If pension funds want to invest more in the circular economy, they need to be more flexible and adjust their assessment procedures, according to participants in an event that was meant to promote such investments.

The event, held last week in the city of Leiden, was organised by the Dutch pensions association, Pensioenfederatie, which finds that many Dutch pension funds are keen to invest in the circular economy but do not know how.

’Circular’ companies only use recyclable materials for their products, produce no waste and emit little to no CO2 in their production processes. This chimes well with the targets of pension schemes to reduce their carbon footprint.

The connection to the Sustainable Development Goals (SDGs), on which many funds base their sustainable investment policies, is also easily made.

Yet Dutch pension funds’ investments in investment funds that focus on the circular economy remain limited. Partly because of this, circular companies in the Netherlands often find it difficult to obtain financing, according to Gerdie Knijp and Rens van Tilburg of the Sustainable Finance Lab, an academic think tank focused on sustainable finance.

The pair wrote a paper on the topic that was presented at the Pensioenfederatie meeting.

Barriers to entry

Pension funds are reluctant to invest in the circular economy because of high perceived barriers to entry: circular investment funds are often expensive, risky and do not fit within existing frameworks.

Pension funds also struggle with a lack of access to specific knowledge about the circular economy, and initial investments are often considered too small to make the effort worthwhile. For much the same reasons, Dutch pension funds also invest only limited in venture capital.

Pension funds often already give up in the initial phase as circular companies often lack a track record and cannot meet certain due diligence requirements.

A rare example of a realised investment in a circular economy company is the €25m investment of pension asset manager PGGM in SCW Systems, a company that generates sustainable energy from waste, captures the CO2 produced in the process and processes it into products such as concrete, plastic and paper. But that investment took many years to take shape, according to Philip Janssen, financial director of the firm.

“Many funds are not set up to invest in the circular economy,’ Janssen noted. “For example, in 2016 we entered into talks with APG and PGGM, who were interested in investing and requested our financial statements for the past three years approved by an external accountant. But we didn’t even have an accountant yet, so we couldn’t meet that requirement,” Janssen said.

“APG dropped out somewhere in this process, but PGGM did follow through,” he added.


But before PGGM invested, there were more hurdles to overcome as it’s not straightforward to find a place for circular investments in funds’ asset allocation.

“We are a kind of infrastructure company, because we produce energy, but still don’t really fit into the infrastructure bucket because of the early stage of our technology,” Janssen said.

Unlike typical infrastructure investments, such as toll roads or solar farms for example, SCW Systems does not (yet) have predictable cash flows.

“Although we see ourselves as an infrastructure company, we also have elements of private equity and venture capital,” he added.

It was therefore not easy for PGGM to invest in his company, according to Janssen. “Pension funds had to make exceptions to existing requirements to be able to invest in us. The solution that was eventually found was to place SCW in the private equity bucket, with the investments being managed by PGGM’s infrastructure team.”

To avoid such difficulties in the future, pension funds should “create a separate bucket” for circular investments, Janssen recommended.

henk groot detailhandel2

Henk Groot at Detailhandel

Besides PFZW/PGGM, only a few pension funds specifically invest in circular companies.

For example, metals and technology fund PME invests in an Achmea Real Estate timber-based redevelopment project where vacant commercial property is being transformed into 163 sustainable homes.

ABP has invested in the Dutch company Avantium, which extracts plastics from plants sugars. According to ABP board member Anne Gram, also present at the meeting, ABP is keen to expand circular economy investments in the Netherlands, and is currently looking for suitable investments.

Pensioenfonds Detailhandel

While ABP and PFZW have opted for equity investments in circular companies, €28bn Pensioenfonds Detailhandel, the sector scheme for the retail industry, invested in a circular debt fund last year as it is a more accessible way to invest in the circular economy for smaller pension schemes.

“We are a small organisation of only six people, and have no in-house knowledge about private equity,” the fund’s head of investments Henk Groot said explaining Detailhandel’s choice for a debt fund.

Pension schemes could also consider investing in a more generalist fund that only invests part of its capital in circular investments, according to Knijp and Van Tilburg.

On top of that, fund-of-funds structures can also be a way for smaller schemes to achieve sufficient diversification, they added in their paper.

This article was first published on Pensioen Pro, IPE’s Dutch sister publication.