-scale electrification.’

But in practice, the situation proved to be problematic. ‘Because nothing happened.’ Sometimes as a result of conflicting interests, but also because there was no clear direction in the climate plans. There were still many options to be considered. The Netherlands is going to use electrification or hydrogen. Will there be any legislation on CO2 pricing? So a great many conditions for a successful business case had not yet been met.’ In retrospect, this was also very logical. The subject matter is comprehensive and complex and also requires broad public support, and I was probably a little naive at the outset as well.’

No direction, many different interests.
‘Someone told me what their experience was: ‘When I started I thought it was a football match. But halfway through I think to myself: I'm now standing in front of the goal and something is flying towards me. First it was a football, then it became a baseball somehow, and now that I'm expected to head it, I'm not sure it's not a bowling ball. And before I do that, I'd like to know for sure one way or another.’

Is that how you experienced it as well?
‘To put it diplomatically, our first phase was one of finding our way. What also became clear to us, besides the fact that there was a lack of direction, was that the committees were not familiar with the structure of the financial sector. When the issue came up at one of the committees: we need money, our counter-question was: what kind of money? Well, money. But what kind of money? Well, euros. The question from the financial sector is then:  Risk-bearing, non-risk-bearing, short, long, hybrid?  And so we developed a financing guide so that they could better understand supply and demand in the field of financing.  We also worked closely with the majority of the primary committees, sometimes in joint workshops, sometimes through participation in the relevant committee or in some other way.’

In February of this year, after a great deal of media fuss about the affordability of the transition, the government issued a broad outline of their assessment of the agreement. This prompted the task group to consider its role in the follow-up. What's next?  ‘We then agreed to focus on two things. The first was the commitment that we are signing today. The second was to help support Invest NL. In the meantime it had been decided to found Invest NL, an investment company belonging to the Dutch State and managed by Wouter Bos.  Invest NL acts as a point of contact and facilitator for parties looking for financing in the context of the energy transition.  It is the investment company that has received 2.5 billion from the state to advance the transition. The idea is this: we are not going to finance the energy transition with this EUR 2.5 billion, but if we invest it in the right place, the private market may be able to invest many times more than that on market terms, and this will make investment capacity available.’

And now we the commitment is there. Aren't you afraid that this will be a paper tiger? It seems like a horrible job to me to standardize the measurements.
‘The next chapter is: how do we make sure this happens? This must not become a paper tiger. This really must be something where the financial sector will genuinely be accountable to politics and society for their efforts. So there must also be an independent guarantee, and it will be difficult to say at first: party A reports using one standard, party B reports using another standard, but what matters is: is the underlying trend the right one? And if it's not the case, that party should be able to say: dear financial sector, you need to redouble your efforts.

And that independent actor will be there?
‘Yes, it is going to happen.’

The problem is that you can't impose sanctions. At best because parties that are lagging behind will have to account for their actions publicly. Or because the sector is exerting pressure.
‘My first instinct is not to resort to naming and shaming. But let's say hypothetically that if a party is known to be clogging up the works, the sector itself will eventually make corrections. The sector has now gained sufficient experience with painful situations where they have been called to account and have themselves been too slow to take action. Whether you look at profiteering policies at insurance companies, interest rate derivatives at banks or how pension funds communicate pension cuts, these social discussions have taught us that this is not how it works.’

So how does this affect APG itself?
‘This means that APG, as a company, is also committed to reducing CO2 emissions in line with the Paris targets. This implies decreased travel and reduced gas consumption. Everything that comes into play in society will also affect us as a company. Sustainability is not something that our clients necessarily expect from their investments, but it is what we expect at APG. This means that our annual report will state how much C02 we emit and how we are going to ensure that this will be 49% lower in 2030. What does that mean in terms of accommodations? In terms of how we travel? How are we going to heat our buildings? From 2020 onwards, the theme of sustainability will be high on the agenda of APG itself.’

