Dutch pension funds all in on sustainable investing

Francesca Veronesi
20 June 2019

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The launch in April by PFZW and PGGM of a €500m private equity allocation is a sign of the uptake of sustainable private equity investments, with Dutch pension funds hoping to lead the charge. Francesca Veronesi reports

A report by responsible investment charity ShareAction published last year shows why Dutch pension funds can be considered at the forefront of responsible investing: assessing the responses to climate change of the world's 100 largest public pension funds, it ranked the two largest Dutch pension funds, ABP and PFZW, among the top 10. The Netherlands, alongside Sweden, were top of the list among European pension funds.

When it comes to private equity sustainable investing, pensions funds are in the process of elaborating a more substantial strategy. A spokesperson for APG, the asset manager of the largest Dutch pension fund ABP, confirmed to Unquote that it is working to increase the amount of sustainable development investments across its full portfolio, including private equity. "ESG practices have been implemented for 20 years now, becoming common practice in the Netherlands," says Willem Jan Brinkman, principal investment manager for private equity at PGGM, the asset manager of PFZW, the second largest pension fund in the Netherlands. "For example, the Dutch Central Bank expects ESG to be part of the investment strategy of asset managers. Sustainable investments, on the other hand, is a newer trend."

The launch in April by PFZW and PGGM of a €500m private equity allocation is a sign of the uptake of sustainable private equity investments, which adds to the €12.5bn PGGM has invested in private equity. The allocation will back deals that should generate market-rate returns and make positive impact in the areas of climate, water scarcity, food security and care. It will be used to invest in "green" GPs, although the asset manager intends to be a co-investor when possible, in order to bring more focus to the designated themes in the portfolio.

Brinkman underlines that the asset manager invests in sustainable investments across several asset classes by, for example, also backing green bonds and buying shares in public companies. However, allocating €500m to private equity investments was identified as an interesting strategy for different reasons: "Private equity investments in this strategy would typically target smaller companies, which suits us better, since a large public company often has multiple activities, not all of them meeting our impact investing goals. Moreover, acquiring stakes in privately held companies allows us to collect data about the company's sustainability and therefore better monitor its degree of sustainable impact," he says. Maurice Wilbrink, a spokesman for PGGM, adds that when acting as an LP rather than a direct investor, PGGM will be backing typically smaller and sector-focused GPs rather than generic ones, also to better track the degree of sustainability achieved.

Returns and noble motivations
PGGM does not expect returns to be any lower than the ones targeted for other private equity investments: "Rather than the sector, we think returns will be related to the market section we're investing in – they will depend on whether we're backing early-stage, expansion or buyout deals," says Brinkman. The first transaction of the allocation is an early-stage deal, but PGGM is likely to invest most of the allocation in expansion or buyout deals.

Questioned as to what the main motivation behind starting the private equity sustainability investing practice is, he says that PFZW's beneficiaries value these types of investments. "Working in health and the social sector, our beneficiaries are very sensitive to the environmental threats we are currently facing – a greater awareness concerning these issues has motivated us to move in this direction," says Brinkman. He also refers to surveys commissioned by pension funds in the Netherlands to assess the priorities of beneficiaries, and what sectors they would like to see their pensions invested in.

The PFZW/PGGM €500m private equity allocation seems like an important step towards the formalisation of a sustainable private equity investment strategy. Provided the strategy pans out, with returns to show for it, the initiative will surely encourage similar organisations in the Netherlands and elsewhere to follow suit.