As an example of the pressure put on the financial sector to respond to the urgency of climate change, Dutch education and government sector employee pension fund ABP is tightening up its investment policy. They explain this move by referring to reports on the climate crisis that have shown that it must move faster, and supporters are calling for action to be taken. Diane Griffioen, head of investments, explained the complex search for social return in conversation with Fondsnieuws, Investment Officer Luxembourg’s sister publication.
On the morning of the Fondsnieuws interview, a picture was published on Twitter showing activists carrying a metres-long orange banner in front of the building ABP shares with\its in-house investor APG. The banner read: “The final warning: ABP stop using fossil fuels now”. The banner is from the Fossil Free Action Group, which together with participants are seeking to take the pension fund to court.
The blackest scenario: -6°C
Diane Griffioen (pictured), head of investment policy at ABP - which manages over half a trillion in pension assets for three million participants and is in constant dialogue with APG on the subject - takes the group’s and the fund participants’ cries for help seriously.
It refers to the same report of the authoritative IPCC panel as Fossil Free Action Group and others do: while the 2015 UN climate summit in Paris was still based on a maximum temperature increase on earth of 4°C, the IPCC in its report from August speaks in the blackest scenario of a possible increase to almost 6°C by the end of this century.
“That report shows us that the urgency in the field of climate has grown much greater, said Griffioen. “It underlines that we must and will tighten our investment policy, as we had already announced we would do in 2020.”
ABP has pursued a sustainable investment policy since 2008 and is regarded by the Dutch Association of Investors for Sustainable Development (VBDO) as the most sustainable pension fund in the Netherlands. “Initially we started with an exclusion policy, followed by an inclusion policy. This gave rise to various themes on which we started to focus. In 2020 we took the next step. We have a vision of being carbon neutral by 2050 and are sharpening our policy “on journey” with concrete targets that we want to have achieved at specific points in time.”
According to Griffioen, ABP is taking its time until the beginning of 2022 to refine its policy, partly because of the IPCC report. But she cannot yet say what that will look like, pending the discussions that are being held internally with APG and with participants, and externally with stakeholders such as the government, companies and knowledge partners. Since 2020, ABP has been targeting a maximum global temperature increase of 2°C, and preferably 1.5°C, in its investments.
Focus on the next SDGs
Currently, the fund has formulated four policy priorities: climate change and energy transition; preservation of natural resources; digitalisation of society and human rights. Linked to these are the United Nations SDGs, which ABP also wants to bring closer to achieving through its investment policy. The 17 goals include no poverty (SDG 1), good education (2), affordable and clean energy (7), decent work and economic growth (8), responsible consumption and production (12), gender equality (5), clean water and sanitation (6), and reducing inequality (10).
In response to the question of whether “all arrows” should not be directed at combating the climate crisis, now that there is an existential threat to life on earth, Griffioen acknowledged that the urgency of the climate is indeed a subject of discussion within ABP and with its stakeholders.
Important in this discussion is the ‘false dilemma’ of the risk/return ratio, which is the sine qua non of investors’ portfolio construction and asset allocation. To get a better idea of the impact of sustainability on the risk/return profile of its investments, ABP commissioned a study in 2020 from Kees Koedijk of Tilburg University in the Netherlands. A study of more than a thousand reports and studies confirmed that sustainable and responsible investments can be made with at least the same return. There is even a case to be made that sustainable investment will eventually improve the climate and biodiversity as well as the return, Griffioen said.
Priority investment themes
“The main dilemmas facing ABP concern which investment themes should be given priority. This is the subject of extensive internal and external debate. Take the 1,000 investment professionals at APG: they have to understand what we want and seize the opportunities. We want to achieve both sustainable and financial objectives, bearing in mind our mission ‘Building a good pension together in a liveable world.”
“We often work together with other investors and parties to achieve this. Our policy also covers a larger chain. We think it is important to look at the coherence of the policy. For example, there are very attractive climate solutions that score less well on other aspects of the policy. The world is not ideal and that means that sometimes you have to make concessions.”
The critics of ABP’s investment policy focus mainly on the equities in the portfolio. Of the more than €500 billion AUM, ABP has invested (as at the end of Q2 2021) some 32.7 per cent in equities - and, against the critics’ wishes, also in listed companies such as Shell. At the same time, it has been announced that investments in companies that derive more than 30 per cent of their turnover from coal mines or 20 per cent from tar sands will be removed from the investment portfolio before 2025.
ABP also wants to reduce the carbon footprint of shares by 40 per cent by 2025 compared to 2015, and to allocate 15 billion euros to sustainable and affordable energy (SDG 7). The activists at the door of the head office think it’s not going fast enough after all.
Not fast enough
Griffioen responds: “We are a global investor and when it comes to fossil fuels, we look at the whole world. Then we see that in certain areas there is no alternative to fossil fuels such as coal. We are mainly asking ourselves how we can increase the pressure to make the global energy transition; it will not happen overnight. Personally, I see the concern of the participants; we share that concern too.”
“It’s not going fast enough, we share that too; we let ourselves be inspired by that. The majority of our participants believe in the positive effects that you can achieve with engagement. We also believe that it is better to actually bring about change than to just make a clean sweep for yourself. Simply getting out of oil is not a solution to the problem.”
Because, she adds, “fossil fuels won’t go out of the world tomorrow, but it’s even more foolish to remain dependent on them. So you have to encourage companies to innovate. ABP chooses to work with other parties to continually increase the pressure. This is done through the Climate Action 100+ collective, in which 600 large institutional investors are working together to encourage the most polluting companies to change.”
Time for bold decisions
According to Griffioen, this is producing stronger results. “Together with APG, we call on governments to put a real price on oil: a CO2 tax. The negative effects are now not sufficiently priced in.”
“If they are, a new market mechanism will emerge and renewable energy will become more attractive. Then the relationship between supply and demand will also change rapidly.” Griffioen expressed the hope that the pricing of fossil fuels will be high on the agenda of the 30,000 participants at the Climate Summit CCOP26 in Glasgow, early November. The time for bold decisions is now.