Integration in the investment process
Ensuring that 4.5 million Dutch citizens receive a good pension; that is what we do on behalf of our clients. We invest the contributions that participants and their employers put aside each month in the best possible way.
In doing so we look beyond the most recent financial results and explicitly take sustainability and corporate governance factors into account in our investment decisions. Last year we again made significant progress in integrating this approach in all asset classes, also including our quantitative equity portfolios. As one of the largest pension investors in the world, APG also uses its size to encourage companies to operate more sustainably with greater attention for their employees and their environment, and with a governance board that listens also to the minority shareholders. We engage in dialogue on these matters with the companies in which we invest on behalf of our clients. Moreover, we set conditions for our business partners, such as external asset managers. In this way we aim to contribute to a necessary change in culture in the financial sector as well. This report sets out how we did this during 2013.
Angelien Kemna, Chief Investment Officer and Member of the Executive Board of Directors
The pension contributions that APG manages for its clients are invested so as to yield an optimum return at an acceptable risk. Responsible investing contributes to ensuring that participants can receive a good pension now and in the future.
The success of APG’s investment strategy depends on it having the clearest insight possible into the risks and opportunities of its investments.
When making investment decisions, APG not only examines financial performance and business processes, but considers also whether companies operate a good environmental and social strategy and whether they are well-governed. These are the so-called ESG factors: environment, social and governance. APG wants to know what the risks and opportunities attached to its investments are with regard to these areas, and takes these into account when making investment decisions.
Integrated in the investment process
APG invests the pension assets of its clients in different investment products, such as equities, bonds, real estate, infrastructure, private equity, hedge funds and natural resources.
In consultation with the clients, the assets are spread across different portfolios, each having its own investment strategy. Responsible investing is an integral part of each strategy. The impact of the environment, social factors and corporate governance is continuously analyzed and assessed as part of the investment processes because these factors can influence the long-term financial performance of the investments, in a positive as well as a negative sense.
APG has formulated clear expectations for all its investments, in line with national and international regulations. These are, firstly, Dutch laws and the international treaties and conventions that have been ratified by the Netherlands.
Additionally, the companies in which APG invests must act in line with the United Nations principles for responsible business practice (Global Compact). These principles concern fundamental human rights, labor rights, environmental responsibility and anti-corruption.
Also important are the guidelines for multinational enterprises and the principles of corporate governance of the Organization for Economic Co-operation and Development (OECD) and the corporate governance principles of the International Corporate Governance Network, a collaborative alliance of market parties that promotes effective standards of corporate governance.
APG has developed various instruments and procedures to enable it to assess whether companies operate in line with the above. A failure to do so may signal the beginning of an intensive engagement process that can, in the most extreme case, result in exclusion. This happens when a company acts contrary to the Global Compact agreements, fails to improve its behavior in response to engagement over a certain time, and there is no prospect of improvement in the future. Exclusion means that APG no longer invests in a company. This is a final step that is taken on a very exceptional basis, not least because it is no longer possible to exert any influence on a company whose shares we no longer hold.
An engaged investor
As an engaged investor, APG maintains intensive contact with the companies and funds in which it invests. This not only gives it insight into the risks and opportunities, but also enables it, where necessary, to question the companies about how they implement their strategies.
This applies to the listed companies as well as the external funds that manage the investments in unlisted companies. While APG’s role in both classes is not entirely the same, it is a universally active and engaged investor that not only formulates clear expectations in terms of how the pension assets are invested, but also uses its influence to urge other market parties to invest responsibly.
OECD Contact Point recognizes APG’s commitment
At the end of 2012, several civil society organizations filed a complaint against APG with the National Contact Point, an independent agency that is responsible for monitoring Dutch companies’ compliance with the OECD guidelines.
In their complaint they queried the applicability of the guidelines to pensions funds and pension investors as responsible investors. The complainants, who included Both Ends, a development organization, and the Centre for Research on Multinational Corporations (SOMO) argued that APG should adopt a more active stance toward POSCO, a steel-making company. This South Korean corporation, of which APG owns a small percentage of the shares, is investing billions in a plant, mining operations, railroads, and a port in eastern India. According to some organizations, approximately 20,000 people must leave their homes to make way for this megaproject. Three people were killed during protests.
In September 2013, the Dutch OECD National Contact Point found that APG had taken sufficient responsibility by calling POSCO to account on its business practices and sustainability policy. APG had also visited POSCO’s activities in India and had held discussions with the local authorities and the police, during which it had stressed that any violation of human rights is not acceptable.
POSCO has announced its willingness to cooperate in an local investigation by an independent agency, as proposed by APG and the civil society organizations who had filed their complaint with the National Contact Point. APG will closely follow developments and will further the dialogue with the company, which has been going on since 2009.
Carbon footprint of investments
Climate change is an important topic for APG as a long-term investor because it can have a significant impact on the value of the investments, directly as well as indirectly. During 2013, APG carried out an extensive analysis of the CO2 footprint of the companies in the equities portfolio.
The level of each company’s emissions was examined (based on figures for 2011), after which the portion of those emissions attributable to APG, due to APG’s percentage shareholding in that company, was calculated. Roughly 90 per cent of the total CO2 emissions of 35 million tons is produced by utilities, factories and power plants, which jointly make up approximately thirty per cent of the equities portfolio. The increase in the absolute emissions produced by the investments in recent years is largely due to the growth in the size of the investments. Emissions per Euro of invested capital have decreased during the past four years.
No direct link was discovered between the CO2 emissions of a company and its financial performance. Nor had this been expected, given the current low price for emissions allowances. Should the price rise, this may well affect the companies with higher emissions. CO2 emissions therefore remain a factor worth monitoring in order to stay on top of the risks to the investments.
The energy consumption of the real estate investments covered by the Global Real Estate Sustainability Benchmark (GRESB), decreased by almost 5 per cent during 2013. Approximately two thirds of APG’s real estate portfolio (198 investments) meanwhile reports against this sustainability benchmark, which was co-established by APG. This provides APG with insight into more than 50 sustainability indicators of its real estate investments, including the total energy and water consumption, CO2 emissions and waste flows. Energy, water, and CO2 reduction of these investments can be tracked at an aggregated level as well as at the level of individual managers.
On average, APG’s listed real estate investments that are held for more than three years qualify for the rank of Green Stars, the highest category in the GRESB benchmark. As such, the APG average is significantly higher than the average performance of all 119 listed real estate companies that reported to GRESB in 2013 and that rank at the Green Talk level. With one exception, all of APG’s Green Stars succeeded in reducing their energy consumption.
Figure: GRESB’s star constellation
The average of APG’s listed real estate portfolio (selection average in the figure) rates better in the GRESB than the average of comparable real estate investments, consisting of 119 listed real estate companies (benchmark average). The coordinate system according to which GRESB positions the investments is based on a large number of measurements which taken together provide an answer to two main questions: to what extent does a sustainability policy exist, and to what extent is that policy applied in practice? The so-called Green Starters have a low rating for both questions, the Green Stars a high rating.
Appropriate human capital policy
Where companies have a good human capital management, this appears to have a positive effect on their long-term success.
This was the conclusion of an extensive study carried out last year by a specialist from the S&G team and a portfolio manager. For their study they talked to roughly twenty large European companies in the consumer sector and reviewed scientific research.
The way in which a company has shaped its human capital policy and manages its employees provides a good indication of the possible success an enterprise will have in achieving its long-term goals. This explains why APG when analyzing companies, also tends to consider these kind of questions. Does the current workforce have the necessary capacities to successfully execute the long-term strategy? How does a company ensure it retains and further develops its most talented employees? How much does it invest in training? How committed, or dedicated, are employees to a company, what is their health status, what is the staff turnover rate? How are the labor relations?
