pggm.nl Responsible Investment

Transcription

1 pggm.nl Responsible Investment Report 2013

2 Content Management statement 4 Foreword 5 Overview of responsible investment in Responsible investment activities 6 1. Frameworks for Responsible Investment Beliefs relating to responsible investment Developments in Implementation of responsible investment activities Outlook Investment processes Developments in Outlook Investing in solutions for sustainable development Developments in Outlook Voting Figures and developments in Outlook Engagement Engagement figures for Corporate Governance Social Environment Outlook 41 2 PGGM

3 6. Legal proceedings Developments in Outlook Exclusions Developments in Outlook 49 Outlook 50 Implementation of responsible investment activities 51 Use of responsible investment instruments 52 Appendix 1. Governance and accountablity 53 Appendix 2. Independent assurance report 56 Colophon 57 3 PGGM

4 Management statement As the management of PGGM Vermogensbeheer B.V., we provide an annual account of our Responsible Investment activities during the past year in our annual report. We have a responsible investment framework which takes our clients policies as its starting point. This responsible investment framework seeks commonality within the PGGM funds while providing scope to meet clients specific policy requirements through internal and external management. That means the activities we describe in this report are not always applicable to all clients. In compiling the 2013 PGGM Annual Responsible Investment Report we have adhered to the international reporting principles of the Global Reporting Initiative. We have assessed the 2013 Annual Responsible Investment Report and declare that, to the best of our knowledge and belief, the information contained therein presents a true and fair view of the reality. This 2013 Annual Responsible Investment Report has been assessed and provided with an independent assurance report by KPMG Sustainability, an independent external auditor. This assurance report is included as appendix 2 to this 2013 Annual Responsible Investment Report. Zeist, 31 March 2014 Management of PGGM Vermogensbeheer B.V. 4 PGGM

5 Foreword To our clients and stakeholders: PGGM Vermogensbeheer B.V. (hereinafter PGGM) is an asset manager whose clients comprise a number of pension funds. Each client has its own policy with particular emphases in the field of responsible investment. Last year we worked with our clients to draw up a new responsible investment framework, taking our clients policies as the starting point. This new framework seeks commonality within the PGGM funds while providing scope to meet clients specific policy requirements through internal and external management. During the past year a great deal of attention was devoted to advising clients on the continued shaping of their responsible investment policies and our Implementation Framework in order to be of service to our clients. This process, aimed at building a new framework with clients, gave rise to both tension and shared insights. To give participants a greater voice in the PGGM funds, we decided to hold participants meetings at least once a year from 2014 onwards. As an asset manager for pension funds, we support our clients in their objective of providing a stable, high-quality pension, now and in the future. Our clients attach great value to responsible investment. We are pleased to support our clients in this regard because we firmly believe that a sustainable world contributes to a valuable future for pension beneficiaries. Responsible investment is integrated in all our investment activities, from policy advice through to implementation. Together with our clients we aim to invest in solutions to create a better world. For example, we seek to contribute to a viable and resilient ecological system based on the preservation of natural capital. We work together with other parties to promote a circular economy. A circular economy is one in which all materials used are recycled or biodegraded. We also aim to contribute to a society in which economic development is not at the expense of vulnerable groups or future generations. We therefore maintain a dialogue with companies on employees rights, a company s impact on the local population and improving access to healthcare. Good corporate governance and the proper functioning of markets worldwide are important for PGGM. Seven years after the financial crisis erupted, the financial sector still has to contend with a lack of confidence. The problems of bank capitalisation, financial stability, lack of transparency and undesirable behaviour are still live issues. PGGM actively pursues dialogue with clients and institutional investors in the Netherlands and abroad with the aim of working together to build a sustainable financial system. There are continuing concerns about the vulnerability of the Dutch economy. This has an impact on our clients beneficiaries. Together with other institutional investors and pension funds, PGGM took part in government consultations on plans to deploy pension assets to support the Dutch economy, without making concessions in terms of pension ambitions. These consultations led to a joint statement of intent to establish the Netherlands Investment Institution (Nederlandse Investeringsinstelling - NII) and the National Mortgage Institution (Nationale Hypotheek Instelling - NHI). This will potentially increase the possibilities for providing scarce long-term financing. As in previous years, a great deal of energy has been devoted to ongoing compliance with new legislation and regulations, in particular the Alternative Investment Fund Managers Directive (AIFMD). This requires managers of an investment institution to apply for a licence and to register the funds they manage with the regulator. One of the services we offer our clients is the possibility of investing in the PGGM funds. We therefore applied for a licence on the basis of the AIMFD in mid This directive brings higher standards in terms of transparency, remuneration policy and risk management. We are delighted with the external recognition which we and our clients received last year for responsible investment. There is still a long way to go, however, and in this report we detail not only our past activities but also the issues and obstacles that lie ahead. In 2014 we will continue the activities and dialogue in relation to responsible investment and, together with our clients, seek to contribute to sustainable development. Eloy Lindeijer Chief Investment Management 5 PGGM

