568 billion euros (end of May 2021). That is the total assets under management of APG worldwide The goal: “to provide a good pension in a livable world” for the participants in the pension funds. The portfolio is diversified. From investments in wind farms in the Netherlands to Australian listed shares in shopping malls. And from relatively safe government bonds to more volatile commodities like gold or soy. Who are the people behind these investments? What drives them? What choices do they make? And why? In this episode: Jeroen Schreur, responsible for investments in the Dutch energy transition at APG.
Serie The investors
Pension funds are criticized: why are they not doing more for the climate with their investments? At the end of June, ABP chairwoman Corien Wortmann responded with ABP’s updated ambition “to take the next step towards a more responsible investment policy”. What is APG’s reaction? “We are increasingly investing in climate solutions,” says Jeroen Schreur, responsible for investments in the Dutch energy transition (ANET) at APG Asset Management. “From smart district heating to energy-saving software , the first investments have been made. Many more will follow,” Schreur outlines.
The energy transition must accelerate. And there is plenty of money to help achieve this. That is the conclusion of scientists Friedemann Polzin (Utrecht University) and Mark Sanders (University of Maastricht) in a recent study on the role of the financial sector in the European energy transition. One of their conclusions: there is plenty of capital, but banks, investors and policy makers lack the crucial knowledge and courage. The duo argued that institutional investors should be allowed to make more risky investments.
APG realized this early on and was already working on this, says Jeroen Schreur: “In 2015, ABP formulated an ambitious responsible investment policy, which was recalibrated in 2020. The aim is to invest more in sectors or companies that are significantly reducing their carbon emissions. And to invest more in renewable energy. We are doing this with the conviction that the greater emphasis on sustainability in our investment portfolios will not adversely affect the returns on our investments and that the risk will remain acceptable. When the ABP Board of Trustees also expressed a desire to invest more in the Netherlands, in order to help strengthen the Dutch economic structure, we combined the two objectives and started ANET." ANET was set up specifically to invest in relatively small and innovative projects and companies in the Netherlands that are active in the generation, storage, distribution and use of energy, Schreur explains.
“Setting up ANET was a good first step, supported by the research by Polzin and Sanders, in which they show that a lot of small-scale investments are necessary to stimulate innovation. This was recently confirmed during a conversation with colleague Nienke Vledder and the Sustainable Finance Lab on financing the energy transition (see min 46: Sustainable Finance Lab : Hoe betalen we de energietransitie? - Pakhuis de Zwijger).”
How much money is available in this fund?
“ABP initially committed 250 million euros for innovative, small-scale initiatives in the field of sustainable energy. And if it proves successful, ABP can increase that amount or extend it to Europe at a later stage. After all, not all energy transition solutions are developed in the Netherlands. We provide growth capital directly to companies or project-financing, even before the phase in which capital from private equity investors normally comes into play. This is relatively new for APG. We also invest indirectly - through specialized managers - in, for example, a Rockstart portfolio of fifty start-ups that contribute to the Dutch energy transition. Rockstart is a start-up accelerator that guides and supports promising young companies. Both with money and with access to the right knowledge and people.”
How much of that 250 million have you already invested?
“We started at the end of 2019, by which time we had assembled our investment team and had the internal processes ready. In the meantime, we built our network. In the Netherlands, the Climate Agreement had also just been finalized at that time, which gave us a big boost. The Covid-19 pandemic then provided quite a challenge, and currently we have committed around sixty million euros. A largest part of these investments, some 45 million euros, is our investment in smart district heating. This involves distributing hot water through pipes to homes and offices, which make use of natural gas for heating obsolete. Various heating sources are used, such as geothermal heat, solar heat, residual heat from factories, heat pumps and local residual biomass .”
With all due respect: 250 million, and only 60 million is effectively invested, currently. Is that not too little?
“Every individual investment is small in the context of our total assets under management. It is key to build a broadly diversified portfolio in order to reduce risk. Still, if you look at funds that focus on the energy transition in Europe, we are one of the largest. Also, the impact we can make in the Netherlands with ANET is substantial. Through our investments, entire neighborhoods in Dutch cities are being taken off natural gas, Dutch companies can grow and create jobs, and we help build a thriving Dutch eco-system for start-ups.”
Do you expect the policy tightening recently announced by ABP’s Chairwoman Corien Wortmann to affect the scope of this investment?
“That’s up to ABP, of course. If ABP wants to expand, we can facilitate that. There are certainly plenty of opportunities to expand the ANET concept to Europe. A climate-neutral economy offers plenty of opportunities for new business models, jobs and investment opportunities. And since we do not exclude new technologies or solutions in advance, it is also good to expand beyond national borders.”
You mentioned smart district heating. They make use of biomass. This method has recently come under fire. As an investor, you have to deal with these kinds of risks too, don’t you?
“Absolutely. It requires a lot of consideration beforehand. Residual biomass is used at peak times for these smart heat grids: when demand rises sharply on a cold winter’s day, or if supply falters. We have stipulated in our conditions that within a radius of 100 kilometers, only Dutch residual wood and/or prunings waste from municipalities and Staatsbosbeheer (the Dutch forestry commission) may be used. Wood residues and pruning waste must be traceable from the local source. No wood that comes from logging in nature reserves or forests in the Netherlands or abroad is burned here. We, and that includes ABP, see burning residual wood and pruning waste as a temporary phase in the energy transition.”
APG also invests in companies directly. Do you have the technological knowledge required to, for example, properly assess a company’s invention?