APG has a Sustainability and Governance Team comprising nine specialists, that is responsible for advising on the responsible investment policy and supports the investment teams in implementing this policy across all asset classes.
Claudia Kruse is managing director. She manages the S&G team to ensure that the responsible investment policy is implemented in all asset classes, and is involved with multiple engagements at board level. Before she joined APG in 2009, she worked in London in responsible investing on the sell-side and on the buy-side. Claudia is a member of the General Board of Eumedion, the Dutch association of institutional investors, and Chairperson of the committee of the International Corporate Governance Network that promotes a greater focus on integrated business reporting.
Mirte Bronsdijk is a corporate governance specialist and has worked for APG since 2009. She mainly focuses on the decision-making process in and around shareholders’ meetings, has further developed the voting policy, and is involved with dialogue and engagement activities with companies on corporate governance worldwide. Mirte takes part in consultations, putting forward APG’s views on Dutch and European policy-making on corporate governance.
Terhi Halme has worked as a senior sustainability specialist for APG since October 2013. She is responsible for promoting the further integration of ESG factors in the quantitative investment strategies, in which regard significant advances were made during 2013. Terhi has more than ten years of experience working in the investment community. Before joining APG, she was responsible investment advisor with PGGM, a pension provider, and prior to that she was joint head of the equity research department of Financiële Diensten Amsterdam, a company providing independent investment advice to professional investors.
Marta Jankovic has been a senior sustainability and governance specialist with APG since 2012. She is responsible for advancing the integration of ESG aspects in the alternative investments, such as hedge funds, private equity, and commodities. Before she joined APG, Marta worked for more than ten years in the investment funds community, including a period as legal counsel for SVG Advisors in London. Marta is joint chairperson of the Responsible Investment Roundtable of the European Private Equity & Venture Capital Association (EVCA).
YK Park is a senior sustainability and governance specialist and is responsible for advancing the integration of ESG factors in APG’s Asia investments, in all asset classes. Based at the Hong Kong office, she leads the dialogue with Asian companies. She represents APG in the Asian Corporate Governance Organization. YK has more than ten years of experience as an investment analyst for international investment banks in South Korea, and also worked for the Association for Sustainable & Responsible Investment in Asia.
Anna Pot is a senior sustainability specialist and in this role is responsible for the exclusion policy and the engagement activities related to social issues. She regularly engages listed and private companies in dialogue on human rights, the importance of effective stakeholder relations and good labor conditions. Before Anna joined APG in 2008, she was fund manager of a sustainable investment fund at ING and program manager for business and human rights at Amnesty International.
David Shammai is as a senior corporate governance specialist for APG since mid-2013. He focuses on corporate governance in capital markets including voting, governance policy and company engagement. David represents APG in collaborative alliances such as the councils of institutional investors in the United States (CII) and in Russia (IPA). Before he joined APG, David was based in London where he held a number of roles in consultancy firms including with Hewitt and KPMG, where he specialized in governance and executive remuneration.
Erik-Jan Stork has worked as a senior sustainability specialist for APG since 2008. He is responsible for advancing the integration of environmental and social factors in the investment process for listed equities and corporate bonds. As a climate specialist he is a member of the board of the Institutional Investor Group on Climate Change, and actively engages in dialogue with policy-makers on climate policy. He previously worked for KPMG and Shell.
Sander Paul van Tongeren has worked as a senior sustainability specialist for APG since 2009 and is responsible for all sustainability issues within the real estate and infrastructure asset classes. He is the driving force behind the development of the sustainability benchmark for real estate investments: the Global Real Estate Sustainability Benchmark. He previously worked for Diageo, Corporate Express and ING, among other things as a manager of real estate funds.
Integration in the investment process
APG has developed several different instruments that enable portfolio managers to effectively assess the sustainability information on the investments.This information is important both for the decision whether or not to invest in a company (and for how much), and throughout the entire period during which a company is included in one of the portfolios.
ESG factors consequently play an important role in the daily investment decisions. Some instruments are fully tailored to the specific need of a certain portfolio, while others can be applied in several asset classes. The Country Risk Monitor, which was created in collaboration with Sustainalytics, a research firm, gives all the portfolio managers (and the team that develops the investment strategy) insight into the risks of countries in terms of sustainability and corporate governance. The exclusion policy also applies to the entire portfolio. APG expects all the companies in which it invests to act in line with the UN Global Compact principles in the areas of human rights, labor rights, anti-corruption, and the environment.
APG also shapes the investment processes to ensure that attention to ESG is safeguarded within the various portfolios. As part of the so-called Committee on Investment Proposals procedure, proposals for new investments in unlisted companies and new mandates for external managers are assessed by the S&G team. The proposals that are discussed in the Committee on Investment Proposals (CIP) are assessed in advance for ESG factors that may affect the value of the investment or that may prove harmful to APG’s reputation or that of any of its clients. The S&G team is authorized not just to give a positive or negative recommendation, but may also formulate conditions that are included in the agreements that form the basis of the new investments. Reporting requirements and additional sustainability requirements are examples of such conditions.
Two new instruments
APG added two new models to its set of instruments during 2013: the Risk Valuation Model for sustainability and corporate governance and the Quant model for ESG.
Risk Valuation Model for sustainability and corporate governance
During 2013, within the equities portfolio, which is composed of roughly 400 European companies (European Fundamental Strategies), APG developed a new method of better estimating how the value of an investment will react to problems in one of the ESG areas. This involves an assessment of companies’ risk exposure, the likelihood that those risks will materialize and their potential impact on the value of the equities. In the case of oil companies, for example, the questions to be considered are the likelihood of an environmental disaster occurring and what its impact might be on the value of the company, based on past experiences with disasters. This way sustainability risks and financial risks are integrated in a single analysis. The outcome determines whether APG is willing to pay more or less for the stock. As this model requires an in-depth knowledge of companies and a thorough analysis, it is only used in case of larger investments and for investments whose sustainability risk is estimated in advance to be high.
The ESG model for Quant
APG’s equities are held in different portfolios, one of which, composed of roughly 1,500 companies, is managed with the support of econometric models (the quantitative equities strategies). The team responsible for this has taken an important step in developing the so-called ESG model for Quant that is designed to enable elements of sustainability and corporate governance to play a more explicit role in the investment process.
During 2013, the Quant team responsible for managing this portfolio jointly with the S&G team examined how the way in which a company is governed, is related to the long-term return. More than 4,000 companies were researched as how they score against 200 different criteria of corporate governance (varying from child labor avoidance policy to anti-corruption measures) and how these scores relate to the share prices during the previous seven years. Main conclusion: the long-term return is not related to what a company says about how it is governed, but rather to how it has actually structured its governance. Furthermore, good performance on some of these 200 criteria shows a clear and positive relationship with the long-term return on shares, while there is no relationship in the case of other criteria.
The results of this study laid the basis for the so-called ESG Quant model that is designed to enable elements of sustainability and corporate governance (ESG) to be given explicit attention in the investment decisions. This has already happened in one of the strategies managed by the Quant team. ESG factors that are associated with a positive long-term return make a significant contribution to determining the expected return of individual shares and hence directly affect the buy and sell decisions.
How APG has insight in the sustainability performance of its investments is indicated below for each asset class.
Equities managed in-house
All portfolio managers have access to the ESG Dashboard, which has been developed in-house by APG and which shows at a glance how a company rates in terms of ESG.
The Dashboard furthermore displays APG’s voting record with the company, its correspondence with the company, and the discussions that have taken place. It also contains analyses by three independent research agencies.
