PGGM is the Dutch pension fund for the healthcare and social welfare sector, responsible for the financial future of over 1.6m people and their families. The €45bn investment portfolio is managed by PGGM Investments.
PGGM’s basic investment objectives are to safeguard the long-term viability of the pension system at low and stable premium rates and generate maximum investment returns by adopting a preferred-risk strategy, subject to certain general constraints.

Why sustainable investment?
There is really only one cogent reason why a pension fund should pursue a sustainable investment strategy and that is because it believes it will produce a higher return in the longer term. PGGM aims to be in the forefront of this development, in order to gain the maximum benefit from it.
One disadvantage of being a pioneer is that it often means venturing into uncharted territory. When PGGM took its first steps on the path towards sustainable investment, the strategy was viewed by many, especially in the financial world, either as hype or as soft and idealistic – but certainly not as profit-enhancing. In fact, sustainability has always been a central tenet of PGGM's philosophy: after all, providing a pension scheme for present and future generations is, by definition, a long-term commitment.

Exclusion criteria
Two exclusion criteria, which together form one of the main pillars on which PGGM’s sustainable investment policy is built, were formulated by the board of trustees in the 1980s.
o PGGM does not invest in countries where human rights are being violated flagrantly.
o PGGM does not invest in corporations whose main activity is in the weapons industry.
No further exclusion criteria will be added. Exclusion as a means of implementing a sustainable investment policy has long been popular, especially in the US (sin stocks), but the drawback of this approach is that, as an institutional investor, you are faced with the problem of making value judgments on the most diverse ethical issues and having to decide from case to case whether or not investing in a particular sector or company is permissible. If you decide not to invest, you will not be in a position to exert pressure on management to mend its ways, but as a shareholder you do have some influence.
PGGM’s policy of investing specifically in companies whose share prices are depressed as a result of deficiencies in corporate governance is a good example of how we perceive the role of an active shareholder. These investments are made via the European Focus Fund run by Hermes. PGGM expects to generate excellent investment returns by acquiring relatively large stakes in companies of this kind and working actively to improve their corporate governance policies.

‘Best in class’
A second pillar supporting PGGM's sustainable investment policy has been formulated as follows by the board of governors:
o PGGM focuses on countries and companies with potential for sustainable added value (social and environmental);
o PGGM focuses on companies with good corporate governance, ranking investments on the basis of positive criteria (the ‘best in class’ approach).
A start was made on the implementation of this policy in 2000 by awarding SNS Asset Management a €25m mandate. This has since been increased to €100m.
SNS was chosen after a lengthy selection process. At that time (in mid-1999), sustainable investment by institutional investors was by no means commonplace. PGGM already had wide experience in selecting external managers, of course, but choosing a manager for sustainable investments was quite a different matter. Initially there were far fewer suppliers than there are now, and even fewer which were set up to service institutional investors. On top of that, all suppliers have their own methods and differ in the rigour with which they screen potential investee companies. In the beginning, therefore, it was hard to decide which supplier fitted best with PGGM’s principles and investment policy. Having been through the process once, it has become easier to find new external managers for sustainable investments, which is especially welcome now that PGGM is selecting a manager for a sustainable US portfolio.
In the near future, PGGM intends to incorporate the ‘best of class’ approach into its total investment portfolio.

The third pillar supporting PGGM's sustainable investment policy is defined as:
o ensuring an ongoing dialogue between shareholders and the companies in which PGGM invests (the ‘engagement’ approach).
In pursuit of this objective, Isis Asset Management was appointed in 2001 to enter into an active and positive dialogue with companies in which PGGM invests, with the aim of encouraging them to ensure that their businesses are conducted on a sustainable basis. Isis is now applying its Responsible Engagement Overlay (REO) technique to the €5.5bn European equity portfolio managed by PGGM.
PGGM has high expectations of this approach. It does not restrict the investment universe and therefore does not impede the portfolio manager's freedom of movement. It also encourages companies to improve inadequate social and/or environmental policies, not by moralising or simply drawing their attention to their shortcomings, but by offering them real support via Isis to make their businesses more sustainable.
One of the disadvantages of this approach is that it is difficult to measure the direct effect of engagement in terms of increased portfolio yield. Another is that the portfolio managers, who are used to looking mainly at financial criteria, no longer need consider sustainability issues. If PGGM is claiming that sustainability criteria are just as important as financial criteria in assessing a company, it is important that the approach is fully supported internally and that the organisation gains experience with it.

Where next?
Although evaluation of our sustainable investment policy is ongoing, the first half of 2003 will see a significant milestone, because we then have to decide which techniques fit best with PGGM, which techniques we expect to give the best results and which pilot projects are to be translated into structural policy. As mentioned above, defining our own vision of how to incorporate sustainability criteria into in-house equity portfolio management will be a major challenge. One prerequisite will be a clearer insight into the trade-off between outperformance (profits) and sustainability (people and planet). PGGM is also planning to expand its sustainable investment portfolio to include the US in 2003. Raising sustainable investment to a higher plane will also require a great deal of research, and we support various initiatives in this area.
PGGM believes in sustainable investment and is confident that it will generate higher returns. We are pleased to see that our view is now increasingly being corroborated by research. One advantage of being a pioneer is that we already possess considerable in-house expertise in this field and we know where to go for any additional external expertise we need. On the other hand, sustainable investment is an issue which, until recently, was not really taken seriously in the financial world. As a pioneer, you need plenty of patience and you have to work hard to find the right partners. Fortunately, we have come through that phase and the pace of development should now start to pick up - which PGGM will certainly welcome!
Sylvia van Waveren is manager, corporate governance & sustainable investments, at PGGM in Zeist