Responsible investing

Can you give a financial product a color? Yes, you can. Because that is exactly what happens as a consequence of the Sustainable Finance Disclosure Regulation (SFDR). The main purpose of this EU regulation is to combat ‘greenwashing’ by financial institutions. Mirte Bronsdijk (Senior Responsible Investment & Governance Manager) explains what this regulation means for APG.

The word disclosure already indicates what these regulations aim to achieve. Financial market participants must disclose information that shows how sustainable their financial products are. “SFDR requires all financial products we offer to be classified,” says Mirte. “There are three flavors: the gray, or Article 6 products; the light green, or Article 8 products; and the dark green, or Article 9 products. These are the three levels of sustainability, from gray (not sustainable) to dark green (100 percent sustainable). Of course, there are quite a few market participants that use the term ‘sustainable investments’. But according to SFDR, you are no longer permitted to do this if your products do not comply with the strict definition of sustainable investments. If you do, you may be guilty of greenwashing.”

How does this affect APG and its pension fund clients?

“We have recently assessed all our financial products with the SFDR yardstick. These include the investment pools in which our clients participate and the investment mandates in which they invest individually. On March 10, 2021, for the first time, market participants including APG and our clients, were required to post information about the sustainability of their financial products on their websites in line with SFDR.”

SFDR has been around for a while. So what exactly is new as of January 1?

“The further detailing of SFDR ('level 2’ regulations) was still work in progress on March 10, 2021. Everything we posted on our website on March 10, 2021, was based on the ‘level 1’ regulations and on what we knew then. Between then and now, the European Commission (EC) and our regulator, the Financial Markets Authority (AFM), provided more clarity, and in mid-2022 ‘level 2’ was established. Those regulations apply as of 1 January 2023, and impose more detailed requirements than 'level 1'.”

What changed on January 1 in terms of the SFDR information on apg.nl?

“We have recently been working on a separate Asset Management environment on our website, with a dedicated section for SFDR information. This is because the regulations also clearly state that we must present sustainability information about our financial products on our website in an accessible, readable and navigable way."

In addition to preventing greenwashing, the SFDR should also make it easier to compare sustainable financial products. APG, however, has no retail clients. Who is this information intended for?

“These regulations apply both to us and to our pension fund clients. For APG, this is the first time that we have posted so much information on individual financial products on our website. One of SFDR's main goals is to prevent greenwashing. Previously, each asset manager took a different approach to presenting products as ‘sustainable’, ‘green’, ‘responsible’, and so on. SFDR defines what a sustainable investment is. However, as it is up to market participants to further flesh out elements of this definition, you still get different interpretations. Therefore, I don’t know if comparing sustainable financial products has become easier since January 1.”

How are APG’s products classified?

“APG has classified all investment pools as gray or light green. Light green, which covers the majority of our investment pools, means that an investment promotes environmental and social characteristics. Dark green products exclusively contain sustainable investments as defined by SFDR, while light green products may, but need not, contain sustainable investments. We have not yet classified any investment as sustainable, mostly because much of the required sustainability information about the investments is still lacking.”

APG presents itself as a responsible investor. So why does it still have gray products?

“For a financial product to be classified as light green, it must promote environmental and social characteristics, as well as meet minimum requirements of good corporate governance. If one or both conditions are not met, it does not meet the requirements of a light green product and must be classified as gray. Some of APG’s investment pools do not meet one or both of these conditions. For instance, because at the time of its creation, the conditions that SFDR now sets for a light green product were not agreed with the managers of the investments. Therefore, these products are classified as gray.”

 
Will the regulations also be enforced?
“In November 2022, AFM published investigations into compliance with SFDR requirements by financial parties, including asset managers and pension funds. I expect AFM to also assess compliance with the SFDR 'level 2' obligations.”

SFDR is a European regulation. What about investments outside the EU?

“The rules apply to our entire portfolio. SFDR requires us, for example, to make data available on 18 mandatory sustainability indicators for all underlying investments of all our financial products. These indicators range from carbon emissions to the gender pay gap. Of course, our portfolio is so diverse and large that it is quite a challenge to gather all the required data for all our investments. It’s not that easy to acquire information on, say, the gender pay gap at a Chinese company.

Outside Europe, rules are also being established. For example, comparable legislation is already in place in the United Kingdom, and the United States is also working on regulations. In any case, we must now proactively indicate to the companies we invest in that, as a European institutional investor, we are required to disclose sustainability information. In that sense, SFDR is a great help.”

SSE Renewables and APG have formed a consortium for participation in the upcoming 4GW IJmuiden Ver offshore wind farm zone tenders. APG, acting on behalf of Dutch pension fund ABP, and SSE Renewables aim for development of a large-scale offshore wind energy project in the Dutch North Sea. Both companies view the Netherlands as a leading market for offshore wind development, supported by ambitious targets and a strong focus on innovation.

The IJmuiden Ver tenders are for the award of permits to develop the four individual 1GW sites within the IJmuiden Ver Zone located approximately 62km off the Dutch coast. The four tenders will have a clear focus on ecological protection and enhancement in the North Sea as well as on optimal integration into the Dutch energy system. Furthermore, Circularity and International Responsible Business Conduct (IRBC) are key priorities for the Dutch government. Criteria and other elements of the procedures are expected to be published in early 2023, with the application window expected to be opened in Q4 2023.

Community involvement

The 50/50 joint venture combines SSE Renewables’ experience in developing, constructing and operating offshore wind farms with APG’s substantial investment experience in renewables and energy transition as well as its strong roots in Dutch society. Both companies have a long tradition of community involvement in their renewable energy development, as well as a track record of deploying innovative technology solutions to their projects. The companies hope to bring their solution-oriented and innovative approaches to achieve important societal goals in the Netherlands and see these tenders as a way to contribute to the renewables ambitions of the Dutch government, thus securing energy supply for Dutch citizens.

ABP is the Netherlands’ largest pension fund and is already invested in onshore and offshore wind energy. Last month, ABP announced its intention to develop offshore wind energy sites in the Netherlands. To realise this, it set up the ‘Noordzeker coalition’ to contribute to plans of the Dutch government to generate approximately 21GW of energy - approximately 75% of current electricity consumption - from offshore wind by 2030. Through Noordzeker, ABP is seeking collaboration with knowledge institutes, industry, societal organizations and national, regional and local governments. APG, in the capacity of ABP’s asset manager, will be responsible for the execution of the Noordzeker coalition goals, in which the consortium (APG – SSE Renewables) will hold a vital role.

Stephen Wheeler, Managing Director, SSE Renewables:

"I am delighted that we are partnering with APG through Noordzeker, on the upcoming IJmuiden Ver offshore wind farm zone tenders, given their significant operating experience and their wider investments in the Netherlands. Both partners are experienced innovators and committed to ensuring that offshore wind is developed in harmony with the surrounding ecosystem”

“We look forward to collaborating with APG, Dutch authorities, the industry, NGO’s and other parties concerned – to help secure energy supply for the Netherlands in these turbulent times, drive innovations benefitting energy systems integration, and to continue putting offshore wind at the forefront of fighting climate change.”

Peter Branner, Chief Investment Officer APG:

"We are very excited to partner with SSE Renewables for the IJmuiden Ver tenders next year. Their experience and expertise in participating in these tenders, constructing the assets and operating a very sizable, worldwide portfolio of offshore wind farms make them the ideal partner for APG. The consortium partners are committed to invest a large amount of capital to support the Dutch energy transition, with particular focus on ecological innovation and integration into the broader energy system. The partnership is the first step of many in realizing ABP’s ambitions through its Noordzeker initiative."