The ESG Company Risk Comparison Profile that APG developed with data supplier Bloomberg, offers portfolio managers insight into development trends, such as energy consumption during successive years, CO2 emissions, and the number of fatal accidents. Using this model, which was implemented in 2013, it is possible to compare a company’s performance with that of other companies in the same sector or line of business.
The Risk Valuation Model for sustainability and corporate governance, which was introduced during 2013, provides insight into the extent to which the value of an investment is influenced by risks and opportunities in one of the ESG areas.
The ESG model for Quant, the basis for which was laid by APG in 2013, makes it easier to enable ESG factors to play a role in investment decisions in the sizeable portfolio that is largely managed with the help of quantitative models.
Equities managed by external managers
Approximately 20 per cent of the investments in equities is managed by more than 30, predominantly large, asset managers: the external managers.
Before entering into a new collaborative alliance with an external manager APG performs extensive analyses, and agrees on aspects such as the exclusion and voting policy. Throughout the entire contract period, intensive contact is maintained with the managers on how they implement APG’s commitment to responsible investing.
In 2013, these external managers’ position with regard to responsible investing was reviewed in depth. Their policy and actual practices in relation to seven different areas were examined, after which they were positioned on each of these areas in a model with five stages of development (see figure). This enabled APG to gain a good insight into the progress already made by the managers in terms of integrating ESG factors into their investment decisions, for example, and their activities in relation to engagements and communication with clients. APG will repeat this analysis each year and use the results during the annual evaluation of the external managers in order to identify their scope for further development.
Figure: How does APG determine the external managers’ status in terms of responsible investing?
The Country Risk Monitor is used by the portfolio managers when analyzing the risks and opportunities of investments in government bonds.
APG does not invest in sovereign bonds of countries on which the UN Security Council has imposed an arms embargo. The exclusion list contained the names of ten countries at the end of 2013.
All portfolio managers have access to the ESG Dashboard, developed by APG, which shows at a glance how a company scores in terms of ESG.
The portfolio managers include the sustainability ratings in the investment proposals. If they are lower than the ratings of comparable companies, a more detailed analysis is carried out.
All investment proposals are assessed by the S&G team for sustainability and corporate governance.
APG requires that all new non-listed real estate investments take part in the sustainability benchmark for real estate that APG helped to create (Global Real Estate Sustainability Benchmark) for the entire investment period.
This involves an ex ante review and an annual measurement of sustainability performance. Where necessary, a dialogue is commenced with the aim of improving the performance. A focus on good governance also is an integral part of this process. APG’s position as one of the largest real estate investors worldwide makes it an influential discussion partner for this sector.
APG has taken the initiative to work together with other major investors to develop a new sustainability assessment instrument for infrastructure that has the potential to become a global standard. This helps APG to gain better insight into the performance of the investments in infrastructure.
APG expects the funds to have a responsible investment policy in place. APG adopts a tailored approach in this regard, with the strategy of the fund largely determining the precise nature of these requirements.
APG encourages hedge funds to become signatories to the Hedge Fund Standards Board, which promotes transparency, integrity and good corporate governance in the sector. In order to contribute to ensuring hedge funds embed this properly in their business operations, APG takes part in a special working group of the UN PRI (the international collaborative alliance that promotes responsible investment).
Sometimes APG decides to work together with a hedge fund manager who doesn’t meet all the ESG requirements yet, provided that the manager is willing to carry out improvements. Sometimes these improvements materialize as a consequence of an engagement with APG. In 2013, APG decided to invest in a hedge fund run by a manager with whom it had refused an opportunity to co-finance a project in 2011 because the fund did not perform well on sustainability. Its new fund was able to pass the ex ante test, however. That was due to the intensive contact that APG had had in the meantime with the manager and that resulted in its signing up to the principles for responsible investment (UN PRI) and formulating its own sustainability policy.
Private equity funds must demonstrate that they invest according to the standards that APG adheres to for responsible investing.
The new framework (Disclosure Framework for Private Equity) that was developed during 2013 partly on the initiative of APG means that this is now better understood, and also serves to stimulate attention for responsible investing throughout the sector. APG demands that all private equity managers adhere to the exclusion policy, maintain an appropriate policy for responsible investing and regularly report on their performance in this area, both at the level of their entire portfolio and that of the individual portfolio companies.
During 2013, APG had significant influence on how different private equity funds realize responsible investing, among other things by commenting directly on the policy formulated by new managers who presented their investment proposals to APG. This included, among other things, managers attending an ESG-related course, the establishment of ESG committees populated by investors of a certain level, improved communication about ESG between fund managers and the companies in their funds.
Discussions with Carlyle, a US asset manager which manages a substantial part of APG’s private equity investments, resulted in Carlyle’s decision to appoint a chief sustainability officer. This is a new position that Carlyle created in 2013 at the suggestion of APG. Carlyle was one of the first major investors in so-called alternatives (non-listed investments) to integrate a focus on sustainability and good corporate governance (ESG) in its investment decisions. Carlyle, which manages roughly 185 billion US dollars worth of assets, views ESG not just as perfectly compatible with value creation, but also sees it as a means of maximizing revenues.
Funds that invest in higher-risk countries must not only demonstrate that they comply with the UN Global Compact principles, but also with the more detailed standards of the International Finance Corporation (IFC).
Every manager operating in high-risk countries is visited annually. During this visits locations with an increased risk are also reviewed.
APG sends an annual questionnaire to all the managers, and stresses that it expects to be informed immediately about major incidents, such as serious accidents.
Investments in natural resources are structured so that they do not drive up prices, for example by not investing in physical stocks but in forward contracts.
For the third year in a row APG applied the Principles for Responsible Investment in Farmland to its agricultural investments. The managers of the agricultural funds reported on the implementation of these Principles, which APG drew up in 2011 together with other institutional investors with the aim of improving sustainability, transparency, and accountability when investing in agricultural land. Specifically, these Principles aim to: promote sustainability, foster respect for human rights and labor rights, foster respect for property rights to land and resources, ensure high ethical standards are upheld, and ensure reporting on how these Principles are put into practical effect.
High sustainability investments
In 2013, APG started investing in ‘green bonds’. These are investments that ensure more capital becomes available for environmentally-friendly and sustainable activities such as wind and solar energy, energy-efficiency and responsible agriculture and forestry.
Green bonds are issued by institutions that have made sustainable investing their core business, or companies that may label part of their activities as sustainable. For institutional investors green bonds are a relatively new product that was previously mainly offered by banks to private individuals who were able to claim a tax relief as a consequence. APG has invested roughly 50 million Euro in green bonds issued by FMO, the Dutch development bank, and EDF, a French power company. The green character of the green bonds is an important criterion for APG, but as with the other investment products its primary focus is the ratio of the expected return to the risks and expenses associated with them.
For a long time APG has actively sought to make high sustainability investments. These are activities that contribute to solutions for climate change, water shortage, a water surplus, pollution, the need for microfinance, and the loss of habitats or species. Here, too, it is essential that they not only contribute to sustainable development but also to a good return.
At the end of 2013, approximately 15.5 billion Euro was invested herein. This represents 4.5 per cent of the total invested capital, roughly the same as in 2012. Some asset classes offer more opportunities for sustainable investments than others. For example, 25 per cent of the real estate portfolio can be classified as sustainable investments. Roughly a third of the assets in the infrastructure portfolio are invested in water purification, waste treatment, railways, schools, hospitals and care homes, for example.
Approximately 1 billion Euro was invested in different asset classes in renewable energy. This includes not just direct investments in wind farms, solar panels and hydropower projects, but also bonds issued by companies investing in renewable energy. APG did not manage to add any new investments in sustainable energy during 2013. Too few investment proposals met the quality requirements.
