Integration in the investment process
Responsible investing is an integral part of APG’s investment policy. We know from experience that factors with regard to the environment, society, shareholder rights and corporate governance (abbreviated to ESG: environmental, social & governance) can have a positive impact on the financial performance of companies in the long-term. That is why our investment decisions are judged on financial criteria as well as on ESG aspects. The integrated approach is reflected in the close cooperation between portfolio managers and sustainability and governance experts, enabling them to find a better balance between return and risk. By dragging your cursor across the map you can find different examples of our activities.
Responsible investing is a means of gaining better insight into the risks and opportunities of a project or a company, enabling us to make better investment decisions on behalf of our clients. This means that our policy for responsible investing is not static, but is updated, as and when needed, to take account of current developments. In 2012, APG has integrated its ESG criteria, even more deeply in our investment processes and decisions. We developed several new instruments for this purpose, including the ‘ESG Dashboard’, the ‘Bloomberg ESG Performance Monitor’ and the ‘ESG Country Risk Monitor’. These also enable us to assess more accurately whether the companies in which we invest integrate sustainability and good corporate governance in their strategy and, for example, whether sustainability aspects form part of their remuneration strategy.
Responsible investing at APG has three goals:
- To contribute to risk-adjusted return on our investments;
- To contribute to the integrity of the financial markets;
- To demonstrate our wider social responsibility.
These principles are based on the following international standards for sustainability and good governance:
United Nations Global Compact
OECD Guidelines for Multinational Enterprises
OECD Principles of Corporate Governance
International Corporate Governance Network
Statement on Global Corporate Governance Principles
Responsible investing is an integral part of APG’s investment process. The influence of ESG factors is continuously analyzed and assessed for our clients across our entire investment portfolio. APG knows from experience that these factors influence the long-term financial performance of companies. This belief consequently helps to define the risk and return potential of the different asset classes. It is therefore important that we integrate sustainability and governance increasingly deeper in our investment decisions. How this is implemented differs from one asset class to the next. During 2012, we took steps to further implement the ESG approach for hedge funds, listed equities strategies and private equity. Sustainability or shareholder rights assessments may lead to a decision not to make a certain investment, to dispose of an investment or to change its size.
During 2012, the S&G team held discussions with roughly 200 companies on various ESG topics. APG engages in dialogue with companies in order to realize sustainability and good corporate governance. When talking with companies, we make clear which standards for sustainability and shareholder rights we advocate on behalf of our clients. In order to reinforce our message we often work with other investors.
The Global Compact is an initiative of the United Nations (UN) which seeks to make a contribution to corporate social responsibility and helps businesses in achieving goals related to this objective. The Global Compact promotes the ten principles in the areas of human rights, labor conditions, environmental protection and combating corruption.
APG expects companies to conduct their business in line with the UN Global Compact Principles and may divest its interests if dialogue does not lead to improvement. Effective January 1, 2012, APG excluded Walmart and PetroChina due to non-compliance with the UN Global Compact.
APG also does not invest in products that are prohibited by Dutch law or international regulations. This means that we do not invest in companies that are directly involved in the production of land mines, cluster munitions and the firing systems for such munitions and of chemical and biological weapons, or nuclear weapons in contravention of the Nuclear Non-Proliferation Treaty. We also exclude companies that are involved in products or services that are generally considered objectionable in the Netherlands. In 2012, we excluded 14 companies due to their involvement in the production of cluster munitions.
APG does not invest in sovereign bonds of countries that are subject to a UN Security Council arms embargo. These embargos are imposed as an enforcement measure in order to condemn violations of international law or human rights.
APG gebruikt zijn rechten als aandeelhouder actief. Wij stemmen op de aandeelhoudersvergaderingen van ondernemingen waarin we beleggen. We publiceren ons stemgedrag en geven een toelichting op de wijze waarop wij hebben gestemd.
Our activities in the area of active shareholdership in 2012:
Nationally and internationally, APG advocates robust policy frameworks to promote sustainability and good corporate governance. We hold regular dialogues with legislators and regulatory authorities on sustainability and shareholder rights. We also contribute to the development of standards aimed at enhancing the integrity of financial markets in the long term.
APG actively seeks out attractive investments that promote sustainability. These include investments in sustainable energy, drinking water and waste water purification, waste disposal, schools, and hospitals. Directly and indirectly via our external fund managers, we invest in projects that add value in both respects.
APG actively promotes its responsible investment policy in order to promote sustainability and corporate governance. We work with other asset managers and pension funds around the world to increase the impact of the responsible investment policy for our clients. We are active in a number of (international) networks. And we communicate actively about our activities.
|Claudia Kruse is the head of the S&G team. She has worked for APG since April 2009, after having previously worked on the buy- and sell-side in London. Since 2000 she has been working in responsible investment and published on this topic. She has in the past been recognized by Harvard’s Millstein centre for her work on governance. Claudia is Chairperson of the Integrated Business Reporting Committee of the International Corporate Governance Network (ICGN) and is a member of the working group of the International Reporting Committee (IIRC). She also is a member of the General Board of Eumedion.|
|Mirte Bronsdijk is a corporate governance specialist and has worked for APG since February 1, 2009. She mainly focuses on the decision-making process around shareholder meetings and is involved with dialogue and engagement activities with companies on corporate governance worldwide. She additionally researches various topics in relation to good corporate governance. She also takes part in consultations putting forward our views on Dutch and European policy-making on corporate governance.|
|Marta Jankovic is a sustainability and governance specialist at APG since December 2012. She is responsible for advancing the integration of ESG aspects in all the investments in hedge funds, private equity, commodities and other illiquid asset classes. She has worked for more than ten years as a lawyer specializing in investment funds and corporate law. Before joining APG, Marta was legal counsel for SVG Advisers in London, where she chaired SVG’s CSR committee and was responsible for applying ESG principles in investment practice. Furthermore, she is a member of the European Private Equity and Venture Capital Association’s (EVCA) Professional Standards Committee and the EVCA Responsible Investment Roundtable.|
|YK Park is senior sustainability specialist for Asia and works for APG in Hong Kong. She focuses on the integration of ESG factors in APG’s Asia investments. She assesses the ESG aspects of the various asset classes, including real estate, infrastructure and equities in Asia. YK plays a leading role in the dialogue with Asian companies. She has more than ten years’ experience as an investment analyst for international investment banks in South Korea, and worked for three years for the Association for Sustainable & Responsible Investment in Asia.|
|Anna Pot is senior sustainability specialist and has worked for APG since February 2008. Anna is responsible for dialogue with companies on their human rights record, labor conditions and how they deal with the interests of local communities. She is also responsible for managing APG’s exclusion policy. Before she joined APG, she was coordinator of the human rights and business sector program of Amnesty International Netherlands, and was previously fund manager of a sustainable investment fund at ING.|
|Erik-Jan Stork is senior sustainability specialist and has worked for APG since April 2008. Erik-Jan is responsible for advancing the integration of environmental and social factors in the investment process for listed equities and corporate bonds. In this role, and as a climate specialist, he puts a strong emphasis on how companies respond to market changes in the medium-to-long term caused by stricter climate policy and the transition to a sustainable energy infrastructure. He was previously a sustainability advisor at KPMG Sustainability, and before that was responsible for the first company-wide inventory of greenhouse gases at Shell.|
|Sander Paul van Tongeren is senior sustainability specialist and has worked for APG since April 2009. Sander Paul is responsible for all sustainability issues within the real estate and infrastructure asset classes. He is the driving force behind the development of the Global Real Estate Sustainability Benchmark (GRESB). He previously worked for Diageo, Corporate Express and ING, where his positions included that of portfolio manager and business manager of real estate funds. In 2010, Sander-Paul completed his Master of Real Estate at the Amsterdam School of Real Estate.|
APG uses different strategies for its investments in listed equities. Each strategy has its own style and its own investment criteria and processes. The analysis of ESG factors is an important element in this regard. As in previous years, in 2012 the value of the intensive collaboration between the S&G team and the portfolio managers for the portfolios managed on behalf of our clients was evident.