If the pace of new appointments of women to company boards in India stays as low as the last three years, it will take until 2058 to achieve 30% gender diversity. This was one of the findings of the study “Corporate India: Women on boards”. What are the reasons for this slow transition and how can the process be sped up? We asked Debanik Basu, Senior Manager Global Responsible Investment & Governance Asia Pacific at APG, who was involved in compiling the study.

"Corporate India: Women on boards" was published by Institutional Investor Advisory Services (IiAS) in partnership with APG, on behalf of Dutch pension fund ABP, at the end of 2022. The study shows that India has progressed in this area. Women accounted for just 6% of directorships on company boards in 2014, but this had jumped to 14% five years ago. At the end of March 2022, however, this figure was somewhat disappointingly only 17.6% for the NIFTY-500 companies (stock market index with the top 500 listed companies on the National Stock Exchange of India (NSE)), with growth during the last three years almost at a standstill (1% in total). And that’s worrisome, says Basu, as India is still behind more developed and mature markets in this respect, and that should change.

Why is the current pace of new appointments of women to company boards so low, compared to the years 2014-2020?

Basu: “In 2013 regulations made it mandatory for boards to have at least one woman director from 1 April 2014. In the first year the number of women holding board directorships immediately doubled from 5-6% to 11% and then increased steadily. A further impetus came when the capital markets regulator mandated companies to appoint at least one independent woman director from 1 April 2019. This reinforces the notion that the growth in women’s representation was driven primarily by regulation rather than a real acceptance of the fact that diversity in company boards creates value and improves the spectrum of viewpoints – which is going to be beneficial for the company in the long run. India is a market where voluntary norms usually don’t move the needle that much.”

Why is there no overarching acceptance by boards in India that diversity is important and must be embraced, in your opinion?

“I think it’s partly a cultural issue. Society in India, and by extension, the workforce tends to be male dominated. The men in the family usually take on the role of worker (at least at senior levels), rather than the women. The second factor is that many listed but also unlisted companies in India are family-led or family-managed. They have a generational view on business. A company is built up by a family and passed on to the children, who in turn pass it on to their children. In such cases, it’s usually the sons that come into the company and take over the important roles, like the position of the CEO or chair. The daughters really don’t get involved in the business that much, even if they are qualified to do so. When it comes to matters of leadership and succession, these societal structures take precedence rather than an objective evaluation of individual attributes and skill sets.”

“Moreover, to round this all off, there is a general reluctance to change a particular pattern or way of working. Typically, board rooms in India tend to be an old boys club and they often question the need to increase diversity when they have done quite well with the current mix of directors for years. There is little faith in both the intuitive notion that greater diversity leads to more balanced perspectives and the empirical studies which repeatedly point to a strong correlation between board diversity and company performance. Despite what companies suggest, the availability of educated and qualified women is not the issue – it is the desire to maintain the status quo which is a greater barrier. ”

Could an increase in the diversity quota be a solution to this problem?

“We believe the regulator is hesitant to do this because regulations in India in this context already go beyond what regulators in other jurisdictions have done. There’s a lot of corporate pushback against increasing the diversity quota even more and the regulator doesn’t want to be accused of overreach. That’s why this study is also important. We can use these results to engage with the Indian regulators and argue that companies might need to be pushed in the right direction a bit more. Not necessarily by a further increase in diversity quotas, but in other ways.”

Could you give an example of such an alternative?

“You could create a separate listing category for companies that go above the minimum requirements – for example, 20% or 30% of women on the board. These enterprises can then be labeled as quality governance companies, creating the potential for them to receive additional flows of capital. So you create a separate, premium category that works as an incentive for companies to bring more women onto their boards. Of course, this would require more governance-related criteria, but the diversity threshold could be one of them.”

The study says that the upcoming ‘Board Refresh’ in 2024 will be a one-time opportunity for Indian companies to rebalance the gender diversity scales. Why is that?

“In 2013/2014 a unique piece of legislation was adopted, which stated that independent directors could have a maximum tenure of ten years, after which they needed to step down. It also stated that this tenure started from 2014. So in 2024 a lot of tenured directors will have to be replaced by a group of new directors. When we ask companies to increase their board diversity, they often say: ‘please wait for the director to step down, because we can’t ask someone to leave and make place for a woman and we can’t extend our board, because it’s already too large’. Therefore, it is important that women are well represented in this group of new independent directors in 2024. If we miss this opportunity, at the current pace of change, it will probably be a long time before we see substantial improvement.”

547 Billion Euros. That is APG’s total invested assets worldwide (end of November 2022).  The goal: a good pension in a sustainable world for the funds’ participants. Naturally, the portfolio is broad. From investments in wind farms in Zeeland (NL) to shares in international hotel chains. And from safe bonds to the more volatile trade in gold or soy. Who are the people behind these investments? What drives them? What choices do they make? And why?

In this episode: Michael Neft, head of Focus Equities.

Promoted from within the team, Michael Neft started as head of the Focus Equities team at the beginning of October 2022. The Focus Equities portfolio currently consists of 35-40 companies, which is supposed to grow to 40-50. The investment strategy is to take large stakes in a limited number of medium-sized, listed companies with a holding period of at least ten years. The goal is to be one of the top active shareholders in the company, because it gives the team a seat at the table with the company’s management. The idea is to move the companies from “good to great”. To achieve this, regular and in-depth discussions are held with company management about improvement opportunities, including on sustainability practices and performance.

The investment horizon of the Focus Equities strategy is quite long. To what extent do current developments, like the hefty inflation, have an impact on your portfolio?

“Apart from rebalancing the portfolio to maintain the strategic allocation, with the rising interest rates we’ve seen a trade out of quality. Quality stocks are out of favor at the moment and that certainly has been a headwind for the portfolio. But it doesn’t change our strategy.

We like to invest in companies with pricing power. So we’re confident that all our companies will be able to recapture inflation in their prices – otherwise we wouldn’t have invested in them. And if they make a strategic decision to keep prices low to gain market share, we have to be on board with that decision. It depends on the market circumstances.”

And what is the more direct impact of the energy crisis on the Focus Equities portfolio?

“We’ve spent a lot of time with companies trying to understand how secure their energy supply is. But in the end we look at it as a shorter term concern. If a company would be hit by the energy crisis, it could even be a buying opportunity for us, as long as we think there’s no structural change in them being able to get the energy they need to operate their business. We’re concerned with structural changes, not cyclical ones.”

How do you find and use investment opportunities that others do not see?

“First of all, our long term investment horizon gives us an advantage over investors that are driven by short term results. We don’t care about quarter-to-quarter results, or even year-to-year figures. We care that the company we invest in is going to be around for the long term. To select those companies, we do a very thorough due diligence, which can take from nine months to two years – during the pandemic it was more difficult, because we always want to meet in person with company management. In our analysis we really focus on the qualitative side of it. We talk to the company’s management and board, to industry experts and we even hire external consultants to do deeper dives on accounting and legal matters. We visit industry conferences, too. And we keep on doing these things after we’re invested in a company.”

What kind of individual does it take, to function in the Focus Equities team?

“You have to understand quality. We see a lot of candidates that look at companies quantitatively. But it’s not only about margins and that requires intellectual curiosity and a critical, somewhat cynical attitude. If you’re not genuinely interested in a company or sector, you won’t be able to ask the right questions. To be in the team, you also have to be willing to spend the time that is necessary to analyze a company. Sometimes it also requires a strong stomach. Because markets move fast. You have to know that a stock is going to get hit and resist the temptation to act in the short term.