6 Overview of responsible investment in 2013 We support our institutional clients in providing a stable, high-quality pension for their beneficiaries, now and in the future. We are convinced that contributing to a sustainable world helps create a valuable future for our clients beneficiaries. Responsible investment is therefore an integral part of the investment approach of PGGM Vermogensbeheer B.V. (hereinafter: PGGM). Responsible investment means that we consciously take account of environmental, social and governance (ESG) factors in our investment activities. Through our activities in the field of responsible investment, we seek to contribute to responsible, stable and good investment results for clients. This objective is based on the following beliefs: Responsible investment pays off: We firmly believe that sustainability factors materially influence the risk-return profile of the investments and that this influence will steadily increase in the future. No good and stable return in the long term without sustainable development: We firmly believe that sustainable development is necessary in order to generate stable, and good investment returns for our clients in the long term. The driving force of capital: We firmly believe that in addition to providing a stable, good pension for our clients beneficiaries, we also have to consider how we can make a positive contribution to sustainable development through our investment decisions.this can be achieved, for example, by investing in solutions which contribute to sustainable development, such as investments in renewable energy. Responsible investment activities PGGM is an asset manager whose clients comprise a number of pension funds. Each client has its own policy with particular emphases in the field of responsible investment. We have a responsible investment framework which takes our clients policies as its starting point. This framework seeks commonality within the PGGM funds while providing scope to meet clients specific policy requirements through internal and external management. We seek to provide customised solutions for our clients, some of whom also make use of the possibility of managing mandates externally. Hence, in responsible investment too, it is possible to depart from the funds managed by PGGM and segregated mandates managed internally by PGGM. This also means the activities we undertake in the field of responsible investment do not always apply to all clients. References to policy frameworks in this report refer to the framework of PGGM and those of one or more of our clients. References to the PGGM policy framework, PGGM Beliefs and Principles or the PGGM Implementation Framework refer to the specific PGGM documents on responsible investment. Frameworks for responsible investment We further developed the responsible investment framework in This new framework shows the developments in our insight and innovations in the responsible investment activities. The new framework is based expressly on our clients policies. In line with the changes in the new framework, we initiated new projects in We are looking particularly at our own conduct, for example at our role in the financial sector. We are doing this internally, but also in dialogue with a group of Dutch chief investment officers. Our aim is to play a part in preventing future abuse in the financial sector and to 6 PGGM

