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Natural Capital in Strategic Portfolio and Impact Investing
SPF Beheer is a medium-sized asset manager for the Railway Pension Fund (SPF) and the Pension Fund for Public Transportation (SPOV) with assets worth approximately EUR 20 bn. With its Strategic Equity Portfolio and its impact fund Annona, Nadja Franssen discovered how the company was taking care of its biodiversity impact.
Nadja Franssen: "It’s not our role, as a pension provider, to dictate to our pension funds and their clients what they should do. Rather it is the other way around, participants are required to participate in a particular pension fund, so it is our job to take their preferences into account and to invest in a socially responsible way. SPF Beheer has a Strategic Equity Portfolio (‘SAP’ in Dutch), consisting of more or less 60 companies, for which a stable growth on the long-term is expected. The objective of SAP is to achieve a positive absolute return over the long-term, with an holding period of about 7 years. Socially responsible investing (SRI) is included as an integral part of the investment decision. The focus is on human rights, child labour, the environment and, for one of the clients, executive compensations. During the first meetings of CoP FiNC, I discovered that SPF Beheer already does quite a bit in terms of biodiversity, but that we don’t explicitly categorize it that way. In our SAP approach we first check information of Sustainalytics and then, based on our internal models and additional research, we write our own ESG-report. We use publicly available information such as the Carbon Disclosure Project Information and the annual report of the company. After the selection, we continuously monitor the companies. The information is used for dialogue with the company."
Collaboration is needed to progress on biodiversity financing
"The assumption that underlies SAP, is that unsustainable practices are an increased risk and often imply poorer long-term returns. The methodology is innovative and the results so far have been so positive that SAP repeatedly made the news in the investment world. SAP covers slightly under 20% of the invested assets of SPF Beheer (60% of the equity portfolio). Climate has attention for the purposes of combating pollution and reducing CO2 emissions. Climate is currently a hot topic. Apart from the fact that we always took issues such as pollution and a the a company’s effect on climate change into account as part of our broader ESG screen when selecting investments, we also measure the footprint of our equity portfolios. It turns out that our efforts bore fruit and that the portfolio emissions of the SAP are significantly lower than the benchmark. We are currently researching how we can further integrate the topic of climate change and the risks attached to this topic into our investment policy. Biodiversity is not explicitly included, but it is strongly interlinked with climate change and pollution."
Biodiversity and impact investing
Besides the integration of ESG criteria in their mainstream portfolio’s, our clients also have 1% of their total portfolio dedicated to impact investments. With this portfolio they aim to generate a positive societal or environmental contribution, next to a financial return. As an investor we are continuously weighing risk-return elements of potential investments, but we also look at the opportunities to allocate a substantial amount of money into a fund. Unfortunately, many interesting and innovative ideas and developments I heard during the meetings on biodiversity are difficult to integrate into our portfolio because they are too risky, lack size or lack track records’.
"When the CFO of our initiated fund Annona gave a presentation in one of the CoP meetings, I noticed that implicitly we were doing more in the field of biodiversity than we thought. For example Annona is developing eco-tourism investments in Africa. Still as a topic for investment choices, biodiversity is quite complex. I don’t expect we’ll start focusing on biodiversity explicitly on a short term, as we do on climate. We would like to see more innovation through impact investing. The obstacle is that most projects are small scale and that the monitoring of lots of small projects is too time-consuming for us. If a fund would be set-up that integrates and bundles several projects, risks are spread and more investors would then have the possibility to take these pro-biodiversity investments into their portfolios".
SPF Beheer was one of the frontrunners that formed part of a Community of Practice of Financial Institutions and Natural Capital (CoP FINC), which aimed to accelerate the transition to sustainable finance. This solution is part of a larger series of best practices that resulted from this CoP.