APG has the following strategies in place for listed equities:
- The European focus strategy. This strategy was introduced in 2011 with the intention to invest, over time, in approximately 30 medium-sized European companies;
- The European fundamental strategies, whereby we currently invest in roughly 315 large European multinationals;
- The ‘global emerging market’ strategy, whereby we invest in roughly 385 large companies in emerging markets in Asia, Latin America and Africa;
- The global quantitative strategies, whereby we invest in roughly 2,500 large companies on the basis of econometric models;
- Global investing via external managers: a strategy that involves selecting the best fund managers in the sector on the basis of expert research and strict investment criteria.
During 2012, the integration of ESG factors in the above investment strategies was embedded more deeply and further implemented. ESG specialists are involved even more intensively in new investment proposals and in monitoring existing investments. In addition, our active shareownership and our engagement activities contributed to strengthening the integration of ESG factors in these asset classes.
The following subjects were further examined in 2012:
- the combination of the positions of CEO and chairman of the board at French companies;
- the risk to continuity due to the absence of proper succession planning for directors;
- relations between local communities and energy and mining companies;
- the risk of bribery and corruption, prompted in part by tougher legislation in the United States and the United Kingdom (with an international scope);
- labor conditions at suppliers of electronics manufacturers.
European fundamental strategies
The European fundamental strategies focuses on companies in the Morgan Stanley Capital International Index (MSCI Index) Europe. This index is composed of 436 companies in Western Europe. APG currently invests in approximately 315 companies from this universe.
The team’s portfolio managers actively contributed to the development of instruments for judging companies and portfolios on their ESG performance. One example is the ‘ESG Dashboard’, which now provides all APG portfolio managers with easy insight into the ESG performance of companies. The portfolio managers take relevant ESG risks into account in their investment analyzes. A review of the more than one hundred largest positions, found that in 14 per cent of the cases the ESG risks are significant to large. In 47 percent of the cases these risks are average, and in 38 per cent of the cases the ESG risks are low. Although ESG considerations are not always decisive, they do nevertheless influence the degree of confidence in investment proposals. This confidence has a strong impact on our investment decisions.
Below we describe a number of relevant decisions and situations during 2012:
- In spite of good financial prospects, poor insight into the safety and environmental performance of an oil company led us to decide against further extending our equity position.
- Following a series of intensive discussions with a power company about our doubts concerning the quality of the management and limited possibilities for reducing CO2 emissions, we reduced our stake in the company.
- The S&G team prepared a wide-ranging and thorough analysis of the ESG strategy and performance of a company in the oil and gas industry. We discussed our findings with the company during a teleconference and later reiterated our concerns about the ESG performance in a letter to the CEO. In spite of the company’s good financial outlook, we will not increase our stake until substantial improvements have been realized with regard to ESG aspects.
- An intensive period of engagement with an oil and gas company had the effect of boosting our confidence in the company’s safety measures and risk management. The enhanced confidence led to us increasing our shareholding in the company.
- A company providing services to the oil industry was faced with accusations of bribery and corruption. We reduced our investment in that company and increased our stake in a similar company with demonstrably better performance in terms of preventing bribery and corruption.
European focus strategy
ESG aspects play a prominent role with regard to the European focus strategy. The aim of this strategy is to invest for the long term in approximately 30 medium-sized listed companies. It is therefore important to analyze thoroughly the risks and opportunities with regard to ESG aspects prior to the investment decision. In 2012, 15 detailed ESG assessments were conducted within the European focus strategy. Several companies were contacted prior to the investment decision in order to discuss the ESG-related risks with their management. This dialogue also continued post-investment so as to monitor developments.
- We devoted considerable attention to the risk of bribery and corruption. In the case of three companies, we delayed our investment until there was sufficient clarity regarding the systems implemented by the companies to combat these issues. We chose not to invest in another company due to a pending fraud investigation, and we are currently monitoring further developments.
- In the case of one company, we identified a number of issues relating to operational management and control. We pursued an intensive dialogue with the company on these matters.
- Three medium-sized listed companies were found not to have a solid plan in place to appoint a successor to the CEO. This had the highest priority during our dialogue with the company. The companies concerned have since presented an effective plan for succession.
- We became aware that a company was possibly facing the risk of a conflict with trade unions. On making detailed enquiries with the company, it turned out it was not beset by labor unrest at all. The company was able to demonstrate through the results of a satisfaction survey that motivation among its employees was actually very high. We also found that the company followed the correct procedures and maintains good communication with employees.
- At the shareholder meetings of companies who we believe have excessively broad powers to issue new shares, we voted against extending this power.
- We carefully examined the staff turnover rate and the safety performance of five companies to careful examination. In the case of certain companies, high turnover of staff could jeopardize their growth ambitions. On the other hand, above-average safety performance enhanced our confidence in some companies.
Global emerging markets strategy
Within the ‘global emerging markets’ strategy, APG invests in approximately 385 companies in the regions Eastern Europe, Africa, Latin America and Asia. This strategy simultaneously emphasizes a balanced selection of countries. We use a model with macro-economic and financial risks as well as ESG indicators in order to determine the weighting of each country in the portfolio. In this strategy, the analysis of ESG factors in relation to a country and/or a company constitutes a standard element in the investment process for large or strategic investments.
During the past year, we entered into dialogue with miscellaneous listed companies in China, South Korea and Taiwan concerning their corporate governance performance. During this dialogue we urged them to improve their governance standards. We also spoke with companies about possible involvement with human rights violations. The media attention given to incidents related to these human rights violations has made companies with whom we were in dialogue even more receptive to our arguments and recommendations for improvement.
In the case of the quantitative investment strategies, we select companies in which to invest on the basis of statistical analyzes using models based on financial and statistical indicators. This has the advantage of enabling the portfolio managers to invest in a large number of companies in an efficient manner. Although these companies number more than 2,500, APG is nonetheless aware of the need for active and committed shareownership. An important part of this is exercising voting rights. Where there is reason to do so, we also enter into dialogue with the companies.
At the same time, the quantitative investment experts examine how they can identify ESG indicators that have a direct correlation with the financial performance of listed companies. The initial results appear promising, although further research is necessary. Detailed data are needed, and these will have to be obtained from follow-up research. For this reason we entered into an exclusive strategic alliance with an external research agency last year.
The purpose of this research is to identify so-called hidden risks, which have not yet been factored into the share price by the market and which APG may be able to leverage to obtain financial benefit. ESG risks in particular represent a still unexplored area. They are not always correctly valued by the equity market and are consequently not factored into the share prices. Moreover, ESG risks are often not recognized until an incident is reported in the media, and this can have implications for share prices. The reactions of the general public and in the financial markets to such incidents also vary from one incident to the next. The reputational damage companies sustain due to ESG-related incidents is difficult to measure and to quantify. This area therefore represents a relevant challenge for both the market and for APG. Our quantitative investment team will consequently continue with this research in 2013.
APG provides loans to governments, public authorities and companies in the form of government bonds and corporate bonds. Portfolio managers and the S&G team assess the financial and ESG risks of these fixed-income securities. Below we explain for each asset class within the fixed-income securities how we integrate our responsible investment policy into the investment processes.
APG does not invest in government bonds of ten named countries. These are the countries that are subject to an UN Security Council arms embargo.
A special instrument has been developed with Sustainalytics, a sustainability research and analysis agency, which gives APG good insight into ESG-related risks of virtually all the countries in the world. This effective instrument is used to make country/region-specific analyzes, which supports our views on government bonds
Within the corporate bond portfolios, APG analyzes different sectors in many different regions. In this context, relevant ESG issues and the sustainability performance of companies are assessed and taken into account when making investment decisions. In 2011, we announced that the integration of ESG analyzes in the investment process of corporate bonds would be further improved, and that goal has been achieved. For instance, the energy sector credit analysts took part in regular meetings of the S&G team and of the managers of the equity portfolios in order to draw attention to the most important developments and to determine jointly the priorities for further ESG research and engagement. We also enter into dialogue with companies, whose corporate bonds we hold, on sustainability and governance issues.