Breakdown of High Sustainability Investments
Dialogue with companies and funds
APG maintains continuous dialogue with the companies and funds in which it invests, in order to learn as much as possible about them. This enables it to keep abreast of the latest developments.
Companies are called to account if there are concerns about the sustainability of their business operations or their governance. This happens in different ways, varying from giving an opinion and voting at shareholders’ meetings to commencing a more intensive process with the aim of influencing a company’s behavior. The latter is referred to as engagement and can take different forms depending on the company, the nature and size of the investment, and the issue at stake. In this context, APG often works together with other institutional investors, formally or informally.
Making choices to ensure effectiveness
In order to act effectively, APG must choose with which companies it wishes to enter into dialogue. During 2013, the activities concentrated on the following areas: energy and climate change, responsible human capital policy, integrated reporting, and board composition and executive remuneration.
Additionally, there was a focus on the UN Global Compact themes: human rights, labor rights, the environment, and anti-corruption.
APG primarily engages in dialogue on topics relating to ESG that are not only relevant to society but that also can clearly influence the value of the investment portfolio. These concern important strategic matters, such as the composition of an executive board or operational factors of long-term importance. Clear examples are: reducing power consumption and improving human capital policy.
In order to engage successfully, APG selects engagements based on the seriousness and the nature of an issue. Also of relevance are the size of the interest in a company, the size of the investment, and the potential impact the issue may have on the business performance and the value of the investment.
All dialogues during 2013
During 2013, APG engaged in dialogue with 196 different companies on various aspects of company performance.
The topic most frequently addressed was corporate governance (192 times). Environmental and social topics were also discussed often (67 and 71 times, respectively). The companies with which we engaged in dialogue are listed below. Information on the dialogues with companies highlighted in blue is presented later in this report.
|Environment||Alstom, Alstria, ArcelorMittal, BG, BMW, BP, BT, Clariant, Colgate Palmolive, Corio, Deutsche Telekom, DRAX, E.ON, EDP, Exxon, Felda Global Ventures, France Telecom / Orange, GasNatural, GDF/Suez, Host Hotels, IOI Corp., Johnson Controls Inc, KLK Kepong, KPN, Land Securities, Mondelez International, PGNiG, Philips, PKN Orlen, Portugal Telecom, Procter & Gamble, Reckitt Benckiser, Renault, REPSOL, Schneider Electric, Severstal, Shell, Sime Darby, Total, Unibail-Rodamco, VastNed, Veolia, Volkswagen, Wereldhave, Wilmar International.|
|Social||Ahold, Alcatel Lucent, Anglo American, Anglogold Ashanti, Apple, AvalonBay Communities, BP, BT, Bunge, Carrefour, Casino, CEZ, Danone, Deutsche Post DHL, Gazprom OAO, Gold Fields, Heineken, Hospira, KLK Kepong, Larson&Tubro, Mahindra&Mahindra, Marks&Spencer, MTN Telecom, Nestle, NetApp, Onex Corporation, Philips, POSCO, Samsung Electronics, Tata Power, Telenor, TEPCO, Transocean, Unilever, Vedanta, Westfield, Woolworths.|
|Corporate governance||ACC, Aegon, Aeon Mall, Agricultural Bank of China, Ahold, AkzoNobel, Alstom, Altarea, AMEC, American Express, AMS, Anadarko, Arkema, Asahi Group Holdings, ASML, Assicurazioni Generali, Assurant, Bajaj Auto, Balfour Beatty, Banco Santander, Bank of China (HK), Barclays, Barrick Gold Corporation, BBVA, Bharat Heavy Elec., BHP Billiton, BinckBank, British Land, Britvic, Capital & Counties Properties, Capital Shopping Centres, Carrefour, Chevron, China Mobile, China Telecom, Clariant, CLP, Colgate India, Commerzbank, Commonwealth REIT, Compagnie Financière Richemont, Conocophilips, Corio, D.E. Master Blenders 1753, Dai-Ichi Seiko, Daimler, Derwent, Deutsche Bank, Deutsche Euroshop AG, E.ON, Enel, Exxon, Fiat Industrial, Foncière des Régions, Fugro, GlencoreXstrata, Goldman Sachs, Grasim, Great Portland, GSW, Hammerson, Heineken, HSBC, Hyundai Motor, Iberdrola, ITC, KB Financial Group, Kenedix, KEPCO, Kingfisher, KPN, Legal & General, Lenovo, LG Chem, LG Display, LG Electronics, Link REIT, Lloyds Banking Group PLC, LondonMetric, Lupin, Mitsbishi Estate Group, Mobile TeleSystems OJSC, Novartis, Olympus, Oracle, Orpea, Pernod-Ricard, Petrobras, PetroChina, Philips, Pirelli, POSCO, PostNL, Prudential, Prysmian, Randstad, Reckitt Benckiser, Renault, Repsol, Resona, Rostelecom, Saipem, Samsung C&T, Samsung Electronics, Samsung Life Insurance, SAP, Sberbank, Schneider Electric, Segro, Shaftesbury, Shinhan Financials, Siemens, Simon Property Group, SK Hynix, SK Innovation, SKT, SL Green, Snam, Sterlite Ind., Swiss Re, Tanger Factory Outlet Centers, Tata Steel, Telecom Italia, TEPCO, Time Warner, TNT Express, Toyota, Total, Transocean, UBS, Unicredit, Unilever, Valeo, Van Lanschot, Vastned, Ventas, Veolia, Vinci, Viscofan, Vivendi, Vivus, VTB Bank, Wereldhave.
Many topics were addressed in the 330 contact that APG had with 196 companies during 2013. Below are several examples divided by topics: remuneration policy, responsible approach toward the environment and energy, protecting the position of small shareholders, human capital policy, and human rights and anti-corruption.
Dialogues on remuneration policy
APG believes executive bonuses must meet certain criteria. It must be clear, for example, why they are awarded, and they may only be given for superior performance.
Companies wishing to deviate from these criteria must be able to justify their decision. Where remuneration proposals fail to meet these criteria, APG sometimes tries to have them amended before they are voted on during the shareholders’ meeting.
unjustified bonuses for acquisitions in Asia
The bonuses of 1.5 and 2.5 million Euro that Heineken proposed awarding to its CFO and CEO, respectively, in early 2013 in connection with the acquisition of Asia Pacific Brewery were unjustified
There was no certainty whether this acquisition would prove successful. On APG’s insistence, a bonus clawback provision was included in the conditions of the award in the event the acquisition should prove less beneficial than expected.
DE Master Blenders 1753
There was also opposition to the special remuneration totaling 10.5 million Euro awarded to the CEO of DE Master Blenders 1753 on the sale of the company to Joh. A. Benckiser.
The remuneration was not consistent with current policy, and the shareholders were unable to vote on it as it was ‘packaged’ into the acquisition proposal. APG therefore voted against the discharge of the members of the Supervisory Board who had compromised shareholders’ interests by allowing these decisions to be presented as a single package at the shareholders’ meeting.
directors not supported due to remuneration policy
As in 2012, APG voted against the implementation of the remuneration policy at Oracle in 2013. It also abstained on the reappointment of eight directors.
This was because Oracle wanted to award a stock options package (76 million US dollars in 2011 and 109 million US dollars in 2012) to managers who performed no more than average. In spite of a majority of the shareholders being against the plans, Oracle was nonetheless able to push them through. However, the company held discussions with the dissatisfied shareholders, including APG.
golden handshake curtailed
APG engaged in dialogue with Swiss pharmaceuticals company Novartis over a period of two years. These discussions were about the lack of information forthcoming from directors as well as the company’s remuneration policy.