You also have to like working within a team structure. You’re going to work with at least one, if not two other people on every stock. A lot of people in the financial world are very independent. They just want to go and put in their trades based on the research they’ve done and make a decision they are comfortable with. That’s not the way we work. Every decision here goes through a process involving the entire team. Your idea may get voted down, while you still think it’s a great idea. Every name that gets pitched you have to ask questions about, you have to be comfortable with, you have to vote on admitting it to the portfolio. So in that way everybody owns every name in the portfolio.

Therefore, you’re not evaluated on the names you’ve pitched or the names you’re primarily responsible for. Everybody is evaluated on the entire portfolio performance. It takes individuals who are comfortable with that, to really make it work.”

Of the companies you look at, which share do you actually invest in?

“Our job is mostly rejecting names. Any name is always looked at by at least three people. If they think it’s a good idea to invest, it is presented to team. But the idea could be killed anywhere in the process – also due to reputational risk. That doesn’t mean that we’ll never invest in the company. Sometimes we go back to a name that we rejected first, and decide to invest because the circumstances have changed. But we always have to really understand what the company does. We will never buy a black box. With a portfolio like this, the risk would simply be too high. Of course, we want to beat the benchmark, but at the same time we do worry about capital preservation. We’re not here to take bets.”

How did you get into investment management?

“After doing my undergraduate at Connecticut College I went to law school at NYU, where I worked on family law. When I graduated I couldn’t find a job that I really liked. I ended up taking a temporary job in sports journalism, at The Associated Press. I worked at the new media division, basically sports for internet sites. I stayed there for eight years, of which I ran the department for four years.

For most of my life, my two biggest interests had been sports and stocks. I had never really paid much thought to working in either of these sectors. I had always considered them as hobbies, not as full-time jobs. My work in sports at The Associated Press was fantastic. But since I’m not a journalist, there’s a limit to how far I could go in a news organization. The opportunities to, for example, work for a sports team, are very limited. That’s why I decided to pursue my other main interest – stocks – and that’s the reason why I went to get my MBA at Wharton business school, at the University of Pennsylvania. As part of that, I did an summer internship at Wellington Management in Boston, worked full-time for Wellington for three years and realized: this is where I really want to be.”

This month, it was announced that Hungary was waiving its veto power within the EU, which threatened to block 18 billion euros in loans to Ukraine. During the same period, it had already come out that four parliamentarians had been expelled from the European Parliament’s Social Democrat group over suspicions of corruption. If Europe is showing anything now, it is that anno 2022, you can no longer get away with old-fashioned and corrupt cronyism, Johan Barnard, head of International Public Affairs at APG contends.

In September 2022, the European Commission proposed to freeze €7.5 billion in EU subsidies to Hungary. The reason: concerns at the Commission about corruption and procurement by the Hungarian government. To avoid an automatic 70 per cent cut in the outstanding amount, it was important for Hungary to get its 'recovery plan' stamp of approval from Brussels before the year end. In addition, Hungary risked missing out on €5.8 billion from the EU’s Covid recovery fund. To claim money from this fund, member states must show in a recovery plan how they will spend it. But in Hungary’s case, this includes conditions on strengthening the rule of law. The deadline given to Hungary for approval of its plan by the other member states in the Council of Ministers was 19 December. After that date, large amounts earmarked for Hungary could no longer be frozen.

Two hostages

It had been clear for several months that a decision had to be made on the conflict between Hungary and the rest of the EU. However, the other EU countries put off that decision for a long time and, with the deadline approaching, the pressure increased. Under this pressure, the Hungarian government made a mistake in my view. At Ecofin, the meeting of European finance ministers, Hungary blocked through its veto power two decisions that require unanimity: a decision on EUR 18 billion of loans to Ukraine and a decision on the implementation of a global deal on a minimum corporate tax rate. With these two “hostages”, Hungary hoped to force a better deal at the level of government leaders, compared to the EC proposal to freeze €7.5 billion.

No blackmailing
However, the other 26 member states - including Poland, which has blocked sanctions against Hungary with some regularity in recent years - did not allow themselves to be blackmailed. On Friday, December 9, a legal solution was found so that 26 member states could still go ahead with support for Ukraine. Normally, such loans are guaranteed from the EU budget. However, this requires a unanimous decision of the member states. To get around this, the other 26 member states chose to issue such a guarantee from their individual member state budgets. In that case, only a majority in favor and, of course, the consent of each member state providing a guarantee is needed. As a result, Hungary could only block its own very limited portion of the total aid to Ukraine. The vast bulk of the aid came from the other 26 member states. Thus, Hungarian Prime Minister Orbán’s main “hostage” was freed. The issue of the minimum tariff can be resolved in a similar way. For procedural reasons, it does take more time, but it is possible.

So, on Monday, December 12, Hungary actually stood empty-handed. Moreover, by attempting to block financial aid to Ukraine, it had now also irritated big brother Poland. After all, Poland favors a hard line against Russia. Orbán had little choice but to abandon his blockade attempts. The ministers of the other member states then decided to offer Orban a small way out, by blocking just a little less budget money (6.3 billion euros) than originally proposed. They also approved the Hungarian “recovery plan” so that there would be no lapses from it. The condition is for Hungary to implement a long list of demands aimed at improving the rule of law. This effectively keeps the pressure on Hungary almost entirely, but gives it a small portion of the money to save face. With Hungary’s public finances in bad shape, Orbán desperately needs that money, so he will have to speed up that improvement in the Hungarian rule of law.

Corruption Investigation
All in all, quite a complicated story, which has led to many different conclusions in the European press about who “won”. But I’m sticking with the European Commission, the European Parliament and the 26 member states. And above all, Europe as a whole won, because in order to maintain a strong European Union there must be fair competition and a good investment climate in all member states. Without the rule of law, this will not happen.

At the same time as the Hungarian issue, attention in Brussels is being claimed by the spectacular Belgian corruption investigation in the European Parliament. It seems that the Greek Social Democratic Vice President (one of 14) of the European Parliament, Eva Kaili, has allowed herself to be bribed by Qatar. The fact that a big riot has arisen over this is justified, of course. It is scandalous; let there be no misunderstanding about that. At the same time, we have to put it in perspective. Kaili's fall is fast and deep, and for now it seems to be a spectacular incident rather than a real pattern. Moreover, the Belgian investigative authorities and the leadership of the European Parliament have worked together quickly and effectively to get to the bottom of it.

The EU’s response to Orbán’s blockade attempts and the cooperation between the Belgian judiciary and the Parliament show: anno 2022, you can’t get away with old-fashioned and corrupt cronyism in Europe anymore. As far as I am concerned, this is good news to go into the Christmas season with, in the hope that significant improvements are coming.

524 Billion Euros. That is APG’s total invested assets worldwide (as of October 2022). The goal: a sound and sustainable return for the funds’ participants. The portfolio is obviously broad. From investments in wind farms in Zeeland to shares in international hotel chains. And from safe bonds to the somewhat more fluctuating trade in gold or soy. Who are the people behind these investments? What drives them? What choices do they make? And why?

In this episode: Vincent Fokke, Head of Listed Real Estate Europe.

There are few sectors that are not being affected by the energy crisis and skyrocketing inflation. The Dutch real estate sector is not escaping these effects either. High interest rates have caused the real estate market to stagnate. The number of transactions is declining because there is a significant gap between requested sales price and offered purchase price and, according to Fokke, this phenomenon is occurring worldwide.   

Can you explain how the current situation in the real estate market came about?

“Until recently, we were in a long-term cycle in which interest rates were mainly declining for the past 20 years and there was practically no inflation - in some parts of the world even deflation. Now inflation has risen sharply and central banks are trying to ensure, through hefty interest rate increases, that that currency devaluation will not continue. When assets become more expensive, it comes at the expense of returns and real estate depreciates. And that is currently occupying a lot of minds.”     