Additionally, two instruments were developed that enable portfolio managers and analysts to obtain easy insight into the ESG performance of companies. One of these instruments is the ESG Dashboard referred to previously. The other instrument is the ‘ESG Company Risk Comparison Profile’ that was developed during the past year with Bloomberg, a data supplier. This instrument offers insight into development trends, such as power consumption and CO2 emissions during five successive years and, for example, the number of (fatal) accidents in particular sectors. This allows us to review specific companies in relation to relevant trends and draw conclusions from this about their ESG performance. At the same time, this instrument enables us to compare this performance with peers in the same sector or line of business.
APG is continually looking for investment opportunities that can support and accelerate society’s sustainable development. We are driven to do this by our desire to contribute to a better world that can offer a good quality of life for today’s and future generations. In addition to offering societal gain, these investments must also be in line with our financial return expectations.
We invest in activities that offer solutions for climate change, water shortage and a water surplus, pollution and loss of habitats and species, for example. We also are interested in investments that contribute to the development of people and countries in poverty with poor economic and social conditions.
While we always endeavor to attain an attractive financial return, we value we an investment’s capacity to make a clear contribution to solving a social and/or environmental problem. This means that we subject companies and sectors and their sustainability performance to critical analysis.
Using the Global Real Estate Sustainability Benchmark (GRESB), APG’s real estate investments are screened annually for their environmental performance in terms of power consumption, water consumption, levels of waste, and CO2 emissions. Based on the results of this screening, we engage in a dialogue with the parties concerned with the aim of improving the sustainability performance of the portfolio. In terms of sustainability, expressed in a ‘GRESB rating’, our real estate portfolio (of nearly 200 real estate investments) outperforms the benchmark (of 443 real estate investments). In short, our real estate portfolio includes real estate funds and listed real estate companies that perform better than the average in the GRESB benchmark.
The review against GRESB is a mandatory element of the due diligence process with regard to the investments in our strategic real estate portfolio. Within that process, external real estate (fund) managers and real estate companies are required to complete the online GRESB survey. The annual GRESB survey is used to measure, to monitor and, where necessary, to improve the sustainability performance of real estate investments by conducting an active dialogue with management.
Before confirming new real estate investments within the strategic real estate portfolio, we first examine the corporate governance performance and engage in dialogue with the company concerned. Each of these companies must attain a better rating than the average of their GRESB peer group within a period of two years. The peer group is formed in such a way that a real estate fund or listed real estate company is only compared with other real estate funds and listed real estate companies operating in the same region and in the same real estate sectors (retail, commercial and logistical real estate, for example). During 2012, we corresponded under the GRESB banner with 241 managers of listed real estate companies and unlisted real estate funds regarding their performance. By comparison, we corresponded with 171 companies during 2011. This provides the funds and companies with insight into their ratings in relation to various peer groups. They are also given advice on a step-by-step approach for improving their sustainability performance.
In 2012, we engaged in extensive dialogue with Lemon Tree, a hotel chain in India in which we have invested, on developing a code of conduct for preventing corruption in its business activities. On our advice, the company developed such a code. We will closely monitor the company in order to see whether the code is put into practice.
APG invests in roads, (public) transport networks, water, power generation, transmission and distribution networks, communication, and ports. Several infrastructure investments that contribute to our risk-return objectives also assist in tackling important social or environmental challenges, such as combating climate change. These include investments in sustainable energy, drinking water and waste water purification, waste disposal, schools, and hospitals. Directly and indirectly via our external fund managers, we invest in projects that add value in both respects.
Of the many investment proposals that are screened, only a select few result in a positive investment decision. This is because we set strict conditions for the risk, return and sustainability profile of each investment. The portfolio of sustainable investments is steadily growing. Below we describe a few examples from this portfolio.
Investments in sustainable and renewable energy (wind, solar, hydropower, and bio-energy) are generally ideally suited to our infrastructure portfolio, mainly due to their positive environmental impact. However, the regulations and policy governing sustainable and renewable energy are continually changing at both national and international level. We therefore pay specific attention to so-called regulatory risks that may have an impact on our investments in relation to these projects. In addition, we analyze technology risks in view of the rapid development of the techniques used for sustainable and renewable energy generation.
We committed to an investment of € 100 million in HgCapital Renewable Power Partners 2. This is an infrastructure fund with assets of € 500 million which invests in projects to generate renewable energy in Western Europe. The fund invests in renewable energy projects that deploy proven technologies, such as land-based wind farms and small hydropower stations. During 2012, investments in three wind farms and fourteen operational hydropower projects were made.
Hedge funds are investment funds that apply a wide variety of strategies in order to achieve returns on the financial markets. In the aftermath of the financial crisis, there has been regular criticism from society concerning the way in which hedge funds operate. Such criticism frequently centers on the lack of transparency surrounding these funds, together with a large appetite for risk and the absence of effective supervision thereof. APG screens all investments in hedge funds in terms of ESG aspects, with the S&G team having an important say in the assessment of the funds. The S&G team is consequently closely involved with the assessment of all new investment proposals. The analysis by the S&G team is moreover evaluated by an internal investment committee comprising senior managers. We started a working group of global investors with the aim of developing guidelines for hedge funds with regard to responsible investment and transparency. This resulted in the publication of a discussion document by the UN PRI that serves as a guideline for institutional investors when selecting and monitoring their hedge fund managers.
Private equity is an asset class that is not as strictly regulated as investments on the public capital market. Private equity funds invest in unlisted companies. We invest in these specialized funds. Due to the private nature and less stringent regulation of these funds and their investments, APG believes that the ESG performance of its private equity investments must be assessed with additional rigor.
We expect from the private equity parties with whom we do business that they conform to our responsible investment policy and that they commit themselves to regular accountability and transparency. In this way, we can monitor these companies and funds effectively in terms of their ESG performance.
The credit crisis has led to a number of initiatives for local guidelines for private equity funds aimed at promoting transparency and responsible governance, among other things. This has happened in France, the United Kingdom and Australia. Together with other institutional investors, APG played a leading role in developing an ESG Disclosure framework for for private equity fund managers. In 2013 we will encourage private equity fund managers to use these principles to be more transparent about their ESG activities. The framework was published in March 2013.
In 2010, APG invested in ContourGlobal (‘CG’) via an investment fund managed by Reservoir Capital Group, a US asset manager that focuses on alternative investments. CG was founded in 2005 and develops, acquires and operates electric-power and district-heating plants and other energy infrastructure around the world. CG’s investment portfolio covers fifteen countries on four continents, many being emerging economies. In several of its projects CG has partnered with investors such as the Overseas Private Investment Corporation (‘OPIC’), an independent organization allied to the US government, and the International Finance Corporation (IFC), which is part of the World Bank.
Activities in developing countries may necessitate increased vigilance with regard to the environment, country risk, human rights and corruption. When APG made the investment, CG agreed to the implementation of more stringent ESG criteria than had previously been applied. CG committed to a social and environmental policy based on the IFC Performance Standards on Social and Environmental Sustainability. CG reports regularly to APG on how its policy is being put into practice. In these reports, CG gives practical examples of the main social and environmental issues it comes across in its investments.
In the commodities portfolio, investments are made directly or indirectly via funds in unlisted companies with operations in the fields of forestry, agriculture, mining, and oil and gas exploration and production. In 2012, we evaluated and further tightened our internal guidelines. We set high demands on the ESG performance of these companies as well the supervision of that performance by the funds in which we invest. We require all the funds investing in mining and oil and gas production in emerging markets to agree contractually to adhere to working procedures in accordance with internationally accepted guidelines. Specifically, this concerns the IFC (International Finance Corporation) Performance Standards on Environmental and Social Sustainability as well as, for example, the World Bank Group’s environmental, health and safety guidelines for mining and oil and gas production (the so-called EHS guidelines).