“No, with our small ANET team, we couldn’t possibly do that for all companies. But within APG there are a lot of specialists working in all kinds of subsectors. For our investment in smart district heating, we consulted extensively with our colleagues who invest in infrastructure; they know the opportunities and risks of these heat networks. And that applies to all our investments. We also often talk to universities, such as Delft and Eindhoven, which has taught us a great deal about hydrogen applications, for example. Being part of an energy transition eco-system is an important objective for ANET in order to share knowledge, skills and experiences. Itis our conviction that we will have to achieve the energy transition together.
One of our first direct investments is a 2.5-million-euro investment in NET2GRID: this Dutch company, with advanced Artificial Intelligence technologies, enables utilities and energy suppliers to provide their end customers with actionable insights, based on an up-to-date analysis of their energy consumption. This allows them to save energy and contribute to the energy transition. We brought in our IT investment specialists to help us evaluate this investment.”
Do you get a lot of proposals for direct investments? And how many of them do you approve?
“We are presented with a large number of ideas and funding requests. Companies and initiators or project managers sometimes come up with the most wonderful plans, which usually cost a lot of money and are very risky. Separating the good from the bad takes a lot of time and energy, but it must be done. We have now seen about two hundred propositions. Of those, three have passed our selection criteria, including the direct investment in NET2GRID. And there are currently about ten more proposals from companies or projects that have a serious chance of getting into our ANET portfolio. The rest have been rejected.”
In addition to these direct investments, APG is building a portfolio of fifty start-ups with partner Rockstart. What are some of the things you are investing in?
“Rockstart will be selecting this group over the next five years. Each year, an average of eight to ten start-ups will be added to the portfolio. They are working on digitizing the energy transition in all sorts of ways through data applications and digital technologies, such as energy-efficient homes, smart meters or software for grid operators to help them manage their energy networks better. Through Rockstart, one company we have now invested in is Starke Energy, which manufactures “smart” batteries that use energy when it is needed but feed it back to the grid when there is a surplus. Another investment is Bia Power, a company that makes software that detects ups and downs in supply and demand on the power grid. This enables consumers to charge at optimum times, which keeps the electricity grid in balance and makes batteries last longer. Some of the fifty companies that we will eventually acquire will continue to grow successfully and may come back to us for follow-on funding.. The same applies to the companies that we have invested in directly. We have already set aside part of the 250 million euros for these follow-up investments; we call that ‘dry powder’.”
Isn't investing in start-ups that innovate in the field of energy transition far too risky for a pension fund? It remains to be seen whether such an investment will generate a return.
“The latter is true. For APG, the most important thing is that we can always provide the members of our pension funds with a good pension. At the same time, we want to contribute to a livable, sustainable world. In our experience, these two principles go hand in hand. That includes investing in the energy transition. But within this sector, for us as investors, the return really comes first, so that we can always guarantee the pensions. As for the risks, in the short term they are there. But in the long run, the risks average out; the risk profile, i.e. the compensation for the risk you take, is the same as for other investments in the long run.”
What kind of returns are you assuming?
“It is too soon yet to talk about concrete percentages. But here, too, the cost comes before the benefit. The returns follow the familiar J-curve: first you make a loss, but after a while the turnover or the profit can accelerate exponentially. But then you are talking about the long term. Naturally, every potential investment has return requirements. For companies, initiators, project managers with a financing requirement, the financing guide of the Task Force Financing of the Climate Accord contains a number of concrete indications of possible maturities, amounts, interest margins and return requirements.”
Wouter Bos, top executive at Invest-NL, which also wants to finance innovative companies in the energy transition, expects that 70 to 80% of his investments will not make it. Isn't that frustrating?
“InvestNL helps innovative entrepreneurs by removing bottlenecks to scale-up and growth. By doing so, they try to increase the willingness to finance because sometimes entrepreneurs’ ideas are so innovative and risky that market parties don’t have the appetite to take them on yet. Even in our Rockstart start-up portfolio, not all start-ups will be successful. But thanks to a broadly diversified portfolio, risks are reduced and losses are compensated for by successes. In addition, our start-up portfolio is a relatively small part of our ANET portfolio so the downside risk is also limited. At the same time, it does provide an opportunity to be part of one or more start-ups that do succeed.”
Facts & Figures
In what type of initiatives that contribute to the energy transition does ANET invest?
The ABP Netherlands Energy Transition fund (ANET) was established to invest in relatively small projects and companies focused on (technological) solutions for the energy transition. ANET can contribute to the financing of all development phases of a company, from start-up capital to listing on the stock exchange. Following the Dutch Climate Agreement, the financial sector, including ABP, pledged to actively contribute to the financing of the Dutch energy transition in 2019. ANET now invests in smart district heating in four big Dutch municipalities and in Dutch company NET2GRID, which provides technology to companies in the energy sector and offers clients direct insight into their current and future energy consumption. ANET is also building up a portfolio of fifty start-ups, such as Starke Energy, Bia Power and Soolutions, which are developing solutions for the Dutch energy transition with their product, service or application. ANET aims to develop and upscale these companies.
Currently about 60 million euros.
What kind of return does that provide?
This is not an investment for the short term. In the long term, ANET expects to deliver a return comparable to that of listed equities. We set return requirements for each potential ANET investment. For companies, initiators, or project managers with a need for financing, the financing guide of the Task Force on Financing the Climate Agreement contains a number of concrete indications of maturities, amounts, interest margins and return requirements; these are indicative and depend on market conditions.