As an investor, how do you deal with the uncertainty of a crisis situation like this?

“I started in the real estate investment sector in 2007, as a junior analyst. That was right before the global credit crisis broke out, so I just barely experienced the peak of the stock market boom. The financial sector really had to struggle through that crisis. I learned a lot from that and since then there has never really been a quiet moment. In late 2009 there was the European sovereign debt crisis, in 2016 Brexit presented itself and recently, capital markets have been shaken up during the Covid pandemic. Looking back, the timing of my entry into the sector has proven valuable. The insights you gain during those earlier peaks and valleys in financial markets help you make sense of the current situation. The dynamics you experience shape you as an investor.”

Can you give an example of what you learned during those crises?

“It is important to ask, especially with intense market developments: have we seen this before? Are there parallels with developments that have troubled capital markets in the past? In the stock market boom just before the credit crisis began, for example, you saw increasingly irrational investment behavior, where you really asked yourself: how is it possible that market participants are still willing to pay sky-high prices for certain assets?”

And that history repeated itself?

“Yes, in the last two years we have seen the same thing, with some companies using more and more leverage - an increasing amount of external financing, to boost returns. That works well as long as interest rates stay low, but now that interest rates are rising fast, debt financing is becoming a lot more expensive. As a result, the profits of these types of companies are under considerable pressure and they are in trouble. As investors, we are therefore concerned that the companies we invest in have a sustainable balance sheet structure. Paying attention to this is an important part of our investment process.

Another example is that almost every crisis has a credit crunch at some point, where liquidity (the extent to which a company can meet its short-term payment obligations, ed.) becomes a major issue - as during the credit crisis. Currently, we are seeing a number of cases where companies no longer have access to the bond market, forcing them to sell real estate properties to meet their payment obligations. When this takes on larger forms, it can lead to quite a significant market correction. That kind of development in the capital market is a signal for us to be cautious - for example, when it comes to new investments, or the amount of leverage we use in an acquisition.”

What are important trends that you and your team are leveraging with real estate investments?

“Megatrends are an important driver in all the investments we make. Take more extensive urbanization, for example. We therefore seek exposure to properties in large cities whose value we believe will increase over time due to increased urbanization, such as residential portfolios or distribution centers for the last mile (the last piece of transport in the process of delivering goods to the customer, ed.). We are also responding to demographic and social trends, such as rising life expectancy, the development of smaller households and an aging population. You can think of real estate that allows the elderly to live independently for longer, thanks to extra service facilities.

Another important megatrend we are responding to is climate change and resource scarcity. We use our influence to develop market-wide sustainability standards for real estate - such as GRESB - and set high sustainability requirements for our own real estate investments. Not only to make a sustainable contribution, but also because we are convinced that sustainable real estate is better able to - continue to - meet the expectations of users.”

How did you get into the world of real estate investing?

“I have always followed my interests, convinced that this way you automatically end up in the right place. During my doctoral studies in economics, I noticed I had an increasing affinity with financing and investments. When I came into contact with the field of real estate investment, it was like a piece of a puzzle that fell into place. I really like the process of arriving at business valuations. The fact that it involves real estate makes it tangible for me. With real estate, you can get a feeling, you can walk around in it. Then I did my master’s in Real Estate Science, which focuses specifically on real estate investment. Because of that, the transition to my first job wasn't very big either. I already had a pretty specific idea of what I wanted.”

You are now Head of Listed Real Estate Europe. What challenges does that bring?

“In my current role, I can combine macroeconomic forecasts, central bank interest rate policy and all sorts of other capital market-driven aspects with my knowledge of specific real estate markets. Quite apart from the current market turbulence, this is an interesting challenge in itself. In this work, the physical markets of real estate come together with capital markets. In that place, I feel like a fish in water.

Over the past 15 years, I have seen APG’s real estate investment process evolve tremendously. The current process is very data-driven and heavily based on fundamental analysis (fundamental analysis is a technique for calculating the true underlying value of a stock based on publicly available numbers, ed.). Moreover, the team responsible for this has continued to distinguish itself.”   

In your view, what is it that sets APG’s real estate team apart?

“We have a global team of 60 professionals with deep-rooted expertise, investing locally in real estate at our offices in Amsterdam, Hong Kong and New York. We believe that real estate markets are very much driven locally. Having the right local contacts and networks is therefore essential. To optimize the global investment portfolio, we combine this local knowledge with top-down insights. 

We invest in both listed and unlisted real estate and both equity and debt. Listed investments require different networks and competencies than private real estate. What particularly distinguishes our team is that we have both types of professionals and they collaborate intensively. This allows us to combine those complementary competencies and networks. This also gives us a wider range of opportunities to put together an investment portfolio and we can arbitrage (respond to valuation differences, ed.) between listed and private real estate markets. For example, if market participants are desperate for liquidity and therefore want to dispose of real estate quickly, this can lead to valuation differences of listed real estate compared to private real estate. We actively take advantage of such moments.

Last but not least: In APG’s investment process, a company's score on sustainability, social aspects and corporate governance, plays a hugely important role. It is important to us to act as an active shareholder and use our influence to create positive impact.”

Facts & Figures

What type of real estate does APG invest in?
APG invests in a highly diversified global portfolio with investments that include: residential, logistics, office, retail, outlets, hotels, healthcare real estate, self-storage and student housing. The investment portfolio is largely invested in equity but also has positions in debt investments.

For how much?
The scope of global real estate portfolio is 53 billion euros (about 9.7% of total invested pension assets).

What does that provide in terms of returns?
2017 +3.4%

2018 +3.3%

2019 +18.4%

2020 -10.2%

2021 +23.0%

Together, construction and the built environment account for more than a third of global energy consumption and CO2 emissions. That is why ANET - the fund with which APG, on behalf of pension fund ABP, wants to stimulate the energy transition in the Netherlands - invests in VIKTOR. Thanks to this software platform, engineers can easily design a custom software application to make their projects more efficient and sustainable.

The software platform VIKTOR enables engineers to create custom applications that help reduce material use and CO2 emissions on the construction site. Designing an application is simple, so engineers only need limited ICT knowledge to work with it. For example, companies that already use VIKTOR today were able to plan the best location for wind farms and the optimal foundation for wind turbines. This demonstrably reduced the number of transport movements and meant that less concrete and other raw materials were needed.

Longest immersed tunnel in the world
A good example is the construction of the Fehmarnbelt tunnel between Germany and Denmark. This tunnel, 18 kilometers long, will consist of a four-lane highway and two electrified railway lines. With VIKTOR, substantially less steel is used during the construction of this longest immersed road and rail tunnel in the world. This saves the emission of thousands of tons of CO2 for the production of the steel."In addition, VIKTOR contributes to greater efficiency through the digitization of project processes in construction," says ANET investor Rutger van Wersch of APG.

VIKTOR is currently already working with companies such as Arcadis, Heijmans, Boskalis, VolkerWessels, Ballast Nedam and BAM. ANET and two other parties are now making a capital injection of 5.1 million. Van Wersch: 'The following applies to the energy transition: all hands on deck. All possible means must be used to achieve the CO2 targets: from more education to wind turbines and from faster permits to software applications.'

With the investment, VIKTOR will mainly further expand the international company base. In addition, the platform will be made accessible to any engineer, with the goal that the app will have a total of 100,000 users in two years.

This investment is made by APG through the ABP Netherlands Energy Transition Fund (ANET), which was set up specifically for investments in projects and companies that focus on innovative solutions for the energy transition. With ANET, ABP is fulfilling the commitment of the financial sector, including the pension funds, to contribute to the financing of the energy transition in the Netherlands. ANET focuses on three parts of the energy transition, namely energy generation, distribution & storage and efficient use of energy. The investment in VIKTOR mainly relates to that last element.