Moreover, each investment in this portfolio is dependent on approval by the S&G team, which bases its decision on thorough analyzes. The portfolio managers furthermore regularly visit the investment projects in the commodities portfolio. These visits serve to ensure that, among other things, the ESG performance of the investments can be properly assessed. The ESG analyzes of these investments are generally based on high international standards, such as the IFC Performance Standards and, for example, the Sustainable Development Framework of the International Council on Mining and Metals (ICMM) in the case of mining operations.
In the field of agriculture, we not only analyze and judge our investments on ESG factors, but we also make a contribution to the development of the standards for investing in agricultural land. Working together with other institutional investors we have been instrumental in drawing up the Principles for Responsible Investment in Farmland, with the aim of improving sustainability, transparency and accountability in this area.
Investments in sustainable and renewable energy (wind, solar, hydropower, and bio-energy) are generally ideally suited to our infrastructure portfolio, mainly due to their positive environmental impact. However, the regulations and policy governing sustainable and renewable energy are continually changing at both national and international level. We therefore pay specific attention to so-called regulatory risks that may have an impact on our investments in relation to sustainable and renewable energy projects. In addition, we analyze technology risks in view of the rapid development of the techniques used for sustainable and renewable energy generation.
We committed to an investment of € 100 million in HgCapital Renewable Power Partners 2. This is an infrastructure fund with assets of € 500 million which invests in projects to generate renewable energy in Western Europe. The fund invests in renewable energy projects that deploy proven technologies, such as land-based wind farms and small hydropower stations. During 2012, investments were made in three wind farms and 14 operational hydropower projects.
APG holds a relatively large interest in Herambiente, an Italian waste company. It is part of the Hera Group, whose shares APG also has in its portfolio. Herambiente is one of Italy’s leading waste companies, with activities encompassing the entire waste processing chain in the north of the country. Of the 80 waste processing plants it operates, seven are managed by the company as so-called ‘waste-to-energy plants’. The aim is to recycle as much waste as possible and to process it into renewable energy. The company has eleven landfill sites for the waste that cannot be recycled or that is too hazardous. Through its investments, APG seeks to contribute to the development of renewable energy sources and the reduction of global waste volumes.
School buildings also represent an attractive investment opportunity through a public-private partnership (PPP) construction. While this form of partnership is not very customary in the Netherlands yet, it is quite common in the United Kingdom and France, for example. Investments in school buildings represent limited risk and generally yield a reasonable return. Moreover, it goes without saying that providing a financial contribution to public schooling fulfills a social role that fits in perfectly with our responsible investment policy. APG has various investments in schools and hospitals in the form of public-private partnerships (PPP).
|ESG topics||Companies with which dialogue has been started|
|Climat change||BASF, BP, BT, Deutsche Telekom, Drax, EDP, E.on, Gas Natural Fenosa, Iberdrola, National Grid, Posco, Rautaruukki, Renault, RWE, Shell, Sime Darby, SSAB, Telefonica, Telecom Italia, Vodafone|
|Corporate Governance||Aeon Mall, Affymetrix, Ahold, Altarea, Amec, Apache, Arcelor Mittal, ASML, Baidu, Banco Bilbao Vizcaya Argentaria, Balfour Beatty, Barclays, Big Yellow Group, Binck Bank, BNP Parisbas, Bristol Myer Squibb, Britvic, Carrefour, Clariant, Corio, Danone, D.E. Masterblenders, Eon, Eurasian Natural Resource Company (ENRC) , Faurecia, Fonciere des Régions, Forest Laboratories, France Telecom, Glencore, Goldman Sachs, Heineken, Helical Bar, H&M, Hitachi, HSBC, Imtech, International Paper, Kas Bank, Kingfisher, KPN, Kyocera, LIXIL, Merck, Newscorp, Norilsk Nickel, Novartis, Olympus, Petrobras, Philips, Ping An, Posco, Post NL, PTT EP, Quantas, Rakuten, Randstad, Reckitt Benckiser, Reed Elsevier, Schneider Electric, Segro, Sinopec, Societe Generale, SSAB, Sun Hing Kai Property, Swiss Reinsurance, Syntega, Technip, Tepco, Toshiba, Total, Unilever, Vale, Van Lanschot, Vastned Retail, Vivendi, Wereldhave, Wolters Kluwer, Xstrata.|
|Environmental Management||Aegon, Allianz RE, Anglo American, Arcelor Mittal, AvalonBay Communities, BAA, Bumitama Agri, Casino Guichard Perrachon, Colruyt, Delhaize, Derwent London, Goodman Group, Grainger, ICADE, Hammerson, Holcim, KanAM, Kerry Group, Land Securities, LaSalle, MahindraMahindra, Metcash, Metro, Norilsk Nickel, Norwegian Property (NPRO), Nutreco, Reckitt Benckiser, Sainsbury Group, Shiseido, Shell, Siemens, Suez Environment, Syntega, Tesco, Total, Unibail-Rodamco, Woolworths, Rio Tinto.|
|Health & safety||Apple, BASF, BP, Carnival, Deutsche Bank, Iberdrola, Impala, Petrobras, Petrofac, SBM Offshore, Shell, SSAB, Total, Transocean.|
|Human rights||Alcatel-Lucent, Anglo American, Barrick Gold, Daewoo International, Finmeccanica, General Electric, Goldcorp, GSFF, MTN Telecom, NettApp, Orascom telecom, Posco, RWE, Samsung, Shell, Sime Darby, TeliaSonera, Total, Vale, Vedanta.|
|Labor standards and conditions||Ahold, Amer Sports, Anglo Platinum, Apple, D.E. Masterblenders, Faurecia, Impala, Lonmin, MahindraMahindra, Philips, Renault, Samsung|
|Transparency & accountability||Aegon, Apache, Arcelor Mittal, Barclays, BP, Danone, D.E. Masterblenders, EDP, Glencore, HSBC, KKR, Orpea, Pirelli, Reed Elsevier, RWE, Shell, Standard Chartered, Syntega, Transocean, Vale|
Xstrata and Glencore – APG voted in favor of the merger but against the remuneration package
In February 2012, it was announced that Glencore International, the UK-listed commodities trading company, had approached Anglo-Swiss mining company Xstrata with a view to a merger. Following a long series of negotiations and consultations with regulators around the world, the shareholders voted in favor of the merger in November 2012. APG voted in favor of the merger because we believe that it will be beneficial to both companies. At the same time we had a number of reservations. Under the terms of the merger, 71 managers would have been eligible to receive a total amount of £ 144 million. We voted against the award of these packages. As nearly 80 per cent of the shareholders also considered the bonuses for the 71 managers exorbitant, the awards were not paid out.
Prior to the shareholders’ meeting and the merger, our S&G team and our portfolio managers were in regular contact with both companies. During these discussions information was exchanged about the sustainability performance of both listed companies. We voiced our concerns during talks with the two companies about the future management structure, compliance with rules concerning responsible governance and sustainability as well as risk management in relation to the then imminent merger.
Petrobras – dialogue leads to procedure for nominating supervisory directors
In 2012, APG had a discussion with Investor Relations and the managing director responsible for corporate governance at Petrobras, a Brazilian oil corporation. During the discussion, APG highlighted the need for better representation of the interests of minority shareholders. It urged the establishment of a nomination and selection procedure for supervisory directors who will represent the minority shareholders. Petrobras promised to use its best endeavors to make electronic voting easier and to enable several nominations for the position of supervisory director. Petrobras also will do its best to allow the large Brazilian shareholders to engage in dialogue with the minority shareholders.
Olympus – vote against anti-takeover construction
In late November 2011, it was discovered that Olympus, the Japanese camera manufacturer, had been hiding huge losses since the 1990s. The company lost nearly 70 per cent of its market value due to the disclosure. Together with other shareholders, APG rebuked the company for this behavior and called for a radical overhaul of the management of the company, including the appointment of independent supervisory board members. Only in this way can investors’ confidence in the company be restored. During the shareholders’ meeting, APG voted against an anti-takeover construction that it felt would not be in the interest of the minority shareholders.