7 win back the trust of society. We have also become a member of Circle Economy. This platform encourages a circular economy in which all materials used to make a product are recycled or biodegraded. Finally, PGGM took part in government consultations with institutional investors and pension funds, leading to a joint statement of intent to establish the Netherlands Investment Institution (Nederlandse Investeringsinstelling - NII) and the National Mortgage Institution (Nationale Hypotheek Instelling - NHI). The aim of these institutions is to match supply and demand for long-term finance and achieve more stable mortgage issuance, thereby contributing to the Dutch economy. After all, our clients beneficiaries benefit from a strong and sustainable economy. Investment processes Climate change, water scarcity and safety on the shop floor are examples of factors which can pose a risk to our clients investment returns. We see taking these factors into account in our investment decisions as a natural part of good risk management. This can lead to a positive contribution to the investment return, but also to an improvement in the sustainability performances of the investments. In 2013 we implemented the ESG index for the first time, applying ESG to the passively managed equity portfolio (beta equities). The ESG index consists of a selection of companies drawn from the FTSE All-World Index on the basis of their ESG performances. The ESG model gives us a better idea of what we are investing in on behalf of our clients in the entire universe within the FTSE All-World Index. This is also important in the light of the revised Guidelines for Multinational Enterprises of the Organisation for Economic Co-operation and Development (OECD). Investors are expected to engage with companies in their portfolio which breach the relevant OECD guidelines, to use their influence to change undesirable conduct and, if unsuccessful, to disinvest from the companies concerned. We use such a process to survey our portfolio and, by means of engagement, to encourage companies to comply with the OECD guidelines. But these revised guidelines raise questions about the extent of our responsibilities. We are in discussion with OECD representatives on the issues and their practical consequences. Investing in solutions for sustainable development We invest on behalf of our clients in solutions for sustainable development. These are clearly defined investments which not only contribute to financial return, but are also intended to generate social added value. Our clients thus help contribute to the resolution of social problems around the world. Examples are investments in clean technology and sustainable energy and investments which help combat poverty. Although there is a growing demand for this type of investment, it is not easy to find investments which meet the requirements. An example of a new investment which did meet the requirements in 2013 is the socially responsible deposit account from Rabobank. The money in this account is linked to the sums Rabobank has outstanding in sustainable finance. As well as investing in solutions, we also like to measure the social impact of these investments. Using an internally developed approach, we continued monitoring the effect of investments in solutions in Such measurement will enable us to monitor the impact over the years ahead and gather evidence that the investments also genuinely contribute to sustainable development. Voting Voting is one of the most important rights a shareholder has. We therefore vote on the basis of our own judgement at shareholder meetings. In this way we contribute to good corporate governance on behalf of our clients. We also devote particular attention to resolutions in the environmental and social fields. In 2013 we submitted two shareholder resolutions to the German real-estate company GSW, when it emerged that the new CEO had not been appointed in accordance with best practice and the company was not prepared to engage in a constructive dialogue on the matter. The resolutions called on the chairman of the executive board to step down and voiced no confidence in the new CEO. The majority of shareholders voted in favour of both resolutions. To the best of our knowledge, such resolutions have never previously secured a large majority in Germany. At the end of the summer of 2013 both the CEO and the chairman resigned. A significant event in the Netherlands was the KPN takeover battle. America Movil announced its intention to launch an intended offer for KPN, which would then enable it to dominate the shareholder meeting (AGM). We considered this to be an undesirable situation; due to the low price we did not want to tender our shares, but at the same time we want to stay on as a minority shareholder while America Movil fully controls decision making process in the AGM. We joined with other investors in calling for countermeasures to be taken. The KPN Foundation then intervened to protect, among others, the interests of KPN and its shareholders. América Móvil then announced that it withdraws from launching the Intended Offer. Engagement As an investor we believe it is our responsibility to talk to companies and market participants about their policies and activities. In this way we seek to bring about improvements in the environmental, social and corporate governance (ESG) fields on behalf of our clients, in the belief that this ultimately contributes to a better social and/or financial return on our investments. We call this engagement. As shareholders, clients and business partners of banks, institutional investors have a great 7 PGGM

8 interest in the stability of the financial sector and can help rebuild trust in the financial system. We therefore have an engagement programme for the financial sector. Our focus is on changing the risk culture and ethics, remuneration policy, corporate governance, ESG integration and transparency. As a member of the EDTF (Enhanced Disclosure Task Force), PGGM has developed a range of initiatives aimed at improving transparency in banks and achieving more uniform reporting on bank risk management in annual reports. We also look at executive pay in the banking sector. Bank of New York Mellon, for example, now bases its long-term variable pay 100% on performance criteria and has limited the use of the company aircraft to business trips. Good corporate governance in companies enables us additionally to promote social and environmental objectives. In the dialogue with the mining company Barrick Gold it emerged that, despite a best practice policy, serious environmental and human rights incidents were occurring regularly in the company, probably due to inadequate supervision. We therefore called for the executive board members who had been in office for a considerable time to be replaced by new members with relevant experience, including in the environmental and social field, to tackle the existing problems. Our endeavours were successful; the board members are being replaced. Since Barrick Gold is an important player in its sector, we are thus also sending a signal to other companies in the sector. One of the responsible investment objectives is to bring about a viable and resilient ecological system based on the preservation of natural capital. Palm oil production is a major and visible cause of deforestation and loss of biodiversity. Wilmar is one of the largest companies in the palm oil sector and has featured in the media following allegations of deforestation and land grabs. We called on Wilmar to make improvements. The company has drawn up a new policy and given a commitment with regard to its own plantations, joint ventures and suppliers: no deforestation, no use of peat soils (due to the high associated greenhouse gas emissions) and no exploitation of employees and the local population. As a major company in the sector, Wilmar is thereby setting a standard for competitors. Legal proceedings PGGM conducts legal proceedings on behalf of its clients where necessary to recover investment losses and enforce good corporate conduct. We do that as a shareholder in listed companies, both in the Netherlands and abroad. In 2013 we were appointed as lead plaintiff in the case against Hewlett Packard (HP) in the United States. HP made misleading announcements about the acquisition and integration of Autonomy. HP had filed an application to suspend the case. The court rejected HP s application and the proceedings are being continued in PGGM