For more information: VIKTOR: Build and share awesome engineering apps with Python

APG won two Awards for its investments in, respectively, Real Estate and Private Markets at the Investment & Pensions Europe event in Rotterdam. Katherine Kucherenko, investment specialist at APG Asset Management, accepted the awards in front of several hundreds of pension investors from all over Europe.

“The bottom-up fundamental research in combination with a top-down vision on mega trends is outstanding, while the strategy proves that ESG and performance can go hand in hand’, the  expert jury commented when awarding the prize for Real Estate to APG. 

“We are honored with this award. It is a wonderful appreciation for the hard work of our team and our distinctive, data-driven globally integrated strategy, which is indeed characterized by a strong focus on responsible investing. We look forward to building on this success and continuing to serve our clients and their participants in the coming years,” said Rutger van der Lubbe, Head of Global Real Estate Investment Strategy at APG Asset Management.

“APG is principled and clear-sighted in its approach to investing in real assets and infrastructure. Its longterm perspective and track record – and what phenomenal returns – highlight its success”, stated the expert jury when presenting APG the Award for Private Markets.

“We would like to congratulate all award winners and are delighted with the Private Markets award we have received. It emphasizes the progressive position of our organization and teams within this segment and the contribution we make in the field of ESG integration. Investments in this category fit in well with our clients' long-term commitments and, in addition to an attractive risk-return profile, explicitly offer the opportunity to make a relevant societal impact for our pension fund clients and their participants," says Patrick Kanters, Managing Director Private Investments at APG Asset Management.

For the first time, APG aims to participate in the development of a large offshore windfarm from scratch. Noordzeker, a consortium that is being created on behalf of ABP, is preparing a bid on up to four lots in the North Sea.  

A huge windfarm will be developed off the coast of IJmuiden (Netherlands) as part of the Dutch government’s ambition to massively expand offshore wind energy. IJmuiden Ver (IJVER) will be divided into four lots, which are to collectively generate 4 gigawatt (GW) of clean electricity – enough to power more than 5 million households. In line with ABP’s ambition to invest in the Dutch energy transition, APG is setting up a consortium to participate in the tender and play a leading role in the further development of North Sea wind energy.

New approach

 “We have of course invested in wind energy before, both on land and offshore, also in the Netherlands,” says Bart Saenen, Senior Portfoliomanager Infrastructure. “But this will be the first time we will be participating in all phases – tender, development, construction and operation – of an offshore project. To this end, we are teaming up with a leading renewable energy developer. We are excited to take on a prominent role in realizing the Netherlands’ offshore wind energy ambitions on behalf of ABP and its beneficiaries.”

The Dutch government recently announced plans to massively expand wind energy production on the North Sea. In 2030, North Sea wind should supply 21 GW or about 75 per cent of current Dutch electricity consumption and this is scheduled to grow to approximately 70 GW by 2050. Prospective sites for the development of windfarms are to be auctioned in stages – with the IJVER lots up for auction in 2023. Tender conditions incorporate both a financial component and qualitative criteria relating to, among other things, system integration and ecology.

Spur innovation

“The Dutch government wants to spur innovation to find and scale-up solutions for system integration and to tackle ecological challenges,” Bart says. “Building a windfarm is one thing but we also need to balance the supply of and demand for wind energy, for instance by integrating battery storage and using hydrogen as an energy carrier. The construction and operation of windfarms also impacts bird and marine life. Noordzeker will work with Dutch research institutes, universities and environmental organizations to find ways to reduce negative impacts and even strengthen eco-systems.”

The competition is likely to consist of large windfarm developers, energy utilities and oil & gas companies. “The Dutch government has announced that qualitative criteria on system integration and ecology will  play an important role in the tender process,” Bart explains. “Together with our partners in Noordzeker we will be able to make a unique offer based on our long-term commitment to the Dutch energy transition and North Sea offshore wind, our successful track-record of building strong long-term partnerships and APG and ABP’s firm roots in Dutch society.”

Financial and societal returns

Investing in the development of North Sea windfarms is expected to provide good and stable returns for ABP’s participants – especially since we are investing for the very long term. And it provides important societal benefits, as ABP also points out. “We invest Dutch pension assets and combine forces with Dutch and European companies to enable offshore energy production. We thus contribute to a reliable and sustainable energy supply for Dutch households and companies. That is good for the pensions, our climate, energy security and employment.”   

Interested parties need to submit their bids by the end of 2023 and selection is expected to take place in 2024.

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.

In approximately two months, the world population will reach 8 billion people. With $ 125 trillion in assets under management, the top 400 leading financial institutions can have an important impact on their lives and the world they live in. But with little time left to turn the tide, it is crucial we join forces - not only with our peers and in our own financial habitat but also and especially with NGOs, governments, science, and society, says Ronald Wuijster, CEO of APG Asset Management.

On 9 November, the World Benchmarking Alliance published the Financial System Benchmark, ranking the 400 most influential financial institutions on their contribution to achieving the SDGs. APG and our largest pension fund client ABP have been allies of the World Benchmarking Alliance for years. Obviously, we are proud that we are the second highest-ranking pension fund investor and that we are in the 30th overall position in this benchmark. It is nice to be acknowledged for our efforts to invest responsibly, respecting planetary boundaries and human rights. At the same time, an average score of 31 points out of 100 tells us that we still have work to do, with little time left.

Emerging markets face disproportionate climate risks

The presentation of the Financial System Benchmark was at COP27 in Egypt, Africa. And that had a reason. Despite its low contribution to greenhouse gas emissions, Africa is highly vulnerable to climate change, as are many emerging countries. As financial institutions, we can help mitigate this, but we need to join forces. It is cooperation that can make change happen.

Investing hundreds of billions on behalf of our pension fund clients, we want to take significant steps to make this happen by allocating more capital to the Sustainable Development Goals in emerging markets. After all, they offer most growth potential for sustainable development. However, it can be challenging to find investment opportunities there because of the accessibility of the market, the relatively small size of the SDG projects, and the higher risk compared to, for instance, Europe and Asia.

We need to join forces

Innovative investment solutions are necessary. In January 2022, we were the first to invest in the ILX Fund, with a USD 750 million commitment on behalf of pension funds ABP and bpfBOUW. This fund is a way to finance specific responsible investment opportunities in emerging and developing economies. But we need to scale up. And for that we need the help of governments, for example by providing investors with first-loss guarantees or opening up the market. Together, we can unlock private capital and speed up the realization of the Sustainable Development Goals.

This does not only apply to emerging countries: it applies to the whole world. The Emissions Gap Report 2022, dated October 27, 2022, is very clear: "Only an urgent system-wide transformation can avoid climate disaster." This report also includes an entire chapter about the importance of the finance system: chapter 7, 'Transforming the finance system to enable the achievement of the Paris Agreement.'

The way forward is unity, partnerships, and collaboration. Not only with our peers and in our financial habitat but also and especially with NGOs, governments, science, and society. We need to meet our counterparts. A one-on-one meeting with the CEO of Greenpeace Netherlands, Anna Schoemakers, made me think. Our differences were far more minor than I ever anticipated - our similarities and common goals far greater. At APG, we started with 'the Reflection Board,' a group of challengers of our board, with people like Gerbrand Haverkamp, the CEO of the World Benchmarking Alliance, and Rutger Hoekstra, associate professor at Leiden University and author of ‘Replacing GDP by 2030’. They do not spare us, fortunately. Together we are trying to bridge the gap.