The chairman of the Supervisory Board left with a golden handshake of approximately 60 million Euro. Under pressure from APG, among others, Novartis cancelled this proposal and presented a new severance package that was substantially less generous.
Simon Property Group
retention bonus amended
A hefty bonus that APG opposed during 2013 was that for the CEO of the Simon Property Group. APG’s criticism did not relate to the CEO’s performance, but to the arrangement.
The US real estate company wanted to give its CEO 120 million US dollars in stock if he stayed in his position for another four years. If he left before the end of this period, he would still receive half this package. Only a quarter of the shareholders voted in favor of this proposal at the shareholders’ meeting. APG spoke with the chairman of the remuneration committee, after which the arrangement was amended.
bonus system based on more sustainable criteria
The dialogue we have conducted for several years with Shell concerning its remuneration policy is finally paying off. The oil company has announced that it will change the current program with bonuses being awarded based on production growth.
It will become a system based on the ratio between revenue and invested capital. APG expects that this will contribute to the company exercising greater caution when investing in large new projects, with all the risks that these entail, including environmental risks. Over the long term this should put the focus more on investments with less risk and that are more likely to meet the expected rate of return.
Real estate companies
clarity about expectations on remuneration
At the end of 2013, APG sent a letter to all the European listed real estate companies it invests in to explain what it expects in terms of a good remuneration policy. This has given them a greater understanding of how they will be assessed in 2014.
improving the sustainability of palm oil production
Following the intervention of several parties including APG, palm oil producer Wilmar decided at the end of 2013 to improve the sustainability of its production methods.
The company, which is headquartered in Singapore and operates large plantations in Indonesia, was heavily criticized for many years by civil society organizations and the local population for its supposed involvement in deforestation, land grabbing and large peat fires. These fires caused significant smoke pollution in Singapore and Malaysia, and led to an enormous release of greenhouse gases.
APG and other investors engaged with Wilmar for roughly two years in an attempt to get it to enhance the sustainability of its operations. In order to maximize its influence, APG approached not just the company itself but also its customers. APG felt that Wilmar had a duty to comply with the requirements agreed by producers, investors and civil society organizations during roundtable discussions on sustainable palm oil. But Wilmar is going even further with its new policy. The company intends to cease all further exploitation of peat bogs and contributions to further deforestation. It plans to provide local people with better information and to give them more opportunities to put their views across. The new policy applies not just to Wilmar itself, but also to its palm oil suppliers.
greater use of biomass boosts share prices
UK electricity producer DRAX has proven that increased sustainability can go hand in hand with financial reward.
Several years ago, APG disposed of its shares in DRAX because of the company’s vulnerability to environmental policy in the form of higher CO2 charges due to its position as the largest emitter of carbon dioxide in England. In order to avoid going out of business, DRAX decided to change strategy and focus more on biomass. APG initially had severe misgivings about this strategic change, among other things due to the origin of the bio fuel. However, DRAX was able to make a convincing case. It made clear that it would not be using any timber from ancient woodland and would not be burning entire trees but only waste wood. APG has recommended DRAX to state the origin of the wood in the annual report. The renewed confidence in DRAX led APG to purchase stock in the company once again, the price of which has risen since.
improved safety at drilling sites
The dialogue APG engaged in with oil and gas company BP about safety and risk management proved successful.
Following the explosion in 2010 on a drilling platform in the Gulf of Mexico that cost the lives of 11 people and caused an enormous amount of oil to gush into the sea during a three-month period, APG had very intensive discussions with the company. BP has meanwhile met most of APG’s expectations. BP has more insight into what precisely happens at the drilling sites, remuneration is better linked to safety performance, and safety experts have been brought in from other sectors, such as aerospace and the army. In 2013, BP announced that it would share the results of inspections carried out by independent safety experts with its shareholders, as APG had requested. These and other improvements were sufficient to justify a decision to retain our investment in BP.
more openness about safety
Transocean, a provider of offshore contract drilling services that was also closely involved with the disaster in the Gulf of Mexico, is considerably less well-advanced. Various attempts have been made to obtain information about Transocean’s measures to increase safety.
For a long time these proved largely fruitless. Last year, however, APG observed the first signs of a change in culture at the company; the chairman resigned and Transocean started to report more openly on its affairs. APG sees these as steps in the right direction, but is still left with many unanswered questions. In order to resolve these questions, the dialogue with Transocean will be intensified during 2014.
Fossil fuel companies
taking account of climate policy
Together with other large investors, APG has asked coal, oil, gas, and electricity companies how they take a decrease in the use of fossil fuels into account in their operations.
If governments stick to the target of limiting the increase in the Earth’s global average surface temperature to 2 degrees Celsius, this will lead to a sharp decrease in the use of fossil fuels. So far, energy companies appear not yet to be taking this scenario into account. In 2012, the 200 largest fossil fuel companies together spent 674 billion US dollars exploring for and developing new oil, coal and gas reserves. If world leaders adhere to their climate targets, these investments may prove unprofitable, or far less profitable than hoped. APG and other investors would therefore like to see these companies take greater account of climate policy.
concern about takeover plans
APG entered into dialogue with KPN when America Móvil threatened to acquire the Dutch telecoms company. APG saw its position potentially undermined and called for better protection for minority shareholders. America Móvil’s decision to withdraw its offer meant this risk was averted.
more independent directors
Pressure from APG has contributed to an increase in the number of independent directors at Japanese companies. Together with other large investors, APG has lobbied the Japanese authorities for many years to make it mandatory that independent directors have a seat on the board.
Until last year Japan was one of the few countries not to have such a mandatory requirement. With effect from 2013 every listed company must have at least one independent director. This is a so-called ‘comply or explain’ requirement, from which companies can deviate if they can give a good reason for doing so. As a shareholder, APG tries to encourage companies nonetheless to comply with the new rule, preferably with multiple independent directors. This pressure has produced several positive results. Car manufacturer Toyota, for example, increased the number of independent directors from zero to three.
more independent directors
Together with other investors, APG succeeded in realizing the appointment of truly independent directors to the board of Brazilian oil company Petrobas. This largest company in Latin America, which is mainly state-owned, had reserved two seats on its board for representatives of minority shareholders.
In 2012, these places were occupied by representatives of companies which in turn were largely controlled by the state. In 2013, Petrobras also promised to be more open about the setting of the sales prices of diesel and gasoline, which the minority shareholders believed were too low. The Brazilian government was happy to see these prices remain low since they served to keep inflation under control, while the minority shareholders saw them as the principal reason for unnecessarily low returns.
improved position for foreign investors
APG has petitioned its ten largest equity investments in India to end the unfavorable treatment of foreign investors. For a long time, the Indian government ruled that foreigners could hold no more than a certain stake in a company.
Initially this was no more than 25 per cent. This was later increased to a higher percentage, which varied from one sector to the next. Companies are now able to increase or even abolish the shareholding limit themselves. Several companies have raised the percentage, while one company has abolished the restriction entirely.
better information for shareholders
In Korea, APG endeavors to ensure that companies provide their shareholders with better information. At the moment, these often receive preliminary figures and a provisional audit report prior to the shareholders’ meetings.
The final documents are not presented until during the meeting itself. This is very inconvenient for institutional investors since they generally cast their votes electronically and in advance. APG endeavors to receive the final documents sooner by lobbying the Korean government, which would have to amend the relevant regulations, as well as by putting pressure on companies. Companies in which APG holds a relatively large stake have been warned not to expect approval of the financial documents in 2014 until a viable solution is presented. This has already produced an initial result. Electronics giant Samsung has promised to send the final audit opinion together with a summary of the final figures. The ultimate aim is for the entire market to change its behavior.
more effective monitoring of suppliers
As in previous years, APG has maintained regular contact with Apple about more effective monitoring of labor conditions among its suppliers.