9 Exclusions We wish to prevent investments managed by PGGM from contributing financially to practices that are incompatible with our identity and that of our clients and their beneficiaries. When taking decisions on exclusions, PGGM goes through an extensive process that takes account of clients considerations, usually through an opinion issued by the Advisory Board Responsible Investment. Clients can keep track of PGGM s funds policy and the resulting exclusions. They can also opt to give PGGM an assignment or mandate to implement their own exclusions policy. Clients can also decide independently to exclude certain entities. In the case of individual mandates, PGGM will implement such decisions on behalf of the client as soon as is reasonably possible. Where such exclusions apply to the PGGM funds, PGGM will first seek to achieve a common position among the participants in the PGGM funds through the participants meeting and take this into account in any implementation when deciding whether to implement it in the PGGM fund. Tobacco producers were placed on the exclusions list in For a long time we tried to encourage tobacco producers to maintain better working conditions in the industry. We also spoke out against marketing practices and advertising by tobacco producers targeted at underage people. The dialogue did not have the desired result. Combined with the fact that tobacco was no longer seen as a suitable product by a large proportion of the rank and file among PGGM s pension fund clients, this prompted several of our clients to add tobacco producers to the exclusions list. responsible investor we find it important that investee companies comply with international agreements. Finally, the American supermarket group Walmart was added to the exclusions list in Walmart s policy in the United States limits the right of employees to organise themselves in trade unions. This contravenes not only international labour guidelines (ILO) but also the codes which Walmart has drawn up for its own suppliers. Moreover, the company s board is not prepared to engage in constructive dialogue with shareholders on this matter. This decision followed a lengthy period in which we raised this matter frequently with the company. In 2013 we concluded the dialogue which we had been conducting for some years with a number of Israeli banks. The banks are involved in financing the expansion of settlements in the Palestinian territories. There were concerns on this matter, because the settlements are seen as illegal under international law and constitute a major obstacle to a peaceful (two-state) solution to the Israeli-Palestinian conflict. This interpretation of the application of international law is disputed in Israel. These discussions revealed that the banks have little or no scope to end their involvement in financing settlements in the occupied Palestinian territories. Since there is no prospect of change in the near future, we are currently no longer investing in the banks in question through the PGGM-managed funds. There were suggestions in the media that this was a politically inspired decision. That is not the case and we are not boycotting Israel. As at 31 December 2013, we had investments in almost 100 Israeli companies. We regret that, partly as a result of the media representation, disquiet also arose among some of our clients beneficiaries and that beneficiaries may thus have been offended. The exclusion accords with the responsible investment policy frameworks and shows that as a 9 PGGM

10 1. Frameworks for Responsible Investment 10 PGGM

11 We support our institutional clients in fulfilling their task of providing a stable, high-quality pension for their beneficiaries, now and in the future. We firmly believe that contributing to a sustainable world is part of building a valuable future for those beneficiaries. Responsible investment has therefore been integrated into all the investment activities of PGGM Vermogensbeheer B.V. (hereinafter: PGGM). Responsible investment means that we consciously take account of environmental, social and governance (ESG) factors in our investment activities. We continued to develop the responsible investment framework in This new framework reflects the developments in our insight and innovations in responsible investment activities. It also fits in with the changing context in which we, as an asset manager, implement the policies of the various institutional clients. The new framework is based expressly on our clients policies. With our clients we sought to identify the beliefs we share with them with regard to responsible investment. We then explicitly defined the principles governing our fulfilment of responsible investment. These principles are consistent with our clients common interests while providing scope to fulfil individual policy requirements. In the PGGM Beliefs and Principles for responsible investment, we set out our ambition of making a positive contribution to sustainable global development through the investments on behalf of our clients. This document replaces the Responsible Investment Policy and also includes a minimum standard. This document has been supplemented with an Implementation Framework, which contains more detailed implementation guidelines for the various activities in the field of responsible investment. Our responsible investment activities do not always apply to all clients. 1.1 Responsible Investment Beliefs Responsible investment pays off: We firmly believe that sustainability factors materially influence the risk-return profile of the investments and that this influence will steadily increase in the future. No good and stable return in the long term without sustainable development: We firmly believe that sustainable development is necessary in order to generate stable, and good investment returns for our clients in the long term. The driving force of capital: We firmly believe that in addition to providing a stable, good pension for our clients beneficiaries, we also have to consider how we can make a positive contribution to sustainable development through our investment decisions.this can be achieved, for example, by investing in solutions which contribute to sustainable development, such as investments in renewable energy. In this chapter we describe the main elements of the resulting frameworks and explain a number of new developments. 11 PGGM