The scandal affecting Olympus has prompted Japan’s stock exchange authorities to draw up more stringent corporate governance rules. We continue to closely monitor the developments in Japan and at Olympus.
Reed Elsevier – generous remuneration for CFO
During the past year, the S&G team discussed the remuneration structure of the board of directors of Reed Elsevier with that company. We also discussed the change of the business model in the face of far-reaching digitization and its consequences for the sustainability profile and management of the chain. APG voiced its concerns to the company about the generous remuneration awarded to the new CFO and the one-off payment offered to him to entice him to join the company. Reed Elsevier indicated that it understood the concerns of the institutional investors, but it has not altered the financial compensation of its directors.
In 2012, the banking sector once again received negative press and financial institutions were accused of not handling their clients’ money with due care. Even banks with a previously solid reputation such as HSBC and Standard Chartered were investigated for breaching banking rules and were ordered to pay heavy fines. APG is in constructive dialogue with representatives of both banks about how to tackle the lack of supervision of this type of behavior.
Barclays agreed a settlement with the U.S. Commodity Futures Trading Commission (CFTC), the U.S. Justice Department and the U.K. Financial Services Authority (FSA) for manipulation of the Libor rate. That was the prelude to a chaotic period of changes in the board of directors of Barclays and eventually resulted in the exit of the CEO. It is essential that fundamental changes are made to the culture and remuneration structure at Barclays.
In 2013, we will continue to engage with financial institutions in order to reinforce changes in the culture of and responsible behavior in the financial sector.
Ahold – alters tone in communications so as not to restrict employees’ freedom of choice regarding trade union membership
During 2012, we once again raised the issue of labor relations at Giant Carlisle, a US supermarket chain, with Ahold, the Dutch retail organization. Ahold showed us a letter addressed to the employees the tone of which was considerably less intimidating with regard to trade union activities than previous letters. We nevertheless wonder whether it is actually appropriate to take such a strong tone in a letter like this discouraging trade union activities. Together with other large investors we sent a letter to Ahold saying that we were satisfied with the less threatening letter, but also that we had doubts concerning the information provided on the deduction of trade union dues. We will continue to monitor Ahold during 2013 and hope that the company will respect trade union freedom in the US, too.
Apple takes steps to improve labor conditions in factories
US electronics manufacturer Apple was once again the focus of investors’ attention during 2012, due to poor labor conditions at its suppliers in China. Foxconn in particular attracted attention in this regard. During 2012, APG corresponded with Apple about the need for good labor conditions and good supervision by the company itself of the entire production chain. In this context, we asked Apple to create a broader base of manufacturers and other suppliers so as to make it easier to switch should abuses come to light at one of them. We also asked Apple to do even more to reduce long working hours including overtime for factory workers.
Apple itself has engaged the Fair Labor Association (FLA) to investigate the working conditions in the factories that manufacture parts and products on behalf of Apple in, for example, China. The FLA’s findings on labor conditions in the factories have been published and show that improvements are being implemented and progress is being made.
While there is still some way to go, we see signs that the improvements that have been made are indeed leading to better working conditions on the factory floor. We will continue to closely monitor developments during 2013 and will remain in dialogue with Apple.
MTN – reviews country risk and human rights policy
MTN is one of South Africa’s largest telecommunications providers and also operates in Syria. Although these operations do not constitute military activities and hence do not fall under the United Nations embargo, APG is nonetheless concerned about how MTN may be involved in the civil war raging in Syria. Various civil society organizations have said, for example, that through its activities MTN is involved in human rights violations by the regime in Syria. We have therefore asked MTN to provide clarification, and are currently engaged in dialogue about its activities and the country risk policy. MTN recently provided a detailed explanation of its activities and the review of its current policy. We will continue to further the dialogue about the company’s human rights policy and its activities in Syria.
POSCO – constructive dialogue with local population crucial
Last March, we had multiple contacts with the Indian representative office of POSCO. POSCO is a South Korean steel-making company that planned to start construction of a steel plant in India seven years ago. The project, which has a value of $ 12 billion, has been delayed among other things due to protests by local people who are concerned about the environmental damage that the steel plant may possibly cause. In view of the protests and the withdrawal of planning permission by India’s National Green Tribunal, APG has embarked on an intensive dialogue with POSCO concerning the company’s plans for constructing the steel plant in India. In this context, APG is keen to stress the need for constructive dialogue with the local population. In light of this long drawn-out matter, a group of non-governmental organizations (NGOs) has filed a complaint with the contact point of the OECD (Organization for Economic Co-operation and Development) in three OECD member countries against POSCO and minority shareholders in the company: against us and one of our clients, and NIBM, the Norwegian state pension fund.
Mahindra Mahindra – offers compensation to employees made redundant
Mahindra Mahindra is an Indian conglomerate that operates in a number of key industries, including the automotive industry. In 2011, the company took over ailing South Korean vehicle manufacturer Ssangyong and then implemented a radical overhaul of the business, which led to a wave of protests among the employees who were made redundant. The protests together with several suicides among the dismissed workers prompted APG to enter into an intensive dialogue with the company. Mahindra Mahindra has promised financial compensation for the employees who have been dismissed.
NetApp –investigation into deliveries to Syria
During 2012, we engaged in correspondence with NetApp, a US technology company, about their possible business activities in Syria. The company is reported to have supplied technology to the Syrian regime in 2011. Of concern was an order from 2011 reportedly delivered to the Syrian regime via an Italian company. This technology could be used to intercept and read e-mails. NetApp replied to our letter by referring to an ongoing investigation by US authorities into the implications of the sanctions regime with regard to the sale of so-called ‘sensitive technology’ to Iran and Syria. Pending that investigation, NetApp does not wish to reply to our questions. We will continue to press for clarification and will study the results of the investigation.
Orascom Telecom – dialogue leads to human rights policy and withdrawal of operations from North Korea
During 2012, we were pleased to note that our engagement with Orascom Telecom, an Egyptian telecoms provider, had yielded several significant results. At our insistence, for instance, the company developed a human rights policy and rolled it out throughout the entire organization. The company also ended its activities in North Korea and introduced further improvements in its country risk systems.
Samsung Electronics – enters into dialogue with families of deceased employees
During the past year there was extensive dialogue with South Korean company Samsung Electronics regarding safe and healthy working conditions and child labor. A recurring topic on the agenda was APG’s concern about the inadequate attention Samsung had paid to its (former) employees who had contracted leukemia and the families of deceased employees who had worked on a production line which has since been closed down. We are therefore pleased that Samsung entered into dialogue with the families of the victims during 2012. We also discussed working conditions in the production chain with Samsung. Samsung works with Taiwanese supplier Foxconn. Foxconn is regularly in the news due to poor working conditions. APG also raised the issue of working conditions at all factories in China with Samsung. China Labor Watch, an independent not-for-profit organization, for example, discovered that one of Samsung’s suppliers was using child labor. After APG had contacted the company regarding control of the production chain, Samsung issued a press statement setting out its position with regard to child labor. Samsung also published an action plan for preventing child labor in its production chain.
BP – has implemented measures to strengthen its safety culture
During 2012, we continued the dialogue with BP about the safety culture in the company. In 2011, we concluded from analyzes of various studies and following discussions with BP that more supervision of safety risks was needed in the organization and that a more self-critical culture was required among staff in order to identify and tackle safety risks more quickly. Two years on, we note that BP has implemented a series of measures in this direction since we entered into dialogue with the company about these matters; supervision has improved and audit procedures have been extended, and, partly at our insistence, a Remote Monitoring Center, which keeps a close watch on activities on the drilling platforms, has been set up. Managing safety risks has also become an element of the remuneration system. In spite of the significant steps that BP has taken to reinforce its safety culture in business practice, the company must develop still further. We will continue the dialogue, and will emphasize, among other things, the importance of the company publishing the findings by independent auditors.