Ronald Wuijster is CEO of APG Asset Management

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.”

Annual general meetings (AGMs) and voting on agenda items are key events in every shareholder’s calendar. But what is the function of an AGM? Why is voting so important? And how does a major shareholder like APG manage the logistics of voting the shares it holds on behalf of its pension fund clients?

Senior Responsible Investment and Governance specialist Mirte Bronsdijk gives us a refresher course on the world of AGMs and voting and explains why the new voting platform which was developed together with APG’s proxy voting service provider, is so important.

First let’s go back to the basics: what is an AGM and why is it held?

“An AGM is the only time in the year when company representatives officially ‘meet’ the shareholders. Holding an AGM is mandatory, and they normally occur within six months of the end of the financial year. At the meeting, directors share the past year’s business performance and present the outlook, including new strategies or policies. Shareholders have the opportunity to ask questions and then vote usually on a number of standard agenda items such as the election or re-election of directors, approval of directors’ remuneration and the payment of the dividend. Shareholders also have the right to vote on matters that directly affect share ownership, such as stock splits, share buybacks or a proposed merger or acquisition.”

Are AGMs really important or just a formality?

"The AGM is a key event because it is the only time shareholders can vote and thus directly influence a company’s behavior. Although some agenda items may not seem significant, indirectly they can strongly impact how a company operates and shape its future policy. For example, at APG, we might vote against new board members if their appointment does not contribute sufficiently to diversity, or against a remuneration policy that fails to incorporate sustainability criteria. In this sense, voting is a very powerful tool. As an active investor, we exercise our right to vote wherever possible for all the companies in which we invest on behalf of our clients.”

Why has APG developed this new voting platform?

“In 2021, APG voted at over 5,000 shareholder meetings all over the world and on more than 53,000 individual proposals. This is basically why our new voting tool is so important – we vote at so many meetings on so many topics it provides more transparency on the details and enables users to look at and analyze voting data in numerous ways. The search function enables the information to be filtered by meeting date, company name, sector and market as well as giving statistics on how we voted on specific agenda items. For APG, it is also vital to be transparent on how we carry out these important stewardship activities on behalf of our clients.”

Does every shareholder attend the AGM?

“No, not every shareholder attends the meeting. And you don’t have to physically attend to vote. In the past, more shareholders– both institutional and retail – used to attend AGMs in person. However, since the pandemic a new trend of holding virtual AGMs or in some cases hybrid versions (online and in person) has become increasingly common. For a large investor like APG, physically attending many meetings is just not feasible as we hold shares in thousands of companies and vote on behalf of multiple clients. This is one of the reasons why we employ the services of a proxy voting service provider which allows us to vote AGMs by proxy.”

How do you cast your vote at an AGM and how do you know what to vote on?

“If you attend the AGM in person you can vote ‘live’ during the meeting. For the AGMs we don’t attend in person, we can find the agenda and the voting items in our online voting system. In such cases we submit our votes in advance. APG’s voting decisions are based on expectations set out in our Global Corporate Governance Framework where we explain our underlying corporate governance principles, how we meet our investor responsibilities, and how we vote on main AGM agenda items for the shares we hold in our portfolio.”

What exactly is proxy voting?

“The term proxy vote refers to a ballot cast by an individual or company on behalf of a shareholder who cannot attend the AGM in person. Shareholders receive a proxy ballot that enables them to let someone attending the meeting vote on their behalf. A proxy can either be instructed on how to vote or can be given the discretion to vote as they see fit. Companies that manage billions of euros worth of assets like APG usually outsource most of their operational voting to proxies. We use proxy voting for well over 95% of our voting activities. Our proxy voting service provider votes on behalf of our clients in accordance with the detailed guidance laid out in their voting policies.”

Are you obliged to vote as a shareholder, and can you vote even if you only own one share? “Every shareholder has a right to vote irrespective of the number of shares they own. But it is normally one share, one vote; so small shareholders have less influence. Shareholders can also choose not to vote if they don’t want to, or they can abstain if they want to show that they have made a conscious choice not to support or vote against a specific agenda item. The number of APG abstentions and the percentage of votes for and against management proposals can also been found in the voting platform. In 2021, we abstained on 1520 proposals and did not vote on 44. Overall, we voted in line with management recommendations in 80% of cases and against them for the remaining 20%.”

Can shareholders join forces and align votes to support or block a proposal?

“If shareholders are not satisfied with a specific decision, they can – within the legal boundaries – convince others to join them in voting for or against a specific proposal from company management. But a shareholder or group of shareholders can also put forward their own proposal or resolution. These can attract a lot of attention, also from the media, and often have an ESG angle, dealing with issues ranging from compensation and labor relations to animal welfare and climate. The voting platform also enables users to look up by company how APG voted on any specific proposal – management or shareholder. For example, in 2021, we voted on 44 Shell agenda items, 2 of which were shareholder proposals. And at Shell’s 2022 AGM, we supported the shareholder climate resolution put forward by Follow This.”

Are there any plans to further develop the voting platform?

“Although we are already reaping the benefits of the new voting platform – all the statistics in this interview were quickly sourced using it – we do want to develop it further. As this information is just as important for our clients, we have also developed similar individual platforms for ABP, bpfBOUW and SPW which will go live soon. Another element we would like to incorporate are explanations as to why we voted against specific proposals to give greater insight into how we implement our clients’ voting policies in practice.”

The voting platform can be found on the APG website by scrolling down to the bottom of the page under Policies, Guidelines and Reports on Responsible Investment.

Or directly accessed via this link: VDS Dashboard (issgovernance.com)

Self-storage asset class in Asia has strong tailwinds, resilient cashflow and abundant growth potential

APG Asset Management N.V.(APG), the investment manager for the largest pension provider in the Netherlands, and CapitaLand Investment Limited (CLI), a leading global real estate investment manager with a strong Asia foothold, have entered into a joint venture to establish an Asia-focused self-storage platform.  APG and CLI have committed an initial equity investment of S$570 million with an option to increase their investment up to S$1.14 billion, in the proportion of 90:10, to fund the acquisition of Extra Space Asia (ESA) and its expansion needs. Post acquisition, the company will be re-positioned into an operating company/property company structure to facilitate future expansion.

ESA was founded in 2007 with two facilities and has since grown into one of the region’s largest self-storage businesses with about 70 owned and leased facilities across six Asian gateway cities – Hong Kong, Kuala Lumpur, Seoul, Singapore, Taipei and Tokyo – with more than 70% of its net property income being generated in Singapore.  The portfolio comprises more than 1 million square feet of net lettable area with an occupancy of over 90%.  The acquisition of ESA comes with an experienced management team holding a proven track record in sourcing and managing quality self-storage facilities.

The self-storage industry in Asia is supported by strong fundamentals such as high urbanisation rates, high population density, an increasing proportion of renters and an explosive growth of ecommerce.  With much lower penetration rates compared to the more mature self-storage markets in the USA and Europe, there is a long growth runway for self-storage platforms in Asia.

APG and CLI were attracted by the sector’s strong fundamentals, growth potential and belief that the fragmented nature of the sector in Asia presents opportunities for consolidation.  The acquisition of the ESA portfolio will allow APG and CLI to achieve immediate scale across key Asian gateway cities with strong presence and brand recognition.  The platform has also been allocated capital for expansion and will benefit from CLI’s global ecosystem of assets, customers and digital platforms to expand and grow the business.

Mr Graeme Torre, Head of Real Estate for APG Asset Management Asia, said: “The self-storage sector is ideally accessed at scale and with local execution capability.  This new partnership immediately offers us both.  On behalf of our pension fund clients, we are delighted to be partnering with CLI and the ESA team to expand this platform throughout the Asia region.  This asset class is fully aligned with the theme of urbanisation, which has been one of our core investment beliefs for many years and is a key tenet of our environmental performance aspirations.”