12 What are our focus areas in responsible investment? Through our investments or other responsible investment activities we seek to reduce the negative aspects of the footprint and make a positive contribution to sustainable global development on behalf of our clients. This is a development which meets the needs of current generations without compromising the needs of future generations. We believe that three important conditions must be in balance in order to bring about a more sustainable world. These are: A viable and resilient ecological system based on the preservation of natural capital A society in which economic development is not at the expense of vulnerable groups or future generations Good corporate governance and well functioning (financial) markets. In order to achieve this in a targeted way, we have specified a number of focus areas in consultation with our clients. These are subjects which our clients and their beneficiaries consider important and developments which materially affect the investments made on behalf of our clients. These are: Climate change and reduction of pollution and emissions Water scarcity Health(care) Food security A stable financial system which serves the real economy Good corporate governance Safeguarding human rights. 1.2 Developments in 2013 Our own behaviour Financial and economic crises have taken a heavy toll on investment portfolios, and on society s trust in the financial sector. That also affects us. Not only are we, just like our clients, players in this sector, but we also have a major involvement in the financial sector, both as a shareholder and as a client or business partner of major financial institutions. To win back society s trust and prevent further abuse, we believe the sector must be reformed. Together with our clients, who are situated at the beginning of the financial chain, we have a sense of responsibility for contributing to this. We critically assess our own behaviour and that of parties in the sector with which we co-operate or in which we invest. At the end of 2013 a Behaviour working group was established to undertake this work. Various subjects are due to be investigated by this working group in We are looking among other things at the role of benchmarks, socially acceptable pay structures and how we can foster more long-term thinking and action among the parties with which we co-operate. 12 PGGM

13 These subjects are also being addressed in a structural dialogue which we are conducting with a group of Dutch chief investment officers on a sustainable financial system and the necessary changes. This dialogue, initiated in part by PGGM, will also be continued in Investing in the Netherlands With regard to our own role in the financial sector, we do not only look at international markets; the consequences of the financial crisis are also evident in the Netherlands. On Prinsjesdag (Budget Day in the Netherlands) the government and institutional investors issued a joint statement of intent to establish the Netherlands Investment Institution (Nederlandse Investeringsinstelling - NII) and the National Mortgage Institution (Nationale Hypotheek Instelling - NHI). The statement of intent was co-signed by PGGM. The NII has the primary task of matching supply and demand for long-term finance and to increase the attractiveness of potential investments in the Netherlands. The establishment of the NHI follows previous exploratory work by the committee on Alternative Financing Arrangements for the Housing Market and aims to narrow the funding gap for Dutch banks, stabilise mortgage issuance and reduce mortgage interest rates. Under the leadership of the quartermaster appointed in November, PGGM was closely involved in designing both the NII and the NHI, on the basis of a conviction that pension funds and their cooperative pension fund service provider have a social responsibility. After all, pension fund beneficiaries benefit from a strong and sustainable economy. Additional investments in the Netherlands, provided they are carefully selected and structured, can contribute to this without having to make concessions in terms of financial objectives. NII and NHI can play an important role in this regard. The Netherlands faces major issues surrounding social investment. Tens of billions of euros will need to be spent in the years ahead to modernise infrastructure, make the housing stock and power generation sustainable and provide protection against the consequences of climate change. The implementation of the Energy Accord of the Social and Economic Council of the Netherlands itself will require an estimated investment of 13 billion to 18 billion up to Pension funds are ideally placed to finance such projects, which are very long-term and usually feature remuneration with an inflation component. Partner of the Circle Economy platform We see the transition to a circular economy as an important contribution to a more sustainable world. We have therefore become a member of the Circle Economy. This platform encourages a circular economy in which all materials used to make a product are recycled or biodegraded. In order to examine how this can be implemented through investments, we will work with Circle Economy to develop a method for assessing the circularity of companies. Such information can assist us in identifying suitable investments in solutions which contribute to a more circular economy. The current investments in clean technology are an example of this. 1.3 Implementation of responsible investment activities PGGM is an asset manager whose clients comprise a number of pension funds. Each client has its own policy with particular emphases in the field of responsible investment. We have a responsible investment framework which takes our clients policies as its starting point. This framework seeks commonality within the PGGM funds while providing scope to meet clients specific policy requirements through internal and external management. That means the activities we undertake in the field of responsible investment do not always apply to all clients. PGGM invests and advises its clients as follows: (1) PGGM manages various mutual funds in which multiple clients participate. (2) PGGM manages segregated mandates for individual clients. (3) PGGM advises clients on investments through external mandates or funds. The Beliefs and Principles for Responsible Investment apply to all of PGGM s investment and advisory activities which fall within these three categories. The Implementation Framework applies to the PGGM mutual funds, to segregated mandates managed internally by PGGM and to the activities of PGGM Treasury B.V. When taking decisions on and within the Implementation Framework, PGGM goes through an extensive process that takes account of clients considerations, usually through an opinion issued by the Advisory Board Responsible Investment. Clients can opt to apply the PGGM funds policy on responsible investment. Requests from clients to amend the responsible investment framework for the PGGM funds are submitted by PGGM to the participants meeting for its consideration. PGGM takes account of the outcome of the participants meeting with regard to such requests when deciding whether to apply this policy framework. Within their segregated mandates clients can also instruct PGGM to implement their own responsible investment policies or can opt to take their own decisions on questions concerning the implementation of responsible investment. In the case of segregated mandates, such instructions or decisions must be carried out to the extent that they are possible and appropriate. Clients report separately on their own decision-making processes. 13 PGGM