Norilsk Nickel – has implemented measures to reduce its emissions
APG has been in dialogue with Norilsk Nickel, a Russian metals prospecting and mining company, since 2009. During 2012, the company made progress in relation to its sustainability policy. During a visit by a company delegation to our offices in Amsterdam, undertakings were given with regard to environmental performance and better corporate governance. The basis for the engagement was our concerns about the absence of strategic targets by Norilsk Nickel with regard to the environment and measures to tackle environmental damage caused by its polar operations. The company has made investments to reduce SO2 pollution.
In relation to business strategy, we have asked Norilsk Nickel to commit to participate in the UN Global Compact and to become a member of the International Council on Mining and Metals (ICMM). It has yet to live up to our request.
Goldcorp – reviews policy for land acquisitions and alters country risk policy
APG has been in dialogue with Goldcorp, a Canadian mining company, for some time about responsible mining. The company, which specializes in gold mining, became a participant in the UN Global Compact in 2009 and is a signatory to the Extractive Industries Transparency Initiative (EITI). The company has furthermore developed and implemented a sustainability policy and various sustainability programs. It has also tightened up its country risk policy. Nonetheless, there are problems surrounding the Goldcorp mine in Guatemala. The local communities and several leading international organizations have called for the closure of the Marlin mine due to reports, from reliable sources, that human rights and labor rights are not adequately protected there. We have discussed this with representatives of Goldcorp and asked them for a report on their assessment of the human rights situation at the mine. Goldcorp has promised to develop a policy for acquisitions and appropriations of land. The company also will report on its implementation of the recommendations of the Human Resources Institute of Alberta (HRIA).
Shell – visit to the Niger Delta
APG has been engaged in active dialogue with Shell for some time about the worrisome oil pollution in Nigeria. This year we once again held consultations with the CEO of Shell, the managing director responsible for the activities in Nigeria and the chairman of the supervisory board. In October 2012, a member of the S&G team visited Nigeria and established contact on behalf of APG with the local management of Shell Nigeria. During this contact, we became aware of the scale of the pollution and the problem of illegal refineries and illegal oil storage activities.
Spurred on by the continuous focus on the issue by ourselves and other institutional investors, Shell has made progress in recent years. There is now better insight into the progress being made to clean up existing and new spills, for example. Shell is now more receptive to independent audits and advice. The oil company’s contacts with local organizations have also improved.
Nevertheless, there is still a tremendous amount of work to be done on achieving a sustainable solution for the entire Niger Delta. In spite of the improved relations, there is still considerable distrust among local communities and non-governmental organizations (NGOs). They raise questions about the method used by Shell to clean up the oil pollution, for example, and they are supported in this by critical remarks from the United Nations Environment Programme (UNEP), which conducted a study in that regard and published a report on this matter in 2011.
Following publication of the UNEP report, APG asked Shell to commission an externally verified study to determine the effectiveness and applicability of the method and, where necessary, to improve that method. Shell has engaged Bureau Veritas for this purpose and has also involved several NGOs in the study. We consider this a positive development. It is essential that the outcomes and recommendations in the final report issued by Bureau Veritas increase support for the manner in which Shell assumes its responsibility for the oil pollution in Nigeria.
Visit to Myanmar – discussions with human rights supporters and companies provide insight into risks for businesses, but offer hope for the future
In 2012, a member of the S&G team visited Myanmar. Important political developments took place, such as the release from house arrest of opposition leader Aung San Suu Kyi and her subsequent election to the parliament of Myanmar, and ongoing progress toward democratization. APG therefore considered it important to make contact with various relevant parties in the country. During the visit discussions were held with experts, human rights supporters, and national and international companies operating in the country.
These included talks with Daewoo International, a company with whom we have been in dialogue since 2009. We are pleased to note that the company has taken up a series of our recommendations. For example, Daewoo has developed a mechanism for closer consultation with the local communities, and the company is committed to hiring as many local workers as possible.
The increasing openness of the country to the outside world is bringing about changes that can influence how investment risks in Myanmar are assessed. To date, investments in Myanmar were generally labeled extremely high risk with regard to potential ESG incidents. We are therefore cautiously optimistic about opportunities for businesses.
While the political situation has changed, economic and social conditions remain troublesome. The conflicts in the border regions and the widespread poverty and poor labor conditions, inadequate safety on the shop floor, corruption and bribery are a source of concern. Moreover, it is debatable whether it is wise to invest in the country at this stage since social legislation and enforcement are still under-developed. Aung San Suu Kyi also has advised foreign investors against investing in the energy sector since this would require investors to enter into a joint venture with state-owned oil company MOGE.
We closely monitor the companies in which we invest and who are engaged in activities in Myanmar. We do this not just due to the political risks, but also because we expect companies to comply with the UN Global Compact Principles.
Visit to forestry investment in Mozambique
APG believes that investments in forestry are a suitable way of generating long-term returns while at the same time contributing to sustainability. We are convinced that forestry, provided it is well managed, is a valuable supplement to our investment portfolio. We also consider forestry sustainability certifications at the highest level to be important, and make them a condition for our forestry investments.
We have invested in forestry projects on different continents. Since 2007, we have invested in a fund focusing on forestry in Mozambique that is managed by Global Solidarity Fund International (GSFI), an international asset manager owned by Swedish and Norwegian churches. In order to ensure that these forestry investments satisfy our requirements with regard to responsible investment, it was contractually agreed at the time we started doing business with the fund that a process would be commenced that would lead to the forestry projects achieving Forest Stewardship Council (FSC) certification. This certification is an important measure for the quality and sustainability of the forests that are invested in. All our forestry investments must meet the FSC standard or, in the case of forestry investments in North America, that of the Sustainable Forest Initiative (SFI). They must also comply with the UN Global Compact Principles, the guidelines in the areas of human rights, labor, the environment and anti-corruption referred to previously.
It gradually became clear to us that the projects in Mozambique were not meeting the aforementioned requirements. This was revealed, among other things, following an independent assessment in the context of FSC certification. At the same time, the projects were accused by civil society organizations of having unlawfully acquired land rights from the local population. This so-called land grabbing became the subject of public debate.
In recent years, we and the other investors in this project have strongly urged improvements with regard to the ESG performance. This resulted, among other things, in the appointment of a new management team that now comprises a healthy mix of local, talented professionals and internationally oriented managers with substantial forestry experience.
In April 2012, a member of the S&G team visited the projects in order to see whether our wishes had been met and to investigate the accusations leveled by NGOs. From the many discussions held with local organizations, employees and villagers, we found no indications for land grabbing. The correct permits are available for all planted hectares. We were nonetheless able to conclude that the previous management had not kept careful records and that expectations had been raised among the local population that could not be met.
We are positive about how the current management deals with the local population and remains in dialogue with them. Should the inhabitants not give consent for the use of the land where they live and/or which they farm, it has been agreed that the management will look for other suitable land.
During 2013, a so-called ‘baseline study’, a study into the social and environmental impact, will be conducted for the purpose of obtaining FSC certification, to which we attach great value. Such a study takes one year, meaning that FSC certification should be realized during the course of 2014.
Exercising our voting rights at shareholder meetings is one important way of making our views on certain matters clear to the management of a company. We endeavor to vote in a well-informed manner at all the shareholder meetings of companies in which we invest. An electronic system is used for this purpose. This system allows us to exercise our votes at all meetings worldwide, where possible. In a number of cases we did not exercise our voting rights. The reason is that it is prohibited in some countries to trade in a share when a shareholder wishes to exercise its voting right. As we wish to always maintain the flexibility to trade in our shares, we opted not to make use of our voting rights in such cases. We consider it important to be transparent about our voting policy and the practical effect of how we exercise our voting rights.
