Environmental Risk: The Changing Climate: ‘Climate risk is only one among many factors’

Nina Röhrbein finds APG grappling with data-quality problems and the challenge of being a mega-fund with a sustainability objective

The ultimate climate-change objective of the €319bn Dutch pension asset manager APG – one of the sponsors of the 2011 Mercer report into ‘Climate Change Scenarios’ – is for the world to stay within the 2°C temperature rise that was agreed internationally.

“However, we are becoming concerned about the point of lock-in where we exceed that point,” says Erik-Jan Stork, senior sustainability specialist at APG and an IIGCC board member. “It makes it all the more important for us to focus on energy efficiency because by reaching the full potential of energy efficiency we can delay the point of lock-in by five years.”

At a sector level, APG’s in-house team tries to assess the impact of climate change on companies through appropriate indicators, the companies’ ability to reduce emissions and the implementation of that strategy. APG particularly focused on energy efficiency in the telecoms industry over the past two years because the sector’s equipments and networks are very energy intensive.

“There are considerable differences between company plans on reaching better energy efficiency standards, how those goals are governed and how they are linked to the strategy of the business, which our portfolio managers can include in their positioning of these companies,” says Stork.

APG does not specifically look at CO2 emissions, which Stork argues are not always the best indicator of potential risk, thanks to the current low European carbon price which actually gives a relative advantage to carbon-intensive companies. The fund has worked a lot on telecoms, because it is such an energy-intensive sector, and there Stork says that it is more useful to look at energy indicators.

“However, there are big differences between companies on what they report,” says Stork.
“They report a variety of numbers such as kilowatt-hour per megabyte, kilowatt-hour saved against an unknown reference scenario, or the absolute amount of energy use divided over profit. It is difficult to interpret those figures, which is why we have started to assess companies on a relative basis by, for example, looking at their energy use over revenues.”

The Global Real Estate Sustainability Benchmark initiative has helped APG in its assessment of the environmental performance of real estate funds and companies. If the asset manager wants to invest in a new real estate company, it always monitors its development, as APG expects the company to reduce its energy use over a certain amount of time.

In fixed income, APG has been involved in a study by Standard & Poor’s and the World Resource Institute to assess the various impacts of potential US climate change policy on the chemical industry. But Stork acknowledges that more work has to be done on how climate change poses a risk to creditors, and how to incentivise investment in climate-change solutions via financial securities.

“Climate bonds are sometimes difficult for us to assess because they do not particularly fit any kind of strategy,” he says. “Their return profile is linked to government bonds but at the same time they are generally not backed by government. If we were to place them in a corporate-bond type of mandate we would require much higher returns.”

At present, APG invests €8.5bn in high-sustainability investments, in other words investments that contribute to addressing sustainability challenges, with a large part of them being in real estate. Around €1bn is allocated to renewable assets, mainly infrastructure.

“We want to increase our exposure to renewable energy but we can only do that if we can make an attractive return at the same time,” says Stork. “Although the debates often focus on the lack of sufficient funding, we find that for a good project there is strong demand. Competition is tough and the last few times our bid was not competitive enough.

Another difficulty is that a lot of investment proposals in renewables do not meet our size requirements and strong dependence on policies can create additional risk. We also need to realise that climate risk is only one among many factors that we have to take into account in our investment strategy. We have absolute return objectives that we need to match with a certain mix of assets, so the liberty to make big changes in our current asset allocation is limited.”

Together with other investors, APG has called for a more stringent international framework at the last UN climate change conferences in Copenhagen, Cancun and Doha to support an increase in investments in cleaner energy infrastructure. APG also engages with policy-makers at a regional or country level.


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