Mr Patrick Boocock, CEO of Private Equity Alternative Assets, Real Assets, CLI, said: “Self-storage is one of the alternative asset classes that has remained impressively resilient during the pandemic and looks set to continue benefitting from strong growth tailwinds supported by favourable demographics and lifestyle trends in Asia.  This is an opportune time to enter the emerging sector with a new platform that will augment CLI’s funds under management and fee-related earnings.  We view the self-storage platform as an extension of CLI’s logistics platform, well-positioned to capture the increasing demand for flexible storage and last-mile delivery requirements in tandem with the growth of ecommerce.”

Ms Patricia Goh, Managing Director, Southeast Asia, CLI, said: “As CLI grows as a real estate investment manager, we are pleased to embark on this strategic partnership with APG.  CLI and APG are fully committed to the vision of creating a dominant Asia-focused self-storage platform that delivers long-term sustainable value to investors.  Both parties will leverage each other’s strengths to grow this platform, with CLI contributing our expertise in fund management and operational know-how to manage the platform.  With the foothold gained through acquiring ESA, we will next look at scaling the platform through mergers and acquisitions as well as conversion of existing assets into self-storage facilities.” 

Has interest rate development reached its peak? That is a prediction APs chief economist Thijs Knaap does not want to make. As long as inflation is high, you will also see high interest rates. In terms of macroeconomic growth, however, things are against us, and when growth declines, interest rates often decline with it. So those two factors work against each other. Which one is stronger remains to be seen, Knaap thinks.

Other topics discussed during BNR Nieuwsradio’s investor panel included the decision by flash trading company Flow Traders to legally establish itself in Bermuda and the reorganization of Philips, which is cutting 4,000 jobs, including 400 forced layoffs in the Netherlands. The company is under pressure, due to a costly recall of its sleep apnea devices, but says it is also suffering from macro-economic developments.

Canary
Knaap: “We know that at some point, macroeconomic problems are going to affect corporate profits. So, the question is: Is Philips the proverbial canary in the coal mine? If you look more broadly at companies’ third-quarter results, you see that while sales are still rising, profits are falling, due to rising prices. This is especially true in Europe, and the decline is stronger than expected.”

As usual, the panelists were also asked about a recent investment transaction. Knaap: “We recently acquired a 49 percent stake on behalf of ABP in Gemini, a solar power project currently under development near Las Vegas. The project will provide energy for more than 400,000 households at peak times.”

Listen to the entire broadcast here (in Dutch).

APG acquired a 49% equity stake on behalf of ABP in Gemini, a solar power and battery storage project currently under development in the Mojave Desert in Nevada, USA. Sean Hannon and Ellen Bizon, senior portfolio managers on APG's Infrastructure Americas team, talk about what this investment says about the future of renewable energy and storage in the US, and the role large investors play in that.

Gemini is the largest solar-plus-storage project currently under development in the US. Everything about is huge. At its heart is a 690 MW solar array with over 2.5 million panels and a 380 MW battery system. The project covers 10 square miles. Every year it generates 2,200,00 MWh of renewable energy. The project created 2,500 jobs during construction and is projected to bring over $450 million of financial stimulus to the regional economy. It's safe to say this is not only an investment in just an asset but in the US energy transition itself. “We have a firm belief that renewable sources will play a very large role in the US energy transition”, says Sean Hannon.

Why should Dutch pension money be invested in the US solar market and in the US energy transition?

Sean: "The energy transition is a global issue, that requires global solutions. A ton of carbon that we can prevent from entering the atmosphere helps people everywhere. The solar resource available in the Western United States, where Gemini is located, is not only strong, but also predictable which makes these investments attractive for our pensioners on a risk-return basis. While we at APG look to invest in good projects in our own backyard, to maximize our impact on the energy transition, a global focus is key. For example, the Gemini Project’s land footprint, if overlaid on Amsterdam would cover 1/6 of the city, so looking to other regions for these mega projects is necessary.

We're going to need these renewable sources, and APG – on behalf of its pension fund clients - will be willing to put capital behind it. Over the course of the last five to ten years there have been many shifts in the US market, whether it is through changes in tax law, in regulations or in what renewables are capable of. But because of our belief in renewables, we've been able to invest continuously throughout this period. Whatever tomorrow may bring, we will continue to adapt and we will be able to move with the market and with the facts on the ground."

That sounds quite confident. What developments do you see?

Sean: "One thing that will have a big impact is the US’ recent Inflation Reduction Act that might be better called the Renewable Energy Act. Previously tax benefits and other incentives for renewables would expire after one or two years and now they will be in place much longer. This greatly benefits those who want to do long-term planning like APG and our pension fund clients. The act also takes away many hurdles around tax benefits for storage assets, like the batteries in this project. Those are now much better positioned going forward in the US."

Ellen: "It's interesting to add that the US has deployed a lot more batteries than the rest of the world. Last year storage capacity tripled, and it is becoming increasingly important for a stable supply and for the performance of the electricity grid. Battery capacity will also increase in other geographies. I hope that with our experience and the lessons we learned about how batteries are used operationally and how that relates to the investment case, we can help the rest of our global team."

What makes this particular project stand out for you?

Sean: "First of all what attracted us is the scale of it. Gemini is the largest asset in terms of megawatts we have ever invested in. Many renewable energy projects don't require that much equity to build them, but this deal allows us to put a lot of capital to work in a single project we believe in. We also like the fact that there is a 25-year contract for its revenues. This provides a stable cash flow for an extended period of time and that is a great match for a pension investor's needs. Finally, we were very impressed by the development team at Quinbrook and how they planned and structured this project. All the things that generally concern us and that we dig deep into when we make an investment, they were able to properly mitigate."

Looking at this deal the other way around: why did Quinbrook select APG as a partner?

Sean: "Because we have invested so much in solar already, we are very familiar with some of the issues and structuring considerations in these kind of projects. As as we went through the due diligence process, Quinbrook definitely came to understand that we are experienced in this sector. We were focused on all the right issues, and as new issues came up or as rules changed, we didn't have to take a big step back and think long and hard about what that would mean. We soon developed a partnership, a dialogue between equals. I also think that since Quinbrook is going to develop other projects, they are attracted to the fact that APG will continue to have capital. So it's possible, if this continues to go well, we could expand on our partnership in the future."

Because of its size alone, the Gemini project has an enormous impact on its environment. How did APG as a responsible investor take this and other ESG considerations into account in this deal?

Sean: "Most renewable energy projects indeed have huge footprints. With Gemini we're talking about a project with a size of ten square miles. This means there is almost always an endangered species to consider, in this case it is the desert tortoise. We developed a rehoming plan for the impacted tortoises and built a little turtle-only highway where they can cross if they need to. Another key consideration is that we're building on federal land that is next to tribal land of the Moapa indigenous people. We have already invested in another solar project that is actually on their tribal land. We're very familiar with how to be a good neighbor and how to make sure that the economic benefits are going where they should. We've taken care that the tribe is not just OK with the development but that they're fully on board and have a voice as stakeholders in the project."

How do the Moapa benefit economically from this project?

Sean: "First let me say that the Moapa are big believers in respecting the environment and they are very supportive of solar energy. They have made a decision to develop solar projects on their land in a way that will bring immediate benefits to their people, protect the land and provide ongoing opportunity for future generations. During construction of the project some tribal members have been working on it, and we have also paid for the storage of some of the major pieces of equipment on their land. And sometimes in renewables projects you have payments that go to the local community, in this case these will go to the tribe."