Below, we highlight several companies with whom we had a dialogue during the past year and in relation to whom we nevertheless found it necessary to focus attention on a number of sensitive issues during the shareholder meetings.
- At the Annual General Meeting (AGM) of Total, the French oil and gas company, our concerns about the combined roles of chairman and CEO were expressed through our voting position. All the management board members additionally hold a large number of other management and board positions, giving rise to doubts as to whether the management board members actually have enough time to spend on the business of running an oil and gas company. Furthermore, one management board member had a very low attendance record at board meetings.
- At the AGM of Ahold, the retail company, we once again voiced our concerns about the stance of Giant-Carlisle’s management , the US supermarket chain, toward trade unions. This chain has actively discouraged employees from joining a trade union. We also asked Ahold to conduct an employee satisfaction survey among all staff members worldwide. APG additionally voiced its concerns about remuneration policy.
- D.E. Masterblenders 1753, a newly listed company, was forced to report major accounting irregularities in Brazil in early August 2012. The incidents of fraud were committed before the new company was floated and fell under the responsibility of the former board of Sara Lee. We voted in favor of discharging the management board from liability because the incidents of fraud did not take place under its responsibility and because we have confidence that the management board has taken sufficient measures to avoid any recurrence of abuses of this nature in the future.
Appointment of independent directors in Italy
Voting on the appointment of directors is one of the most important ways for APG to exert influence on the composition of the boards of the companies in which we invest. It gives us the possibility to participate in the decision-making process regarding who will actually manage the company. Italy has had the so-called ‘Voto di Lista’ since 2007. This system enables minority shareholders to nominate at least one member of the board of directors or the board of statutory supervisory directors as a counterweight to a majority shareholder or a group of shareholders acting jointly. While the system is not optimal, since the majority shareholders are still able to appoint more supervisory board members, it nonetheless offers minority shareholders the opportunity to be better informed about the company. In 2012, this system proved useful to APG when enquiring about the nature of the activities and involvement of Finmeccanica in Syria since we had nominated an independent member of the company’s supervisory board in 2011. We were able to approach this supervisory board member directly in order to discuss the company’s country risk policy and its activities in Syria.
Investing is never without financial risks. Occasionally, APG suffers a loss on the investments due to, for example, fraud, deceit, a misrepresentation of affairs, disregard for the disclosure obligation or violation of fiduciary obligations (misconduct) by a company. It is possible to limit the damage following from these incidents or to demand compensation for such damage by initiating legal proceedings or by joining a shared or group action that has already been brought against a company. In such an event, and to the extent possible, reasonable measures will be taken on our behalf to recover (part of) the loss or damage. We will only do this if it is likely that the advantages of such an action will largely outweigh the necessary efforts and the costs of the proceedings. Recovering the loss or damage will always be the objective; however, action can also be taken to improve the governance of the company in question.
In the United States, the possibility exists of ‘class actions’. If an investor instigates legal proceedings against a company in order to obtain compensation, the class action system automatically makes all other investors who held shares in the period during which the misconduct allegedly occurred a member of the ‘class’ that is collectively claiming compensation from the company. Due to this system, APG is currently passively part of such a ‘class’ in approximately 230 cases. Class actions generally result in the award of compensation. The rule is that each participating investor receives compensation for the loss or damage sustained by them on a pro rata basis. However, investors can elect not to join the ‘class’ and instead instigate their own legal proceedings.
APG believes it is important as a large institutional investor to exert influence on companies in which we invest on behalf of clients. We are often in a position in which we can encourage companies to engage in socially responsible business practices. We expect from all the companies in which we invest, that they act in accordance with the principles of the UN Global Compact. We actively engage with companies who still fall short in terms of their adherence. Through this so-called ‘engagement’ we seek to convince companies of the need for change. Should our efforts fail to have any effect, then we sometimes opt not to invest in such a company. We prefer not to do this, because we believe that we can exert greater influence through engagement. But if a company fails sufficiently to comply with our wishes, exclusion may be the only way to enforce our responsible investment policy.
Since January 1, 2013, it is prohibited in the Netherlands to invest directly in manufacturers of cluster weapons. Based on our own research, we have excluded the 14 listed companies named below due to their involvement in the production of cluster weapons. We also take steps to ensure we avoid non-listed manufacturers of cluster munitions and indirect investments in cluster munitions. The portfolio and fund managers are contractually obliged to avoid such investments and consequently carefully research the activities of companies before we invest in them.
The list of excluded companies, operative on January 1, 2013, is as follows:
|Aeroteh S.A.||Romania||cluster weapons|
|Alliant Techsystems Inc.||United States||cluster weapons|
|Aryt Industries Ltd.||Israel||cluster weapons|
|Ashot Ashkelon||Israel||cluster weapons|
|China Aerospace International Holdings||China||cluster weapons|
|China Spacesat||China||cluster weapons|
|Hanwha Corporation||South Korea||cluster weapons|
|Kaman Corporation||United States||cluster weapons|
|Lockheed Martin Corporation||United States||cluster weapons|
|Norinco International Cooperation Ltd.||China||cluster weapons|
|PetroChina||China||UN Global Compact|
|Poongsan Corporation||South Korea||cluster weapons|
|Poongsan Holdings Corporation||South Korea||cluster weapons|
|Singapore Technologies Engineering||Singapore||cluster weapons|
|Textron||United States||cluster weapons|
|Walmart Stores||United States||UN Global Compact|
In 2012, we decided no longer to invest in government bonds of countries which are subject to a UN Security Council arms embargo. These countries are: Democratic Republic of Congo, Eritrea, Iraq, Iran, Ivory Coast, Liberia, Libya, North Korea, Sudan, and Somalia.
During 2012, extreme weather once again caused widespread damage: large forest fires in Russia at the end of July and in Australia in December, floods in the United Kingdom and Hurricane Sandy on the eastern seaboard of the United States. The debate as to whether or not extreme weather is caused by climate change continues to rage around the world. At the same time, investments are being made worldwide in energy efficiency, reducing greenhouse gases, and into limiting and preventing damage due to extreme weather that leads to drought or floods. Greenhouse gases have more than doubled since 1990. Under the Kyoto Protocol (1997), it was agreed at international level that emissions of greenhouse gases would be reduced by 5% by the end of 2012. This goal has therefore not been met. If we want to limit the rise in temperatures at the Earth’s surface to no more than 2 degrees Celsius, as agreed in Cancun, Mexico, in 2011, then global CO2 emissions will have to be reduced by 80% in 2050.
The annual climate negotiations took place in Doha (Qatar) in early December last year. The meeting failed to produce any noticeable changes in international agreements and legislation and regulations with regard to energy and greenhouse gases. One of the reasons for this may be that parties are working on a climate agreement in 2015.
Institutional investors around the world are concerned about the implications of climate change due to their long term interests. For this reason APG is a board member of the European Institutional Investors Group on Climate Change (IIGCC). Together with other regional investor groups (North America, Asia and Australia/New Zealand), prior to the climate summit in Doha we pressed for firmer government policy, improved cooperation between governments and tougher international agreements. The IIGCC also supports the efforts of various political parties in the European Parliament to save the European Emissions Trading System from collapse.
APG is one of the founding members of the United Nations Principles for Responsible Investment. The PRI represents 1,071 worldwide investors and other financial market parties who between them manage more than 30 trillion US dollars worth of assets. Each year we report on the basis of the UNPRI reporting framework on how we implement the six principles of the PRI to which we have committed. We additionally participate actively in different working groups and initiatives with the aim of working with other institutional investors to further strengthen the financial sector together.
In 2012, we started a working group of global investors with the aim of developing guidelines for hedge funds with regard to responsible investment and transparency. This resulted in the publication of a discussion document by the UN PRI that serves as a guideline for institutional investors when selecting and monitoring their hedge fund managers.