14 The assets which PGGM has under management and advice on behalf of its clients amount to 154 billion, including 141 billion within the (1) PGGM mutual funds and the (2) segregated mandates managed internally by PGGM (as at the end of 2013). This report covers only the responsible investment activities carried out by PGGM Vermogensbeheer in respect of this 141 billion (total of 1 and 2 in the illustration below). Responsible Investment Policies of Clients PGGM Beliefs and Principles PGGM Implementation Framework Responsible Investment (implementation and advice) Responsible investment advice PGGM funds 1 PGGM internally managed segregated mandates 2 Externally managed mandates & funds 3 Participants meeting Roles and responsibilities for responsible investment The responsibilities for responsible investment are clearly defined by the organisation. Three PGGM committees and the participants meeting play an important role: Investment Policy Committee: This committee takes decisions on the policy aspects of responsible investment, such as providing policy advice for clients or the PGGM Beliefs and Principles. Investment Committee: This committee takes decisions on individual investment proposals of a particular nature, on exclusions of individual companies and conducts annual reviews of the PGGM investment teams ESG processes. Advisory Board Responsible Investment: This advisory body consists of five independent external experts from whom PGGM Vermogensbeheer and its clients can obtain advice and with whom they can discuss issues relating to responsible investment. Participants meeting: The participants meeting gives the various clients participating in a particular PGGM fund the opportunity to discuss or take decisions on fund-specific subjects, including responsible investment, with the manager and the other participants. factors. The department also provides support for internal and external communication on responsible investment and advises clients on their policies in the field of responsible investment. Responsibility for integrating ESG factors in investment decisions lies with the various investment departments. 1.4 Outlook The Beliefs and Principles for responsible investment and the underlying implementation framework are being implemented in 2014, for example by applying greater focus in the engagement programme. A number of clients will continue to develop their responsible investment policies over the coming year, with PGGM playing an advisory role. In addition, the Responsible Investment (RI) department co-ordinates and oversees activities within the Responsible Investment Implementation Framework. It also conducts the engagement and voting activities and legal proceedings as a shareholder. RI also takes part in deal teams where there is a medium or high ESG risk and helps investment teams to develop tools to integrate ESG 14 PGGM

15 2. Investment processes 15 PGGM

16 Climate change, water scarcity and safety on the shop floor are examples of factors which can pose a risk to our clients investment returns. We see taking these factors into account in our investment decisions as a natural part of good risk management. This can lead to a positive contribution to the investment return, but also to an improvement in the sustainability performances of the investments. Taking account of the effect of ESG factors on the investment risk and return is a process we call ESG integration. We look, for example, at the effect of water scarcity on a beer brewer and the costs which a beer brewer has to incur to secure access to water because this can also have consequences for the investment. Specifically we define ESG integration as the structural and systematic incorporation of material ESG factors in existing investment processes. Material ESG factors are those which have such an impact on the underlying investment that it can reduce the risk or improve the return on the investment. 2.1 Developments in 2013 Status of ESG integration In 2009 we initiated a project to integrate ESG factors in investment decisions in a more structured way in order to manage the associated risks more effectively and exploit opportunities. The approach consists of three phases which take place in each investment category. The phases represent the degree of implementation of ESG factors in the investment decisions and the monitoring of existing investments. They do not show the extent to which exclusions or other restrictions to the investment universe are applied. Table 1.1 shows the status of each investment category. Monitoring of implementation We periodically engage in discussions with internal and external investors on the way in which they implement ESG factors in new and existing investments. The internal investment teams also monitor how external asset managers integrate ESG factors in their processes. The way in which this is done differs in each investment team, and this is a point we aim to improve in In 2012, we conducted a review of our own internal procedures, the outcome of which led to changes to the investment process in The Responsible Investment department s position in the procedures for various new investments was consequently strengthened. In the case of investments with high ESG risk, input from the RI department is required and RI takes part in the deal teams. We have also worked with other investors to develop general control measures for ESG implementation. An example is the ESG Disclosure Framework for Private Equity. This document sets out the objectives and basic questions which investors can ask during the due diligence and the monitoring phase of the private equity funds in which they invest or wish to invest. That makes the extent to which fund managers actually integrate ESG factors more transparent for investors. In 2014 we aim to work with other investors in order to define further details of the framework. A number of investment categories recorded progress compared to Responsible Equities, for example, established its process for integrating and monitoring ESG factors. Private Equity and Infrastructure also applied the integration of ESG factors in their investment process, as set out in their responsible investment implementation framework in ESG factors are now also incorporated as standard in company analyses in the Corporate Bonds segment. In addition, Treasury has introduced an ESG risk-rating system in which it can monitor counterparties and screen new parties for ESG risks. 16 PGGM