How important are ESG criteria in a project like this, could they be showstoppers?

Sean: "We work very hard to both identify the ESG concerns around a project up front and then ensure they will be mitigated before we invest. Engaging the Moapa tribe for their support and working to protect the desert tortoises are good examples of how we successfully address ESG issues that arise during the process. Either of these could have been a showstopper. We also make sure our partners have strong ESG policies and practices. That goes a long way to avoiding red flag issues. With Gemini for example, our partners had already considered that they need to source solar panels from suppliers that have appropriate labor and human rights standards. The contracts as our partner wrote them are pre-wired to deal with such an issue. If someone violates these principles, they are out of the project. And of course, our partners have to meet APG’s ESG standards. If the seller's standards were insufficient, we would work those in the contract or it would be a showstopper for us."

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."

Sustainability-linked bonds offer resource-intensive industries a viable solution to finance change and work towards a greener future. But there are plenty of challenges. Four of APG’s experts in this field explain how large investors can play a role in this transition. “We believe it is our role is to help push the market in the right direction.”

Sectors like steel, cement, chemicals and some forms of transportation support many of our basic needs. But these hard-to-abate industries are also collectively responsible for nearly a third of global CO₂ emissions. As a major responsible debt investor, APG is taking a proactive stance in looking at ways to support this challenging but vital transition and is committed to playing a role in the development of the sustainability-linked bond (SLB) market. Finding instruments to help finance these changes requires APG to tread carefully as a responsible investor.

“Through constant engagement with the market, we believe we can implement our clients’ investment policy and help companies make the transition,” says New York-based Simone Andrews. She works together with fellow fixed income responsible investing expert in Amsterdam, Willem Hettinga, US credit analyst Joshua Linder and EU credit portfolio manager Oscar Jansen. They draw up investment guidelines and liaise with issuers, banks and peers to critically assess new issue structures and ensure the sustainable integrity of this growing market.

Different pathways to transition

Promoting transition in these hard-to-abate sectors is challenging and expensive; each industry requires a different approach and has a different timeframe. “For the automobile industry there are credible avenues using EVs but these are expensive and mineral intensive while large-scale change in the chemicals sector is further away, although there are potential solutions to explore, for example, using hydrogen to drive net zero goals,” explains Andrews. “In determining how to invest, we first evaluate potential bond investments to ensure they meet our financial risk and return requirements, as well as identifying investments that contribute to the SDGs. We also leverage our Guidance on Sustainability-Linked   and have developed a specific but related framework for different industries according to the challenges they face and the transition stage they are in. For example, we have recently documented our guidelines for financing the transition in the aviation industry.”

Flexible SLB structure gives companies more options

There are pros and cons to all types of bond structures. In the past, issuers and investors including APG have generally preferred the use-of-proceeds structure, of which green bonds are the most common flavor, because they have a clear link to projects that create real world impact. But things are changing as the increased flexibility the SLB structure offers becomes more widely acknowledged.

“In the case of green bonds, the money is earmarked for specific projects, so it is easier to determine whether an issue is green enough to fulfil investment requirements and then to monitor how the proceeds are spent and calculate the impact of the investment. But a company has to have sufficient upfront and credibly green spending requirements to make this feasible,” explains Hettinga. “We have seen examples of green bonds issued by energy and mining companies, where the proceeds may have been credible, but the rest of the company’s strategy is not truly focused on transition. Such issues are not always well received by the market, so it is also in the company’s interests to use a structure that fits.”

Most companies in hard-to-abate industries are inherently not so green – the transition time frame is longer, and it is much harder to set aside spending purely for decarbonization. The SLB structure enables these companies to align issuance with their overall corporate sustainability strategy, by setting targets in the form of Key Performance Indicators (KPIs) and Sustainability Performance Targets (SPTs). Hettinga: “For companies that choose this structure, the quality of the goal setting is key. There should be clear communication on the rationale and process for selecting the KPIs, which should, in turn be realistic but still ambitious and clearly linked to the company’s transition path and goals.”

Credible and comprehensive long-term transition plans

Many hard-to-abate industries have a high relative proportion of Scope 3 (or indirect) emissions[1]. These are more difficult to address than direct (Scope 1 and 2) emissions as they often occur beyond a company’s direct control and require it to focus on change throughout its entire value chain. This also strengthens the case for the SLB structure, where a long-term plan can be established with KPIs that can reflect the progress made on transition in all areas of a company’s business. “We turned down an issue that laid out ambitious reduction plans for direct emissions (Scopes 1 and 2) in its KPIs but incorporated no target for the indirect emissions that made up 98% of the total emissions”, explains Jansen. “We prefer to see KPIs that incorporate a broad transition plan with absolute emission reduction targets, clear spending programs and concrete time frames.”

Intensive engagement with issuers and underwriters

“As a major investor, APG has an important role to play by providing feedback to issuers to create a virtuous circle where a landmark deal for a sector can set a positive precedent. We do this by being transparent on what our standards are, by staying in close contact with issuers and determining parameters together with them,” explains Linder. This process may require our responsible investment experts, portfolio managers and credit analysts to go back to the drawing board and dive deeper into the issuers’ business to determine an acceptable level of ambition for KPIs and targets. Jansen: “This approach enables us to fine tune our guidelines for specific sectors and gives the banks that underwrite the bonds and the issuers a pathway to follow, also by making it clear upfront when we will and won’t invest.”

Supporting the SLB market

The annual APG roundtable on the sustainable bond market plays a key role in keeping major players aligned. Now in its fifth year, this event has gained increasing traction and attracts a diverse group of investors, underwriters and other stakeholders who exchange views on ways to promote and develop the labeled bond market. Andrews: “In the 2022 roundtable we focused on the role SLBs can play in financing the energy transition and zoomed in on the aviation sector, this discussion contributed to APG’s guidance on how to approach the challenges and opportunities in this industry”.

Some dedicated green bond investors are not in favor of what they deem to be the looser structure of SLBs and the potential for greenwashing. But other ESG investors are supportive of the market’s development as it opens up opportunities to a broader group of issuers. Linder: “Some of the criticism is valid, but we believe our role is to help push the market in the right direction. It’s more art than science – a balance of wanting to help the market grow, while maintaining its integrity, and accepting that some issuers are further along in the process than others.”

Gemini is currently the largest solar and storage project under construction in the US. The $1.2 billion project, which is located near Las Vegas, is projected to generate 690 megawatts (MW) of solar energy and provide 1416 megawatt hours (MWh) of battery storage. Gemini is expected to generate enough clean energy to power more than 400,000 households during peak periods and save 1.5 million metric tons of CO₂ annually. The project is scheduled to become operational in 2023.

The size, scale and integration of battery storage makes Gemini one of the most advanced clean energy projects under development. APG is acquiring this stake in Gemini from Quinbrook Equity Partners, a specialist investment manager focused exclusively on energy transition infrastructure, and its portfolio company Primergy Solar. According to Quinbrook, APG was selected as an equity partner because of ‘its sophisticated approach to the Gemini project and to the US renewables market more generally.’

Financial returns and positive impact

“As a responsible investor, we are always looking for infrastructure investments that bring long-term financial returns for our pension fund clients and that have a positive environmental and social impact,” says Steven Hason, Managing Director and Head of Americas Real Assets at APG. “This transaction provides an ideal opportunity to invest in a state-of-the art energy project that will provide clean, renewable electricity for Nevada.” 

APG has been an active infrastructure investor since 2004, investing over € 17 billion to date. APG’s investments include assets in the power & utilities, energy, transport infrastructure and telecommunications sectors. In the US, APG has several direct investments in utility-scale solar and storage assets.

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.