APG is a member of Eumedion, the platform representing institutional investors’ interests in the field of corporate governance and sustainability performance. We are on the board of Eumedion and have representatives in several committees. During the past year, Eumedion commissioned TilburgUniversity to examine whether the view in society that institutional investors are inclined toward short-termism was actually correct. In light of the credit crisis, among other things, pension funds and asset managers have been accused of being too focused on the short term with regard to their investments. The study conducted by TilburgUniversity found that Dutch institutional investors keep the majority of their shares in listed Dutch companies in the portfolio for a long period of time. More than 80% of the equity portfolios are held for five years or more, and no less than 55% for a duration of at least ten years. In addition to our client ABP, Pensionfund Zorg en Welzijn, PME and Spoorwegpensioenfonds (Railway Pension Fund) also took part in the study, as did Robeco (Hollands Bezit investment fund) and Teslin Capital Management, both of whom are Dutch asset managers.
The Global Real Estate Sustainability Benchmark (GRESB), which was launched on our initiative in 2009, has now become the leading global sustainability benchmark for real estate investments. From a starting position of 3 global institutional investors, GRESB is now supported by more than 40 investors and can rely on the support of all the major regional real estate associations, such as the European Public Real Estate Association (EPRA) and US National Association of Real Estate Investment Trusts (NAREIT). Furthermore, the number of private real estate funds and listed real estate companies taking part in the annual survey is increasing. In 2012, 443 respondents took part in the GRESB survey, compared with 340 in 2011.
APG is a member of the International Corporate Governance Network (ICGN) and chairs the Integrated Business Reporting Committee. ICGN has 600 members in more than 50 countries. ICGN is an important organization to us in our endeavors to reinforce corporate governance standards worldwide.
Institutional investors around the world are concerned about the implications of climate change due to their interests (investments) with regard to the long term. For this reason, APG is a member of the European Institutional Investors Group on Climate Change (IIGCC). Together with other regional investors’ groups (North America, Asia and Australia/New Zealand), prior to the climate summit in Doha we pressed for firmer government policy with regard to climate laws and regulations, improved cooperation between governments and tougher international agreements.
The IIGCC also supports the efforts of various political parties in the European Parliament to save the European Emissions Trading System from collapse. As the European Commission itself concludes: this trade in emissions has led to an enormous surplus of allowances. As a result, the price of CO2 has dropped to barely € 7 per ton, while a price of € 25 per ton would be needed to make it attractive to invest in cleaner energy technologies. The drop is admittedly due to a combination of positive factors, such as increased energy efficiency, and negative factors, such as the economic crisis and an oversupply of free rights. It nevertheless remains important for us to be able to offset the costs of climate change in a responsible manner.
In November 2012, the European Commission wrote a report for the European Parliament and the European Council containing six recommendations for making the ETS and the price of CO2 valuable again. We look forward to a good solution.
More and more boards of directors are becoming convinced that a sustainable strategy and related policy and performance are important for the success of their company. As investors, we must know how companies can guarantee that they have sufficient financial resources, natural resources and human capital, and that they are able to combine these in the right manner, so that they can create and maintain added value going forward. We are therefore interested in reporting that presents a transparent view of an integrated approach.
Since 2010, APG has been an active member of the International Integrated Reporting Committee (IIRC), a powerful interdisciplinary initiative by leading figures from the business community, the financial sector, legislators and regulators, accountants, academics and civil society organizations. The aim of this initiative is to arrive at a widely supported reporting framework for companies that combines financial, social, environmental and governance information in a workable form. APG is active at the highest level of the International Integrated Reporting Council (IIRC). Within this organization it is a member of the Working Group. In 2012, the IIRC published the first draft of its framework and this is now being further developed with the stakeholders. Version 1.0 of the IR Framework is expected to be published during 2013, following an extensive period of consultation. Dozens of publicly listed companies are taking part in a pilot program that enables them to gain practical experience of preparing integrated annual reports, thereby allowing them to share their experiences for further development of the framework. APG aims to ensure that the IR Framework meets investors’ needs.
The Hedge Fund Standards Board (HFSB) is an initiative by the hedge fund sector to define guidelines for the sector. The HFSB monitors the practical implementation by the hedge funds of these guidelines with regard to transparency, integrity and good governance. This organization brings together hedge fund managers, investors, regulators and consultants around the world to determine jointly how the hedge fund industry should operate so as to safeguard the sector’s reputation.
APG is fully committed to the HFSB and actively advances the standards. Through our hedge fund manager we are a ‘Core Supporter’ of the HFSB.
The European Venture Capital Association (EVCA) is the organization of European private equity parties in which the sector jointly makes agreements and monitors standards on corporate governance and transparency. APG is a member of the EVCA and has a seat in the EVCA Professional Standards Committee. APG also is vice-chairman of the EVCA Responsible Investment Roundtable.
The ESG Disclosure Framework for Private Equity is the result of close collaboration between various parties in the private equity sector. The Framework provides guidance to the sector on implementing more structured reporting on ESG issues in private equity investments and is an important step forward.
APG actively contributed to the development of the Framework because we consider it important that there should be effective and consistent reporting on ESG aspects by the private equity sector. Given our commitment to responsible investment, it is extremely important to APG that ESG factors are taken into account in the investment process and that private equity parties report on this.
Mining companies and companies in the oil and gas sector often operate in countries where conflicts and corruption are rampant. Therefore, it is important that measures are taken to improve the stability in these regions. APG actively participates in the Extractive Industries Transparency Initiative (EITI) on behalf of its clients. This initiative calls on governments to publish audited financial statements disclosing the payments received by them through taxes, royalties, and other charges and payments from mining companies and other enterprises in the oil and gas industries. For their part, the companies are expected to disclose the payments made by them to governments.
The United States became a signatory to the EITI in 2011, and through the Dodd-Frank Act has now imposed an obligation on mining and energy companies to be transparent about their payments. The Securities and Exchange Commission (SEC), the US stock exchange regulatory authority, has transformed the statutory obligation into a set of rules for corporations that are publicly listed in the United States. The practical impact and implementation of these rules will become evident during 2013. For the moment, several companies affected by these regulations are seeking to have the legislation overturned through the courts.
Outlook for 2013
In 2013 we will continue the dialogue with publicly listed and unlisted companies on behalf of our clients. Important subjects we will continue to discuss with companies include good personnel policy, efficient water management, and the implications of climate change. Governance-related themes such as remuneration policy, directors’ independence and succession planning will once again be items for discussion. In addition, there are certain topics about which we were already engaged in dialogue but which now assume a more prominent place on the agenda due to various incidents and legislation. Examples are fraud and corruption and the true insight directors have into the activities of subsidiaries. The quality of directors and their capacity to uphold a company culture marked by integrity play an important role in this regard.
Last year, APG experienced for itself the value of having ESG factors extensively integrated in the investment process. With the support of the instruments developed in 2012, such as the ESG Dashboard and the ESG Country Risk Monitor, the portfolio managers now have the means to take even better account of ESG risks in their valuation of companies.
The quantitative equity strategies still constitute a relatively new area where there is a need for ESG factors to be taken into account. This prompted the portfolio managers to commence a study into the so-called hidden risks, which have not yet been factored into the share price by the market and which a quantitative investment strategy may therefore be able to leverage to obtain benefit. This study will take further shape during 2013.
In 2013, we will further deepen the integration of ESG factors in all asset classes. We aim to apply the knowledge and experience we have gained in recent years in the individual classes more widely across the entire portfolio.
Private equity is the primary focus in a further deepening of ESG integration, and we are developing a new framework for assessing our investments in infrastructure.
APG plays a prominent role in improving the sustainability of real estate through the Global Real Estate Sustainability Benchmark. In 2013, APG will continue to leverage the so-called GRESB survey to encourage listed and unlisted real estate companies to be more transparent about their ESG performance.
2013 will see the further development of integrated reporting. As an institutional investor, APG is involved with the International Integrated Reporting Council via the board and a number of committees. The first experiences of companies with the so-called integrated reporting framework are expected during the course of 2013. It is important to investors that integrated reporting provides better insight into the value and the value creation of companies.