PGGM, asset manager for the €172bn Dutch healthcare pension fund PFZW, is to divest the scheme’s stakes in more than 200 mining, steel and energy companies in a bid to halve its investment portfolio’s carbon footprint. 

Patrick de Jong, senior strategist, and Han van Manen, senior investment manager for external management, say PGGM will tackle the issue by exploiting the “steering power” of money. “By making clear we want to divest from companies with high CO2 emissions,” says De Jong, “we show we are serious about reduction.”

Halving the CO2 emissions of PFZW’s portfolio is an ambitious target. The €357bn civil service scheme ABP, for example, has announced plans to reduce its carbon footprint by one-quarter over five years by offloading stakes in an estimated 1,500 companies.

PGGM’s position is that the reduction must not increase its exposure to risk, and it has therefore avoided fully excluding any sector from divestment. It also wants to keep costs down. “The divestments,” Van Manen says, “also had to fit in with our passive investment style. Moreover, we wanted to present a comprehensive story for PFZW’s participants. Together with our clients, we have developed a method that enables us to carry out the reduction within these conditions.”

At first, PGGM will assess the listed equity portfolio for possible carbon reduction. “We check carbon efficiency, which differs per company,” says De Jong. “Over time, we will divest from the least efficiently performing firms as far as necessary to hit our reduction target.”

PGGM and other investors measure CO2 efficiency by dividing the emission by turnover. Because the outcome can vary widely between sectors – IT companies versus steel producers, for example – investors only compare companies within a sector. As a result of this approach, an energy company that generates power from solar panels and wind turbines scores better than a coal-burning competitor.

The carbon-based selection focuses on the materials, energy and utility sectors. “Combined,” says Van Manen, “they account for more than 70% of the emitted CO2 in our portfolio. If we also take other criteria into account, such as costs, a switch to more carbon-efficient companies in these sectors is the most effective.”

The three sectors include 630 companies, of which almost 50% represent materials, such as chemical, building and mining companies. The other half is equally divided across energy (oil and gas producers, as well as their suppliers) and water, gas and power utilities.

PGGM is invested in about 3,100 listed companies and divesting from 200 firms cannot be carried out without first accounting for PFZW’s financial targets, says De Jong. “Firstly, we inform all companies that qualify for divestment,” he says. “We make clear they are the least efficient ones in their sector and explain our approach. If they don’t improve, we will gradually sell our holdings.”

But not all companies will be treated equally. “We’ll have a more extensive engagement with companies that, in our view, have sufficient potential for improvement,” says Van Manen.

Further, PGGM’s divestment does not mean it will necessarily reduce its stake in mining, energy and utilities. “Our approach is sector-neutral,” says Van Manen. “We don’t exclude any part of the economy in advance. Within the sectors, we shift capital from slow developers to companies that score relatively well on our carbon index, which we apply to a €30bn portfolio.”

Van Manen and De Jong expect that several companies will fail to improve their carbon efficiency within a short period. “Mining firms and coal-fired power plants emit a relatively large amount of CO2 ,” they say. “Changing this isn’t easy.”

PGGM does not foresee any negative impact from the carbon-based reshuffle on the risk/return characteristics of PFZW’s equity portfolio. “It could even have a positive effect, but we don’t actively anticipate a specific scenario for energy transition,” De Jong says. “After all, we shift assets from companies that don’t score well to the most efficient ones in their sector.”

PGGM’s approach seems to be a relatively simple way of reducing the carbon footprint of a portfolio without increasing risk or incurring high costs, raising the question of whether other investors will follow. “Developing this model has taken us a year, and it is only available to our clients,” Van Manen says. “As far as we know, we are among the first asset managers to apply this system at this scale. To other investors, such as family offices, it is much easier to change their investment mix. At pension funds, we need to take the risk profile into account. Schemes don’t only have to explain changes to their participants, but they must convince the supervisor as well.”