Apple responded to this request by reporting in greater depth and detail about the monitoring at these factories. The Fair Labor Association (FLA), an independent body to which Apple was admitted in 2012, inspected business practices at FoxConn, a Chinese supplier, in 2013 and reported on its findings. After specific questions from APG (from 2012) about accusations of abuses following an investigation report by NGO China Labor Watch, Apple immediately started an investigation and took corrective measures.
Deutsche Post DHL
freedom of association in Turkey
Correspondence with Deutsche Post DHL about effective monitoring of the uniform implementation of its labor relations approach has achieved results.
APG asked questions after possible abuses came to light in connection with DHL’s activities in Turkey and the United States following reports of intimidation and wrongful dismissal of employees who were trade union members. APG wanted to know whether monitoring of the worldwide uniform implementation of group policy is effective, and required details about the measures taken in this connection. The company provided APG with the requested information and confirmed DHL’s commitment to a labor relations approach that meets international standards. An employee organization confirmed in early 2014 that measures had indeed been implemented, and that freedom of association in the operations in Turkey is safeguarded. It also reports that Deutsche Post DHL will launch an additional investigation into labor relations in the operations in India and Colombia, and has introduced a program of regular consultation with employee organizations.
labor relations in the US
APG engaged in dialogue with Onex Corporation, a listed private equity fund, about the labor relations approach in the companies in which Onex invests.
Onex requests these companies to conduct a policy that allows employees the freedom to join or abstain from membership of a trade union as they wish. In spite of this, IAM, the US machinists union, reported that one of these companies was obstructing employees at several of its locations who wanted to set up a trade union lodge. Onex contacted the company, which generally maintained good relations with the labor unions, and reminded it of Onex’s views on this matter.
freedom of association in the US
Labor relations also were under pressure at Giant/Martin’s, one of the US chains of food retail group Ahold, where labor union activities were obstructed.
Following intensive dialogue, Ahold announced early last year that it would focus greater attention on this issue so that in practice it is clear that every employee is free to join a trade union, and that that union may negotiate terms of employment on behalf of its members. The company has meanwhile enshrined this in its ‘employment principles’. By taking this step, Ahold is signaling that henceforth the same policy will apply throughout the entire company. In addition, the regular survey of employee satisfaction has been extended to cover Ahold’s American holdings, as requested by APG.
safer labor conditions
Action by APG has contributed to the decision of American real estate company AvalonBay, to tighten up its safety policy. AvalonBay violated many aspects of the statutory regulations that are intended to protect the health and work safety of employees and subcontractors.
Unsafe situations existed at construction sites where several accidents took place, one of which resulted in a fatality. This information prompted APG to temporarily suspend all additional investments in AvalonBay and to commence a dialogue. Discussions with management, subcontractors and staff have meanwhile resulted in the company reviewing and tightening up its health and safety policy. Safety experts have been appointed, and safety ratings at the construction sites will have an impact on executive remuneration. AvalonBay also will monitor suppliers, contractors and subcontractors more stringently in order to ensure they are adhering to acceptable safety standards.
governance restructuring must continue
APG has engaged in regular dialogue with Siemens about the company’s performance in recent years and the composition of the board.
APG is confident that the new CEO will implement the changes that are needed to prepare the company for the future, and supports the governance changes that have been initiated. As part of this, the chairman of the Supervisory Board also will now be required to make proper provision for his own succession. While he has steered his company through a difficult period following the corruption scandal of 2006, APG would like him to announce his successor by no later than the 2015 general shareholders’ meeting.
better insight into production conditions of cocoa
APG engaged in dialogue with Nestlé about the progress being made in reducing child labor in cocoa production, among other things; this has been a topic of dialogue with food companies for many years.
Nestlé has gained better insight into its suppliers and can now trace the origin of 15 per cent of the cocoa it purchases. When APG first raised this issue with Nestlé in 2009, the company had no idea of the origin of the cocoa, at least not beyond the level of the intermediate suppliers. Nestlé is now better able to monitor the labor conditions during cocoa production, and has increased its efforts to improve the conditions of farmers.
clarification of human rights policy
APG engaged in dialogue with South Africa’s MTN about the company’s policy and position on passing on customer information to governments.
The telecommunications provider operates also in states governed by a dictatorial regime, such as Iran and Syria, and might become involved with human rights violations in the Syrian civil war by supplying information on users to the government there. During a meeting in Johannesburg, MTN pointed out that it did business with both sides in the Syrian conflict and in doing so attempted to remain neutral. MTN promised to clarify its human rights policy in the spring of 2014, with disclosure of the resources committed to its implementation.
better insight into clients
Activities in Syria also prompted APG to contact American technology company NetApp. Just as the uprising against President Assad started in 2011, NetApp reportedly sold a computer data storage system to the Syrian authorities.
NetApp announced that it is cooperating fully with an inquiry into this matter by the US authorities and that it is unable to comment in substance on the allegations pending this inquiry. NetApp did nonetheless tighten up its internal procedures, as APG had requested, to enable more investigations and checks to be carried out during the sales process, with the result that NetApp now has better insight into its clients.
engagement with campaigners
APG requested Gazprom to explain its policy towards civil society organizations. This was prompted by the commotion caused by the actions taken by this Russian gas and oil company against Greenpeace campaigners demonstrating at the site of an oil platform in the Arctic Ocean.
APG underlined the importance of constructive dialogue with civil society organizations. Gazprom agreed on this point, but stressed also that the safety of its employees may not be endangered by acts of protest. In response to questions, Gazprom stated that there had been no excessive use of force when the demonstrators were arrested. The environmental and safety measures taken by Gazprom when drilling in the Arctic were also discussed during a meeting at the company’s head office. APG will remain in dialogue with Gazprom.
doing business in Burma
APG discussed the prospects for doing business in Burma (Myanmar) with several companies. These discussions were a follow-up to the visit paid to the country in 2012 during which APG talked with a series of local organizations and businesses.
At that time it was concluded that there were still many risks: uncertain legislation, lack of legal certainty, corruption, the strong role of the army, poor labor conditions, and failures in the protection of human rights, particularly those of ethnic minorities.
Telenor, the Norwegian telecommunications company that secured the license to install the telecommunications network in Burma, has explained its measures to control human rights risks. It included conditions in this regard in the contracts it signed with the Burmese authorities. Telenor leads the way in the telecom sector in developing guidelines on how to respond to requests from governments for user data or the (temporary) closing down of telecom networks. APG will closely monitor how Telenor puts these guidelines into practice.
comprehensive sustainability strategy
APG requested GlencoreXstrata, an Anglo-Swiss commodities company, to disclose its policy for combating corruption and bribery. The company operates in many countries that appear toward the top of the various corruption indexes and must therefore have a clear policy for employees and other stakeholders.
During 2013, discussions were held with different employees of the company, including the director responsible for the health and safety policy. GlencoreXstrata was also requested to disclose how it takes possible policy measures designed to reduce the use of fossil fuels into account in its coal-mining activities, and what plans there are to enlarge the board. APG stressed the importance of having a comprehensive sustainability strategy and a vision for addressing the concerns of stakeholders.
APG visits mine site and a forestry company in South Africa
At the end of September, APG visited mining companies in South Africa, where the mining sector is beset by strikes and breakdowns in labor relations. Two platinum mines were visited, along with two companies in the gold production sector and a forestry company.