17 ESG integration phases Investment category* 1. Survey ESG framework 2. Implementation Integration in investment decision Monitoring and reporting tools 3. Internalisation Continuous improvement Equities Beta equities Responsible equities Private equity Real Estate Listed real estate Private real estate Fixed-income securities Corporate bonds Emerging markets credits Emerging markets debt High-yield corporate bonds Structured credit Rates & Inflation (including European government bonds) Cash Commodities Beta commodities Supplementary Infrastructure Real assets Insurance Hedge funds Trading & Execution Others Table 1.1 Legend Started Completed / Continuous (for phase 3) Not applicable Comments Beta equities: Investments are made on the basis of a share index or quantitative model. It is not possible to integrate ESG factors in individual investment decisions. Structured credit: The CSR policy of the counterparty, the bank, is taken into account, but it is not possible to take account of ESG factors in the credit risk. Rates & Inflation (including European government bonds): These portfolios comprise interest rate swaps and a limited range of European government bonds. Adding ESG factors to the investment processes yields no added value. Others: These include portfolios which are being run down. Process definitions ESG framework Integration in investment decision Monitoring and reporting tools Continuous improvement n/a In this phase an ESG framework is drawn up for each investment category. We examine and record which, and to what extent, environmental, social and corporate governance factors affect the financial performance of underlying investments. On the completion of the phase, it has been determined how financial ESG factors play a role in the investment selection. Elements of this are the development of policy or tools to assess external asset managers or incorporate ESG in valuation models. On the completion of the phase, processes have been established in which it is determined how ESG factors are regularly discussed with external managers, assessment criteria have been established for external managers, reporting requirements and KPIs have been established and/or the ESG performances of the underlying investments are monitored. ESG factors are a natural part of the overall investment process. This means among other things that ESG factors play a part in the normal routine of the investment process, are periodically evaluated and, if necessary, adjusted. The Investment Committee evaluates the ESG integration each year. If the inventory phase shows that ESG cannot be integrated in a financially material way because ESG factors have no material financial effect on the investments, as may be the case with derivatives, the subsequent phases do not take place.

18 Implementation & Measurement PREF PREF 2012 GRESB Global Average 2013 GRESB Global Average Figure 2.1 GRESB scores GRESB survey Green Walk Green Stars Green Starters Green Talk Management & Policy Another example is the Global Real Estate Sustainability Benchmark (GRESB). Every year we request the external real estate fund managers to complete an extensive GRESB questionnaire. This helps us to compare realestate funds in terms of ESG policy, management, implementation and ESG performance. In 2013 we received a completed survey for 93% of all investments in the Private Real Estate Fund. Figure 2.1 shows the accumulated scores of the Private Real Estate Funds (PREF) in 2012 and It shows that the PREF scores are better than the overall GRESB average. The PREF scores also improved in 2013 compared to In 2014, on the basis of our acquired historical knowledge, we will contact the lagging real-estate funds to discuss possible sustainability improvements. Research into ESG risks among investment categories In addition to the ongoing focus on integrating ESG factors within the various investment categories, we continued the project aimed at clarifying and comparing differences in ESG risk among the investment categories in In order to determine the ESG risk in each investment category, we identified the sector and country risks in the investment category concerned. As well as investigating the ESG risks of the sectors and countries, we will examine the control measures required to reduce these risks. An investment category in which there is extensive scope to reduce the ESG risks may have a high gross risk but may limit this risk to a large extent, leaving a low net risk. This project answers the question of whether all ESG risks can be mitigated in the current investment mandates and whether ESG opportunities are being exploited. This insight can be incorporated in future investment plans. In 2014 we will present our quantitative approach and the results achieved so far to a panel of experts in order to assess how we can continue this research. OECD & UN guiding principles, expectations for minority shareholders The revised Guidelines for Multinational Enterprises of the OECD (and the UN Guiding Principles on Business and Human Rights, to which the OECD guidelines refer) may have far-reaching implications for institutional investors who are minority shareholders. Investors are expected to engage with companies in their portfolio that breach the relevant OECD guidelines, to use their influence to change undesirable conduct and, if unsuccessful, to disinvest from the companies concerned. That is asking a lot of investors with large, widely diversified passive equity portfolios. Although we have a robust process for surveying such risks in the portfolio and encouraging companies to change by means of engagement, these expectations also give rise to issues such as the extent of our responsibilities. We are in discussion with OECD representatives on these issues and their practical consequences. 18 PGGM

