SDI Asset Owner Platform: ESG investing gets a platform lift
Two Dutch pension providers have launched a global platform to help asset owners invest in line with the UN’s Sustainable Development Goals
Dutch institutional investors have announced the launch of a global platform to guide and standardise ESG investments, supported by artificial intelligence (AI).
The joint initiative by two of the largest Dutch pension providers – APG and PGGM – is called the SDI Asset Owner Platform. It aims to help asset owners invest in line with the UN’s Sustainable Development Goals (SDGs).
The platform will attempt to draw institutions together “around a shared objective of understanding to what extent their portfolio investments contribute to the UN SDGs”.
What it is
The SDI platform thus aims to provide a global “common definition, a common taxonomy and a common data source”, enabled by AI. Establishing this commonality, where everyone is looking at things through the same analytic framework, means that it is more straightforward for investors to make meaningful comparisons with increasingly standardised ESG metrics.
“We are seeing quite a bit of interest, particularly from large pension plans,” says Claudia Kruse, the APG managing director heading its global responsible investment & governance team: “The platform has global scope, with global interest. There is real value in bundling this expertise, in what contributes to a more standardised approach.”
This is premised on work previously done by both APG and PGGM. In 2017, they jointly published a social development investment (SDI) taxonomy. This framework is in the form of a taxonomy of sustainable-development investments, which the platform has made public. “Other organisations are already using it,” says Kruse. “APG has also gone deeper, looking at this sector by sector. Having a large number of in-house portfolio managers is an advantage here.”
In 2018, APG took over Deloitte’s data analytics team, and established the company Entis, whose AI technology powers the platform, translating this taxonomy into an ESG classification for listed companies, supported by further in-depth research.
Kruse explains: “We started from scratch, [looking at] how we can identify and measure contributions to SDGs, defining the framework then translating onto an AI-based platform. We did an initial proof of concept with Entis, which was successful.”
What it does
As RobecoSAM’s head of quantitative research and licensing, Ruben Feldman, comments: “Some SDGs are difficult to translate into investment goals”. And, indeed, two of the 17 SDGs – peace and justice strong institutions, and partnerships for the goals – as being non-investable, according to the taxonomy. Each of the 15 others, however, may offer multiple investment opportunities.
So, for example, SDG 5 (see figure) on gender equality breaks down into three goals: broadly, end all forms of discrimination against women; equal opportunities for leadership; and reproductive rights (see figure). These in turn can be used to identify companies or instruments, such as microfinance funds targeting women, that have the potential to concretise this high-level SDG.
“We look at the SDGs and translate them into investment opportunities, analysing what our investments do to meet these SDG ends,” says Kruse: “Alongside this, each investment still has to meet our risk-return goals; there isn’t a trade-off between sustainable and financial goals.”
- APG and PGGM have launched a global platform to help asset owners invest in line with the Sustainable Development Goals
- The platform will use both artificial intelligence and machine learning
- It is important that any output from this analysis should be easy to interpret
- The platform may not just benefit investors but companies as well
How it does it
The platform combines the detailed SDI taxonomy with AI to enable investors to assess about 10,000 listed companies worldwide on their contribution to the SDGs.
“This is not a standard ESG analysis, but instead looks at companies’ products and services to see if each fits into the 17 SDGs and, if so, how and to what degree,” says Kruse, adding that the financial and operational data of these 10,000 companies presents “a vast amount of unstructured data that has to be interpreted. We are not just looking at what we invest in, but what we conceivably could invest in. So, given the sheer amount of work, the platform has to be scalable.”
It is important that any output from this analysis should be easy to interpret, so that investments decisions can be drawn from it. “We are using quantitative data, so such outcomes have to be binary. For example, is a company’s behaviour sustainable – yes or no?” says Kruse.
However, this is more than an algorithm, with a mass of data in one end and a single number (plus or minus) out the other. Interpretation is still vital. “There is also a lot of fundamental analysis, looking at what SDGs are affected and to what degree. We report on why a company is sustainable, which products and services contribute to what SDGs and to what degree,” she says.
“Companies are reacting positively, as this means that what is expected of them by investors is of a more standardised nature” - Claudia Kruse
The platform may not just benefit investors but companies as well. Firms increasingly have to respond to investors’ demands for disclosure around ESG themes. As things stand, there is no market standard for such disclosure, so the compliance burden in dealing with a plethora of requests can be considerable. But if companies have a uniform framework from a large section of the market, this becomes less burdensome. This is already being well-received, according to Kruse: “Companies are reacting positively, as this means that what is expected of them by investors is of a more standardised nature.” Indeed, she says, some have already taken this as a guideline for their bond issuance.
According to Kruse, APG has €505bn in assets under management (AUM) on its clients’ behalf, and that once the platform is established in in the first quarter of next year, assets are expected to grow in line with the number of members, although the pension provider is not revealing any AUM targets.