The mines were an open-cast mine and an underground mine. APG was able to evaluate on site how management addresses the safety of employees, the labor relations and the interests of local residents. APG spoke not just with the management, but also with trade union representatives and a civil society organization that had examined labor conditions. APG concluded that the mining companies took employees’ complaints seriously. The companies gave an assurance that the wages they paid were not below the level of the statutory minimum wage. They also showed the measures they had taken to protect the safety of their employees, by hanging nets in mine shafts against falling debris, for example. One company provided information on its own housing program that allowed employees to buy their own home with help from their employer. Other companies in the sector had set up similar programs.
The dialogue with the gold-mining companies addressed not just labor relations, but also the impact of machines on the work performed by employees. The central theme of the dialogue with the forestry company was the company’s approach to land rights. The company said that it sought to resolve any problems in this area by selling land to the local community and then leasing it back from them.
APG visits POSCO investments in India
In October, APG visited the Indian state of Odisha, where POSCO, a South Korean steel-making company, is developing a mine and a steel plant, including a port for incoming and outgoing goods and supplies.
The project involves an investment with a total value of 12 billion US dollars in an area covering more than ten square kilometers including woodland, agricultural land and several small villages. The company’s plans led to angry protests. Disagreement between villagers who wanted to sell their house and land to POSCO and others who refused to sell escalated to the point that the former no longer felt safe and had to leave their village for a temporary camp where conditions were reported to be very poor. The project is being closely and critically followed by the more than 400 news media in the region as well as various NGOs.
The purpose of APG’s visit was to examine on site whether the complaints were justified and to impress once again on the company’s representatives and the local authorities that APG strongly opposes any involvement on their part in violations of human rights and environmental regulations. APG visited the location where POSCO is developing its activities and the temporary camp that receives the families who have been driven away by their fellow villagers. Discussions were held with officials of the state of Odisha and the regional authorities, the head of police, representatives of POSCO and the Korean ambassador.
APG urged POSCO to build constructive relations with local communities and to take their interests into consideration in the construction plans. In spite of the continued absence of effective dialogue on the ground, APG concludes that POSCO is following the recommendations. For example, the company and the local authorities have removed some of the social tensions by deciding not to execute the project in one go, but rather to implement it in stages. The authorities indicated that the second stage would not go ahead without the consent of the villagers. POSCO has indicated its willingness to continue with the consultation and information meetings which it previously took part in. It hopes that this, and other commitments, can offer it a way of becoming more firmly embedded in the local community.
At the end of 2013, the list of companies in whom APG opts not to invest contains 15 names. These are mainly companies engaged in the production of cluster weapons.
APG has considered involvement in the production of these weapons as a ground for exclusion since 2007, but a statutory prohibition on investing in manufacturers of cluster weapons has applied also in the Netherlands since early 2013. Furthermore, APG does not invest in companies that are involved in the production of anti-personnel (land) mines, and chemical and biological weapons. Companies manufacturing nuclear weapons are excluded if they do so in contravention of the international Nuclear Non-Proliferation Treaty, which the Netherlands also has ratified.
A new name on the exclusion list is that of Tokyo Electric Power Company (TEPCO). APG disposed of its shareholding in this company at the end of 2013. TEPCO is the owner of the Fukushima nuclear power station that was so badly damaged by a tsunami in early 2011 that 150,000 people had to be evacuated from the surrounding area and an enormous volume of radioactive water was released into the sea. The Japanese authorities still do not have the problem under control, and experts fear that many evacuated residents of the surrounding area will never be able to return to their homes. TEPCO was aware in advance of the weak spots in the power plant, but neglected to take adequate precautions. Even after the tidal wave hit, the company committed a series of errors by wrongly estimating safety risks and withholding information, thereby needlessly aggravating the effects of the disaster.
According to the agreements made under the auspices of the United Nations about how companies should respect human rights (Global Compact), companies must pay sufficient attention to public safety and do everything possible to avoid damage to the environment. APG is of the opinion that TEPCO failed to comply with these requirements. APG had a meeting with the management in 2012, and there was written contact during 2013. This dialogue had little effect. The corporate culture and the way in which governance at TEPCO is organized did not give the impression that much improvement could be achieved in the near future, meaning that there was little point in further engagement.
Two companies from the United States who were on the exclusion list at the end of 2012 were removed from it in mid-2013. Kaman Corporation and Lockheed Martin announced that they are no longer involved in the production of cluster weapons.
|Alliant Techsystems Inc.||United States|
|Aryt Industries Ltd.||Israel|
|China Aerospace International Holdings||China|
|Hanwha Corporation||South Korea|
|Norinco International Coorporation LTD||China|
|Poongsan Corporation||South Korea|
|Poongsan Holdings Corporation||South Korea|
|Singapore Technologies Engineering||Singapore|
Excluded due to breaches of the principles of the UN Global Compact
Excluded sovereign bonds
APG does not invest in government bonds of countries on which the UN Security Council has imposed an arms embargo.
Consequently, the portfolio does not include bonds issued by the governments of Somalia, Congo, Sudan, North Korea, Iran, Libya, Ivory Coast, Iraq, Liberia and Eritrea. No new countries were placed on the exclusion list during 2013.
Exercising shareholder's voting rights
During 2013, APG was represented at approximately 4,500 shareholders’ meetings in 59 countries at which roughly 45,000 resolutions in total were on the agenda. The meetings took place in locations across the globe.
In most cases, APG exercised its voting rights from the Netherlands using an electronic voting system.
How did APG vote on different topics?
The majority of the roughly 45,000 resolutions on the agendas of the various meetings (more than 40 per cent) concerned the (re)appointment of board members. APG voted against one in ten of these motions, and abstained from voting on one in every twenty motions. The votes against were largely due to doubts concerning the independence of the candidates proposed.
Dialogue with policy makers
Governments and market parties must agree on good rules and regulations that help to enable APG’s clients to continue to provide a good pension for their participants also in the long term.
Well-functioning financial markets are essential in this regard, as is a stable climate that does not pose a threat to the value of the investments. APG engages with policy makers and relevant market parties in order to promote this aim.
APG has urged the commission reviewing the corporate governance code in Germany to ensure greater openness for shareholders concerning the appointment and backgrounds of the people on the boards.
In Germany this is a responsibility of the Supervisory Board, which is not required to inform shareholders about the selection procedure and the accompanying applicable criteria. In order to be able to assess whether the independence of the supervisory board is safeguarded, APG would like to see more information about each director published on the websites and in the annual reports.
APG has requested the US government to tighten the rules for corporate governance so as to require directors to receive at least 50 per cent of the votes cast at shareholders’ meetings for their (re)appointment. At the moment, individual directors do not require a majority of the votes cast. Furthermore, APG wishes to end the practice of directors who are voted out at the shareholders’ meetings returning to their former position within a short period of time. Additionally, APG advocates that a CEO should no longer be able also to simultaneously be chairman of the supervisory board, so that this position can be held by someone with less involvement in the day-to-day running of the business and who can focus more on long-term issues. There must also be greater openness about companies’ funding of political parties and lobbying expenditure.
APG supports the European Commission’s proposal to stimulate long-term financing. This can help generate economic growth and ensure, for example, that more alternative capital becomes available for the SME sector from non-bank sources.
The European Commission, which published a Green Paper on this topic in early 2013, expects that pension funds in particular will be suitable for providing long-term financing given their many long-term liabilities.
APG believes the Commission’s plans are not well-defined at the moment and does not want to see them result in obligations that would interfere with effective asset management, for example through the requirement that a fixed percentage of the investments be reserved for long-term financing or a cap on investing outside the European Union. The new policy also will have to align with the multiple measures the EU recently took, and is currently still in the process of preparing, to regulate the financial markets. These may also have an impact on long-term financing. APG therefore also supports the basic principles for long-term financing drafted by the G20 and the OECD, since they stress that any new (supervisory) regulations may not create unnecessary obstacles to long-term investments.
