APG will be offering sustainable index investments

Published on: 8 September 2021

Baskets of shares in sustainable companies, where the client can choose from different sustainability grades. That is how you could describe APG’s new investment product. The launch of iSTOXX APG World Responsible Investment Indices in September 2021 is a joint response by pension administrator APG, index provider Qontigo and asset manager BlackRock to the growing demand for customized, sustainable index products. For an active investor like APG, this step may come as a bit of a surprise at first glance, as the pension administrator is not known as a great advocate of what is irreverently known as “passive investing”. An interview with APG’s Ronald Wuijster (member of the board responsible for asset management) and Ronald van Dijk (managing director of quantitative strategies). “We primarily want to offer the best solution for our clients. In certain cases, that may include an index product.”


The difference between an active investor and an index investor is that the former aims for a higher investment return than the average on the stock market or a certain stock market index (weighted average of several important stocks or other investment categories, such as the AEX, S&P 500 or Nikkei 225). The index investor, on the other hand, invests in a basket of shares whose return is approximately equal to that of the market as a whole. The “iSTOXX APG RI Index Family”, launched by APG, Qontigo and BlackRock, consists of five “Responsible Investment Indices” and is therefore an index investment product. That is a step you would not really expect from a pension administrator that has always shown itself to be a staunch active investor.


For the first time, APG is offering pension funds the opportunity to invest in indices. Have you fallen away from your faith?

Wuijster: “Let me say first of all that we still advocate for a very active form of investment for those clients who have the opportunity to do so. But that form also involves higher costs and is therefore only attractive from a certain asset size. Not every client has that size. There are smaller funds that want the low cost of an index product, but want to be active on the ESG front (exerting a positive influence on sustainability and corporate governance, ed.). It is precisely for those funds that this product is suitable. In addition, some clients are simply less convinced of investment analyses as a method of selecting certain companies. Ultimately, the client decides what is good for him. We then want to offer the best solution. That solution is somewhere on a continuum, with a very active investment policy at one end and pure index investing at the other end. The “iSTOXX APG RI Index Family” is not the ultimate in active investing, but it does have active components. In short: we have certainly not abandoned our beliefs, because we are still sincerely convinced of the value of active investment and if it is possible for a client, we also advise it. But we primarily want to offer the best solution for our clients. And in certain cases that can therefore also be an index product.”


What do those active components consist of?

Van Dijk: “The basis of this product consists of the 'iSTOXX World Index' over which five filters (see box, ed.) can be placed, depending on the preference of the customer. The first filter is 'Exclusions'. By applying that, you exclude companies that do not meet certain sustainability requirements. You could call that the entry level of this product. By applying additional filters, you increase the sustainability content of your investment portfolio. The criteria then become increasingly stringent and when all five filters are applied, the most sustainable portfolio is created. In this way you go further than just investing in, for example, the iSTOXX World Index. That makes it a somewhat more active form of index investing. As far as we know, there is no other index series yet, where a pension fund can consistently opt for an increasingly ambitious SRI policy over time.”


Isn’t there a risk that this index product could cannibalize your range of active investment activities?

Wuijster: “This is unlikely to happen, if only because this product offers just a fraction of the investment mix you need as a pension fund. This product is suitable if your pension fund is not of the scale that makes active investment attractive, but you do have serious sustainability ambitions. But if you do have that size, you can still achieve higher returns by active investing.”


What does the most sustainable form of investment in the iSTOXX APG RI Index Family look like?

“In concrete terms, you then have the companies from the iSTOXX World Index, which certain companies - the Exclusions - are removed from. The sustainability leaders are then selected from what remains. From these, we then select the companies with low carbon emissions. If you then select the companies that contribute to achieving the UN Sustainable Development Goals, you are left with the most sustainable portfolio. This is then optimized so that the risks are virtually the same as those of the broad index - the iSTOXX World Index.”

Couldn’t APG have offered this product entirely on its own?

Wuijster: “It is always better to seek cooperation for those things that are not part of your standard capabilities. You could look at APG as the architect of the product. We determine the ESG profile and make sure it is appropriate for our current clients and other Dutch pension funds. Then we selected partners that can make it happen.”

Van Dijk: “Qontigo maintains the index on a daily basis. This is a discipline in itself, which is also highly regulated. BlackRock makes sure every day that the right shares are bought and sold, so that the client’s investment portfolio reflects the chosen index. We also have a trading department ourselves but BlackRock already offers many index products and therefore has the experience and manpower to keep track of such an index. Accuracy is very important when tracking an index. APG takes care of the voting policy and monitors whether the companies in the indices comply with the ESG profile we determine. APG also votes for the clients of this product at shareholder meetings.”


Does a product like the iSTOXX APG RI Index Family already exist?

Van Dijk: “Certain components of the product can be found in the market, such as index products of companies with a low carbon footprint. But the SDI component (Sustainable Development Investments, companies that contribute to the achievement of the SDGs, ed.) is unique. There is also no index product yet that uses a global standard to define what is an SDI and what is not. In addition, the ESG profile of this index product is truly APG-inspired. We are a Dutch player and we focus on Dutch clients. We invest internationally, but for the ESG profile of this product we try to take into account as much as possible what is going on in Dutch society. The Dutch have a different view of sustainability and good corporate governance than Americans, for example. Perhaps not when it comes to universal issues such as child labor and emissions, but certainly when it comes to executive pay, for example. That Dutch perspective is reflected in this product. In that sense, clients with this product benefit from the fast-growing ambitions of our pension fund clients, including ABP. As a result, we lead the way in knowledge, approach and experience with responsible and sustainable investment. Therefore, in terms of ESG standards, the bar is set high for this product.” 


How big are the assets under management that APG expects to attract with this?

Wuijster: “It is not part of our strategy to attract clients purely for this purpose. We see this as an enhancement of APG’s product range, with which we primarily want to serve existing clients. This product may attract new clients, but we expect to serve them integrally. That means not only with equity investments but also with other investment categories. An active approach to investing is inherent in this. By the fourth quarter, 1 billion euros will have been invested in this product, but we cannot yet indicate the size this will grow to.”


Can't you offer this product to the private sector too?

Wuijster: “That would be possible, but we do not currently serve private investors. It is not part of our strategy. We are not 'wildly commercial' with this product."


Read here the press release.