And beyond the company itself - what does this mean for the stakeholders, consumers who read in the newspaper that the energy transition is unaffordable?
‘Of course, the transition will be costly. The idea that some of the news media presented was that in five years, everyone will have to cook electrically, or have solar panels on their roofs. So that's our starting point now, and the question is who is going to pay for it? But what matters is that you adapt to match the natural flow of the consumer. The financial sector will of course be there to support consumers in their decisions. So if you, as a consumer, want a new kitchen, then the lender will say: if you are going to make a choice anyway, then it's better to go for induction. That's different from saying: I've just had a new kitchen installed and now it turns out that I might as well replace my stove in two years’ time. When you are making choices about financing your kitchen, your house, your car, your company, you will find a bank, an asset manager or a pension fund that will say: we will help you finance your needs, but at the same time we will work with you to think about how you can make sustainable choices.’

Interview Ronald Wuijster with Management Scope

At APG we ensure that millions of Dutch people have a so called ‘income for later’. “We do this by obtaining a good return, that’s our main aim. Leading on from this we also have a second goal: to contribute as investors to a sustainable world.”, says Wuijster. “We consciously invest in leaders in the area of sustainability and in companies with the potential to become leaders in the future. If you just invest in companies that already have fantastic performances in terms of sustainability, you don’t improve the world.”

Attractive employer

This way of working makes APG an attractive employer for investors:
“Many employees find satisfaction in contributing to the pensions of millions of people and exerting influence on companies and governments to make them behave in a socially responsible manner. Our employees can work at these goals with substantial assets behind them, they can enter new markets and look for new investment possibilities with good returns worldwide.”

More comprehensive investment process

Regularly, people talk on the possible dilemma of returns versus sustainability. Wuijster says: ‘In practice we’re seldom faced with that dilemma, because we look at our investments from an overall point of view. The portfolio managers themselves take various perspectives into account in their considerations, including sustainability factors. If you look only at economic factors or cash flow, you get a good, but one-sided picture of company performance. Portfolio managers were quick to see that a broader perspective actually strengthened the investment decision. So it made our investment process more comprehensive.”

Long term

In the interview, Wuijster underlines the long term focus of APG to maximize pension value for pension funds and participants: “We still see too many shareholders and directors with a horizon of just three months. As long-term investors we believe you have to look much further ahead. We also see this too as part of our purpose: to contribute to shifting companies’ and governments’ short-term horizon.”

Wuijster concludes: “At APG we don’t invest on impulse. People sometimes think that our trading floor is powered by testosterone. In this I must disappoint them: it’s certainly not the case. We're in it for the long term.”

Read the full interview here (in Dutch)

Gerard van Olphen, chairman of the Executive Board of APG and chairman of the Task Force for Finance, responds to the Climate Agreement.

"The Dutch financial sector is positive about the draft Climate Agreement that is now ahead. In recent months, many parties have worked hard on this and that deserves much appreciation. Now it is time to take the next step to achieve the Paris climate goals together. According to the agreement, the financial sector takes its responsibility when it comes to climate change. We will invest billions more in sustainable growth and will measurably and significantly reduce the CO2 emissions from our loans and investments. So that our customers can also enjoy a financially healthy and sustainable world in the future. Promising steps have been taken with the climate agreement today. At the same time, more elaboration and realization is needed. The financial sector would like to discuss this further with all parties involved in the coming months.”

The full text of the Climate Agreement can be found on klimaatakkoord.nl (in Dutch only).

APG will leave the location Symphony Tower on the Zuidas in 2021 and will concentrate all its Amsterdam activities in the building Basisweg 10, near Sloterdijk station.

The property will be converted as from January 2019 by owner Edge Technologies into a sustainable and contemporary building. The renovation creates a modern working environment that facilitates employees better than the current working environment and invites them to work together on the main goal of APG, creating maximum pension value. Around 500 employees will move from location Symphony to Basisweg, where about 1000 employees of APG will work.

One of the most sustainable buildings in the Netherlands
Owner Edge Technologies realizes the building with a "BREEAM" sustainability certificate with the level excellent or higher so that the building will become one of the most sustainable buildings in the Netherlands, in accordance with APG's role as a responsible investor. In terms of appearance, the building will suit APG as a leading pension provider and global investor.
 

High-quality work environment
The renovation creates a modern working environment that facilitates employees better than the current working environment and invites them to work together. The working environment will be of a higher quality: different working methods (e.g. concentrated work, collaboration, agile work) will be facilitated in a flexible work concept.