19 We also conduct a review of our procedures and assess whether they comply with the OECD Guidelines for Multinational Enterprises. Application of ESG factors in index investments We have developed and implemented an ESG index based on the FTSE All-World Index in order to apply ESG factors in the passively managed equity portfolio (Beta Equities). The ESG equity index consists of a selection of companies in the FTSE All-World Index based on their ESG performances. This means we divest shareholdings in companies which score relatively poorly in their sector for environmental aspects, social policy and corporate governance. The ESG model gives us a better idea of what we can invest in on behalf of our clients within the entire FTSE All-World universe. It also sends an important signal to the market: investors take account of individual companies ESG performances in passive investment strategies. The ESG index helps with prioritising engagement with companies. For example, we now also focus on (previously unknown) laggards in terms of ESG. The information provided by the ESG model and the risk analysis also enables us to tackle companies on specific aspects in which they are underperforming: inadequate ESG policy, management and/or results. The initial analyses of the impact of the ESG Index in 2013 points to a slight improvement in the average ESG scores of the companies in the ESG index, which are higher than those in the FTSE All-World Index and, what is more, have risen compared to We implemented the ESG index for the first time in the first quarter of The ESG index is renewed annually. The 2014 ESG index was compiled in November Investing in food derivatives A great deal of attention was devoted again in 2013 to the debate on the possible effects that investment in food derivatives could have on real food prices. We organised a meeting jointly with a number of NGO s, which was addressed by various experts with different visions, including market participants (such as food manufacturers and investors), government authorities and scientists. The aim of this meeting was to gain greater insight into market mechanisms and thereby ascertain whether investors influenced real food prices in the derivatives market. of liquidity, efficient pricing) are outweighed by negative effects such as excessive volatility? Can such a point also be predicted and integrated in the investment policy? The problem of stranded assets The Unburnable Carbon report was published by the Carbon Tracker Initiative in 2013 and delivered an important message. If global warming is to be limited to 2 Celsius, it will not be possible to exploit proven reserves of fossil fuels. Companies are currently valued on the basis of the availability and expected saleability of these reserves. If companies are no longer able to exploit them, these companies valuations will be adjusted downwards. In recent years various experts have cited the risk of stranded assets investments which, due to physical limitations (such as water scarcity) or laws and regulations (due to climate or air pollution) could rapidly lose their value. Since we also have investments which could potentially be stranded assets, this is an important subject. In 2014 we are investigating the possible impact of stranded assets on the portfolio. 2.2 Outlook The aim is to have all investment categories in the continuous improvement phase in In most cases investment teams are already implementing ESG in investment decisions and it is a question of structurally recording and monitoring such implementation. After four years the existing phasing is no longer particularly meaningful. In the years ahead, rather than describing processes, we aim to present more results, for example the reduction in CO 2 emissions within an investment portfolio. The meeting produced a lively debate but no clear answer on the effect of investments in food derivatives on real food prices. It was therefore decided to conduct more detailed research in 2014 into the effect that different types of investors have on the market (for example the distinction between active and passive investors), also covering the size of financial operators in the food derivatives market. Is there a point at which the advantages of having investors in the market (provision 19 PGGM

20 ESG integration Results and targets for quantitative indicators (at year-end) 2012 outcome 2013 target* 2013 outcome 2014*** target* Completed in phase 1 Inventory (as % of total assets under management) (millions of euros) Started in phase 2 Implementation (as % of relevant investment categories)** Completed in phase 2 Implementation (as % of relevant investment categories)** 100% n/a 100% n/a 100% n/a 100% n/a n/a n/a 21% n/a * No targets are applicable for some of these components. These components have nevertheless been included in this table to show the outcomes of the various responsible investment activities. ** See table 1.1 for the investment categories in which phase 2 is relevant. *** We will no longer report on these quantitative indicators in 2014, because they are no longer relevant. 20 PGGM