As an asset manager at PGGM, manager of the Netherlands’ second biggest pension fund, my priority will always be to ensure we can provide pensions for the over 2.5m healthcare workers who hold their pensions with us. That also means that we make the most of investment opportunities when they arise, as long as they deliver market-rate financial returns.
At PGGM we try to include environmental risks in our investment decisions and increase the positive impacts of our investments on society. We do try to have it both ways: a measurable impact at market-rate financial returns.
Importance of water security
While the world of investment can seem abstract, the same things that impact the real world, impact investments too. The issue of water security for example: industries can be highly efficient users of water, but that doesn’t mean that their water supply is secure. Efficiency without security is like being a clean fish in a dirty pond.
An issue like this is important to an investor and it brings into question the way companies disclose the risks they are exposed to. We can see that companies often report on the water they use for their operations, but few report on their exposure to water security as it is outside their control and requires collective action. But exposure to actual or future water risks is often what is missing and could be very valuable information to an investor.
Investment with a purpose
You want your investment to have a purpose but in order to do this, you need to know where you want to and can have an impact - and this is where water is coming into the fold for more investors. At PGGM, we aim for impact on Water, Food, Health and Climate.
Water was an obvious choice because of the Netherlands’ rich history in the sector. Making use of existing expertise and networks PGGM could have an edge in the field. The type of investments we’ve made to date range from water utilities, handling water and water supplies, or more indirect links like precision agriculture and companies developing seeds resistant to droughts.
The important thing for us, is not just claiming positive impact of our investments, but measuring as best we can what difference our investments have made in the real world.
Stronger planning, means stronger investments
Of our four themes, Water is the most difficult, largely because of how hard it is to find attractive investment opportunities with the right combination of risk, return and size. That is despite the obvious need for water investments and the trend of worsening scarcity and pollution.
The traditional investors’ approach of predicting the future by extrapolating the past might not work anymore. Some of the changes and challenges facing us are not linear, but exponential – just look at the impact of COVID-19 for example. Now more than ever, investors need to understand the future – whether it’s a risk or an opportunity.
The key is to express the importance of water scarcity, for example, as the investment value at risk. It is how water scarcity affect their portfolios, that makes investors sitting up in their seats and listening.
Measuring impact and building partnerships
At PGGM, we have begun measuring the impacts of our water investments through three key performance indicators.
Our three indicators are to quantify the volume of water savings, the volume of wastewater treated, and the number of people provided with clean water. Finally, we try to understand where those outcomes are happening, so we can factor in local needs. Context matters in water: water savings in Australia for example matter more than those in Canada.
We began doing this work, because we saw a gap in the market – and this is where the importance of partnerships and initiatives will be in the coming years. A lot of water initiatives need to understand what investors want – which is that value at risk, or competitive positioning through positive impacts. Risk and impact must be quantified for investors to take notice. A number of water initiatives aren’t there yet – so that would be my challenge to them.
Cementing water investments
Water is making its mark on the agenda of investors like PGGM – but to cement those investments, companies have to work on their water stewardship, including the measurement and reporting on water usage and their exposure to water risk.
By doing that, we as investors can demonstrate to our own stakeholders that we’re investing with a purpose.