APG is convinced that it can achieve more by working together with investors who are on the same track. It is therefore actively involved with organizations who engage nationally and internationally in promoting the focus on sustainability and corporate governance. During 2013 it was active principally in the following areas.
Implications of climate change
Together with other major investors in the Institutional Investor Group on Climate Change (IIGCC), APG has lobbied the European institutions to amend the policy which aims to reduce CO2 emissions.
The emissions trading system (ETS) that was introduced in 2005 has been largely ineffective. This is mainly because there are too many allowances in the market, driving down the price and making it unattractive for companies to invest in clean technologies. In the short term, Europe must redress the surplus of emission allowances in the market, and in the long term the system must be reformed so as to prevent any recurrence of this type of surplus. Since the energy market is not working optimally, it remains difficult for APG to invest substantially in alternative energy sources such as wind and solar power which are still largely dependent on subsidies and tax benefits. That does not provide a solid basis for long-term investments, since a government can, in principle, decide at any moment to withdraw the subsidy or tighten the tax rules.
Reporting on ESG
Through the International Corporate Governance Network (ICGN), APG has pressed European leaders to accelerate the implementation of regulations requiring certain large companies in Europe to report on their commitment to sustainability and good governance.
The European Commission published a proposal in this regard during 2013 which is awaiting approval by the European Council and the European Parliament. This appears to herald the conclusion of a process that commenced back in 2009 and that APG was closely involved with from the start, among other things through its participation in the expert advisory group, on behalf of ICGN, that provided input to the proposal.
APG is among the roughly 600 ICGN members in more than 50 countries that work together to increase the focus on corporate governance.
Better reporting by companies was one of the aims of the International Integrated Reporting Council (IIRC) which in December presented a framework that helps companies to set out in a single report how they create value over the short, medium and long term.
Since 2010, APG has been actively involved with the IIRC, in which companies, civil society organizations, accountants and institutional investors have made agreements on the type of information that must be included in these holistic reports. The reports must not only ensure that companies present a clearer picture of how their business model is structured and how they handle their finances, but also of the environmental and social aspects of their operations. APG is committed to promoting use of this by companies and investors.
Private equity ESG disclosure
Early 2013 saw the publication of the ESG Disclosure Framework for Private Equity that APG developed with other major investors in recent years as part of a similarly named collaborative alliance.
This framework is intended to bring about an enhanced focus on ESG by private equity funds. It sets out in detail how a manager of a fund must report on its responsible investment performance to its investors. This helps APG to better monitor its private equity investments.
Additionally, APG is a member of the European Venture Capital Association (EVCA) in which European private equity parties make agreements on corporate governance and transparency. Within this EVCA, APG is co-chair of the Roundtable that arranges ESG-related courses and develops standards on ESG integration in the private equity sector as well as the associated reporting.
ESG within Hedge Funds
APG chairs the working group within the United Nations Principles for Responsible Investing (UN PRI) that develops guidelines for hedge funds on responsible investment and transparency.
The UN PRI is a collaborative network of approximately 1,200 investors and service providers that promotes responsible investing (APG is a founding member). The signatories to the UN PRI are required to report annually on how they implement the principles.
Click here for APG's 2013 report to the UN PRI
Dutch institutional investors
During 2013, APG worked together with other major investors within the framework of Eumedion on various engagements with Dutch companies, such as Heineken and Ahold, for example.
APG sits on the board and in various committees of this organization representing the interests of institutional investors, which last year published a report on the future of the Dutch banking system. In this report, Eumedion called for a more sustainable revenue model and cultural change, among other things. It also advised the Dutch House of Representatives to tighten legislation to require external auditors of listed companies to issue more informative audit reports.
Better governance globally
Through the Asian Corporate Governance Association (ACGA), APG has pressured South Korean companies to provide their shareholders with better information. At the moment, they often receive preliminary figures and a provisional audit report prior to the shareholders’ meetings.
The final documents are not presented until during the meeting itself. This has already produced an initial result. Electronics giant Samsung has promised to send the final audit opinion together with a summary of the final figures. The ultimate aim is for the entire market to change its practices.
The ACGA promotes better corporate governance in Asia with more rights for shareholders. APG also is a member of the Council of Institutional Investors (CII), which pursues the same goal in the United States, and the Investor Protector Association (IPA) in Russia. The latter is a collaborative alliance of large (Russian and non-Russian) investors in Russia, which APG joined in 2013. In October, APG took part in an investors’ panel during a two-day congress about a new Russian corporate governance code organized by the Moscow Stock Exchange and the Organization for Economic Co-operation and Development (OECD).
In Italy, APG collaborates with other investors in the Assogestioni collaborative alliance. Assogestione utilizes the so-called Voto di Lista, which enables minority shareholders, who jointly own a relatively small portion of the shares of a company, to nominate independent candidates for the Executive Board as well as the Board of Statutory Auditors, which supervises the auditor’s activities. APG has supported Assogestione since 2009. During 2013 Assogestione was able to realize the appointment of directors to the boards of power company Enel, insurance company Assicurazioni Generali, cable manufacturer Prysmian, gas transport company Snam and the bank Unicredit.
Sustainable real estate investors
The Global Real Estate Benchmark, which was launched on APG’s and others’ initiative, has now become a leading global sustainability benchmark for real estate investments.
The Global Real Estate Benchmark, which was launched on APG’s and others’ initiative, has now become a leading global sustainability benchmark for real estate investments. APG also is a member of the US National Association of Real Estate Investment Trusts and the Asia Pacific Real Estate Association, organizations that represent the interests of real estate investors in the respective regions.
APG will continue to develop and optimize instruments that make it easier for portfolio managers to factor considerations on the ESG performance of (potential) investments into their analyses.
This means in particular developing further the model for quantitative equities strategies that will mainly be used to aid the daily investment decisions in this portfolio, which comprises more than 1,500 companies. A topic that will continue to attract APG’s interest is climate change. APG commenced a project that will enable it to establish on the basis of various scenarios how climate policy can alter future demand for energy in the world, and identify the possible risks and opportunities for energy-related investments, such as oil companies and power plants. This topic will also feature in the dialogues with individual companies, for example in North America, where discussions will be held with major listed companies on shale gas, environmental and safety issues.
A few years ago, APG, on behalf of its clients, was one of the first pension investors to decide to undertake major investment in infrastructure. APG has now taken the initiative to develop an instrument that can be used worldwide to assess the sustainability of infrastructure investments. The practical effectiveness of this instrument will be reviewed in 2014 by APG and the fellow investors. The next step is to ensure that the same model will also be used by others, with the intended aim to realize a global standard that makes clear to companies what requirements they must meet to more easily facilitate sustainable operations.
In mid-June APG is a sponsor of the congress of the International Corporate Governance Network that will be held in Amsterdam. This annual gathering of the collaborative alliance of investors that seeks to advance enhanced standards of corporate governance worldwide will attract hundreds of people to the Netherlands who will share their knowledge about supervision of the financial sector, ethical business conduct and the transition to an economy that is less dependent on fossil fuels.
APG is working together with civil society organizations and market parties to further clarify what the revised OECD Guidelines for Multinational Corporations mean for institutional investors.
APG intends to further the dialogues with companies on human capital policy. Together with other market parties it will encourage companies to be more open about their aims in conducting their human capital policy, and its actual implementation.
APG intends to maintain its commitment to promoting the focus on sustainability and corporate governance among large asset managers, private equity funds, and hedge funds. It will also continue to leverage its influence as one of the world’s largest pension investors to help realize a change in culture in the financial sector.