Cost
Due to a lower price per sqm, a lower requirement for sqm and a lower energy consumption, APG saves an amount of € 87 million in accommodation costs over the term of the lease (17 years), which contributes to the APG goal of reducing the costs per participant.

Twelve Dutch banks, insurance companies, asset managers and pension providers (including APG) have developed a methodology for measuring the carbon footprint of their investments and loans.

This will enable them to set their own targets for helping to keep global warming within safe limits. The final report, including the methodology – the product of two years’ work – was published on 12 December 2017.

Claudia Kruse, Managing Director Global Responsible Investment & Governance at APG Asset Management says: ‘This result shows how important cooperation is within the sector. In this report we agreed upon definitions with which we can measure more accurate and compare the carbon footprint in our portfolios better. Today in Paris, we are also starting a global collaboration with investors for engagement with the global top 100 of largest CO2 emitters. We Together, we will discuss the governance and reporting of climate risks and the reduction of greenhouse gas emissions. Only through cooperation will we achieve the scale needed to tackle climate change.’’

Influencing the carbon footprint

Financial institutions can influence the carbon footprint of business undertakings. They do this by taking account of the business’s carbon footprint when they make investment decisions. And by entering into a dialogue on the carbon footprint of business undertakings in which they invest or which they finance.  

That information forms the basis of the Platform Carbon Accounting Financials (PCAF). This is one of the first initiatives in which financial institutions have worked together to reduce carbon emissions. The PCAF’s members consist of banks ABN AMRO, ASN Bank, Triodos Bank and De Volksbank, pension funds PMT and PME, asset managers ACTIAM, Achmea Investment Management, APG, MN and PGGM, and development bank FMO. At the Paris Climate Change Conference in Paris in 2015, they signed the Dutch Carbon Pledge, promising to join forces in the interests of the climate. Insurance company Achmea Investment Management joined the PCAF in 2017.

Common, transparent methodology

The PCAF members’ plan was to develop within two years a common, transparent methodology that would enable financial institutions to set targets for carbon emissions and to measure the extent to which these targets were achieved. The recently published report describes such methodologies for listed equities, project finance, government bonds, mortgages, corporate finance and real estate. The report is in the public domain. The PCAF members hope this will encourage other financial institutions to adopt these methodologies.

Unique collaboration between financials

Piet Sprengers of ASN Bank, Chair of PCAF says: ‘We have worked hard for two years and have achieved a great result thanks to the unique collaboration between twelve financials. It is now time to build on this result and really get to grips with the methodology. We are therefore going to proceed with the PCAF for another two years, so that together we can continue to encourage and inspire other institutions. Ultimately, what is important is that we use our influence as financiers and investors to help keep global warning within safe limits.’

Promoting the developed methodology internationally

PCAF’s stance is that a financial institution’s footprint reporting is a means to an end. The ultimate purpose is to allow steering towards a low-carbon portfolio in line with the Paris Agreement. PCAF continues for at least two years. The members also intend to share best practices, address dilemmas and work together on improving the methodologies. They are furthermore going to promote the developed methodology internationally. PCAF is also part of the Dutch Sustainable Finance Platform, chaired by the Dutch Central Bank (DNB).

About PCAF

Twelve Dutch financial institutions – the Platform for Carbon Accounting Financials (PCAF) – are working together to jointly develop transparant open source methodologies to measure the carbon footprint of their investments and loans. By measuring and disclosing this information they expect to develop more effective strategies that help contribute to a low carbon society, in the hope that stakeholders inside and outside the Dutch financial industry will follow suit.

About the Sustainable Finance Platform of the DNB

The Sustainable Finance Platform is a cooperative venture of De Nederlandsche Bank (chair), the Dutch Banking Association, the Dutch Association of Insurers, the Federation of the Dutch Pension Funds, the Dutch Fund and Asset Management Association, the Netherlands Authority for the Financial Markets, the Ministry of Finance, the Ministry of Infrastructure and the Environment, and the Sustainable Finance Lab. The aim of this platform, set up by DNB in 2016, is to promote and encourage a dialogue on sustainable finance in the financial sector.