New real estate product from APG actively aligns with ESG objectives

APG is introducing a new indexed product in the field of responsible investment in publicly traded real estate: the Real Estate Responsible Investment Index Strategy. Rutger van der Lubbe (Head of Global Real Estate Investment Strategy) and Ronald van Dijk (Managing Director Quantitative Strategies) discuss what makes this index strategy unique.

The APG Real Estate Responsible Investment Index aligns with the trend towards greater customization for pension funds. “This trend is only increasing,” says Van Dijk. “Standard products that should be suitable for everyone will, on the other hand, gradually disappear.” This is partly because pension funds have their own sustainability policies and want to see this reflected in the products in which they invest. The new index is primarily intended for APG's smaller asset management clients: SPW and the PPF employee fund.

What makes this index strategy unique?
Van Dijk: “The distinctive character lies mainly in the customization that it provides to clients, helping them achieve several key ESG objectives. This distinguishes it from the existing index products in the market. The Real Estate Responsible Investment Index gives us great flexibility in customizing our index investing strategies to our client needs. We have achieved this by working together with many parties that specialize in data and index constructions. We combine the preferences of our pension fund clients with our knowledge and that of data providers in order to create this investment product.” 

Which parties collaborated with you on this?
Van Dijk: “We created and compiled the index together with STOXX, and we also work together with a number of data providers. A key one is CRREM, which ensures that the index aligns with the targets set out in the Paris Climate Agreement.”

Van der Lubbe: “APG was one of the initiators to globally implement CRREM – which was originally an EU-funded initiative. It stands for Carbon Risk Real Estate Monitor, and sets for instance guidelines on how much CO2 an office building in the Netherlands is allowed to emit and how much energy it may consume in order to meet the Paris climate target. This applies not only to the present, but also to the years leading up to 2050. By following the CRREM standards, the permitted CO2 emissions and energy consumption of real estate will decrease every year. The equities comprising this new index meet those standards. If an investment fails to meet these criteria, we exclude it.”

Did the initiative for this index come from the pension fund clients or from APG?
Van der Lubbe: “It has mainly been a synergy. On the one hand, our clients focus on costs. That makes an index product attractive to them. We saw that as a reason not to simply offer a passive index strategy, but instead to leverage our leadership in responsible investing to create what we believe offers a superior solution: an index that incorporates ESG factors. You don't see that in the standard passive index products.”    

Van Dijk: “This index actively focuses on ESG objectives and risk management. And since we are guiding it, we can quickly respond to new needs or preferences from our clients, and thus continually raise the ESG bar. This will allow pension funds to make both sustainable and risk-conscious choices in their investment portfolios.”

As the bar continues to be raised, won't the number of companies eligible for this index continue to decline?
Van der Lubbe: “The requirements that CRREM sets for real estate do indeed become stricter every year. At the same time, buildings will become increasingly efficient in their energy consumption. It is difficult to say in advance what the net result will be, but we can say that the companies that remain in this index will have to meet the increasingly strict requirements. Only if a company meets the five criteria we set  ̶  CRREM compliance, good governance, a good reputation, and both our exclusion and inclusion policies  ̶  will it qualify for inclusion in this index.”

In 2021, the iSTOXX APG World Responsible Investment Indices were launched for equities. The Real Estate Responsible Investment Index is the second index product offered by APG to its clients. Does this mean that APG is moving more towards passive investing, at the expense of active asset management?
Van der Lubbe: “With regard to real estate, we intend to maintain our active strategy that we have outlined for ABP. This real estate index complements that active strategy and fulfills the preferences of our smaller clients, which make different assessments in the risk, return, costs and ESG matrix. We still believe that active investing, especially for our largest client ABP, remains a superior way of investing.”

Will APG vote at the shareholder meetings of the companies in this index?
Van Dijk: “Absolutely, that will stay explicitly with us. All positions follow our voting policy. A common complaint about index funds is that large index investors don't know the companies, but we want to know what we're investing in and what the agenda is of the companies in the index. So, regarding voting policy, this index also has an active component.”
 
Does the focus on sustainability of this index create a risk to returns?
Van der Lubbe: “No. The beauty of this index is that the investment is widely and globally diversified, and in principle has the same risk and return profile as the broader market.”

See also the press release.