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Special Report

Impact investing

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From periphery to mainstream

Dutch superfund ABP has been actively involved in both socially responsible investment (SRI) and corporate governance since the mid-1990s. Since then, ABP has undertaken a whole array of national and international activities to include SRI and corporate governance in its mainstream investment processes. ABP is one of the leaders in this area and is convinced that effective SRI and corporate governance-related activities can contribute to the preservation, or even stimulation, of the long-term value of institutional shareholders’ value. Furthermore, research increasingly indicates a positive correlation between SRI, good governance and performance. As a result, the scheme takes the view SRI and good governance should become an integral part of mainstream investment processes.
To promote the integration of social, ethical and environmental criteria in its investment process, ABP opted for an active approach. First of all the fund established a code called the ‘prudent investment policy’. This stipulates that ABP should aim to encourage sustainable investment behaviour and the incorporation of best-practice corporate governance principles. Also the code states that all investments are made exclusively in the interest of the participants in the pension fund and so aim to achieve a maximum financial return. To include SRI in its mainstream portfolio, ABP addressed the question of how to implement an SRI policy whilst ensuring that it remained in the best interest of its clients.

Academic research
ABP decided to become actively involved in academic research investigating the proposal that portfolios based on sustainability screening can not only be managed without a ‘cost’ (negative excess return) but also offer the possibility of delivering positive excess returns. The survey International Evidence on Ethical Mutual Fund Performance and Investment Style, conducted by Rob Bauer, head of research at ABP Investments, together with Koedijk and Otten, was awarded the prestigious Moskowitz Prize for Socially Responsible Investing.
In addition, ABP has created a series of networks and exchanges of ideas to encourage both pension funds and academics to consider how SRI could accelerate as an approach and lead to the long term goal of enhancing returns or not.

SRI portfolios
Based on positive indicators, ABP started with two SRI portfolios that both demonstrated positive returns. To further accelerate SRI as a practical approach, ABP transferred its SRI portfolios to a fund offered by Loyalis Financial Services – a wholly-owned subsidiary of ABP. Whereas the two initial SRI portfolios were internal, ABP now offers its global SRI portfolio to third parties throughout the Loyalis Global Sustainability Fund (LGSF). ABP believes that LGSF satisfies both the sustainability and investment objectives that institutional investors seek. From sustainability perspective the fund stimulates companies to act in a sustainable manner, thereby stimulating long term economic growth. ABP says the fund also provides institutional investors with a tool to implement a sustainable investment strategy as part of their long-term investment policy.
Furthermore, on the investment side it offers a way of achieving profitable returns with diversification in investment style.
In addition, the fund offers institutional investors the chance to participate in a network of long-term investors who all have a vested interest in solid and sustainable business practices in the long run.

Applying mainstream benchmarks
For its SRI portfolios, ABP has chosen to apply a mainstream MSCI benchmark, because it positions the portfolio as part of the risk/return profile of the total investment portfolio. Moreover, it shows the excess return of the SRI portfolio in comparison to the overall benchmark. In this way, the SRI portfolio can easily be applied within the common mainstream core/satellite portfolio approach.

Strategic stake in Innovest
ABP also acquired a strategic minority stake in Innovest Strategic Value Advisors, an international investment advisory firm specialising in best-in-sector SRI. This stake represents a strategic investment in knowledge capital in an area ABP believes to be one of the most critical factors driving the future of fiduciary investments. ABP believes its stake in Innovest is another indication that mainstream investors are seeing the benefit of implementing SRI strategies. Innovest´s analysis and research is not only valuable within the SRI community but can be acted upon by the mainstream as well, because SRI is becoming one of the drivers of mainstream investment decisions. By taking this stake, ABP is aiming to contribute to the growing body of evidence that companies that manage environmental, social, and governance risks most effectively tend to deliver better risk-adjusted financial performance than their industry peers.

Corporate governance
ABP has an active corporate governance policy in which it requires high standards of transparency, independent supervision, accountability and shareholders’ rights. The fund believes that companies will be forced by international competition and the dispersal of their share capital to adapt their corporate governance according to international standards. In this way they can obtain the loyalty of investors.
ABP made its policy public in its Code for Prudent Investment Policy in 2000 and the Code for Corporate Governance in 2001.
ABP believes that listed companies should aim at generating a sustainable maximum return for their shareholders. To this end, the fund will evaluate the policy of the board of directors and supervisory board of a company in the light of this target and vote on its share accordingly. These principles are further explained by corporate governance codes drawn up by international and authoritative organisations such as the International Corporate Governance Network (ICGN) and the Organisation for Economic Cooperation and Development (OECD).
ABP published its corporate governance policy to the public a few years ago and is working towards disclosing its voting in individual companies on its website. This should be realised by the start of the proxy season in 2004.

Networking
ABP Investments is one of the founders of the ‘Stichting Corporate Governance Onderzoek voor Pensioenfondsen’ (Foundation for Corporate Governance Research for Pension Funds) (SCGOP). The principal objective of SCGOP is to enhance the quality of corporate governance in the Netherlands. Together with the other members of SCGOP, ABP Investments expresses its views at shareholder meetings of Dutch companies quoted on the stock exchange. ABP Investments is also an active participant in several international platforms working for the improvement of corporate governance, such as ICGN and the Council of Institutional Investors.
In order to benefit from the growing evidence that good governance pays off, ABP has acquired a stake in GovernanceMetrics International, an independent governance ratings firm. Through this investment the fund is seeking to evaluate whether it is profitable to take these ratings into account when evaluating the attractiveness of sectors and companies.

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