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Engagement with Consequences

Dominique Dijkhuis, Director of Investment Policy at ABP, admits there are limits to engagement in accelerating climate transition, with few companies fitting into a sustainable economy. 

Over the past decade, many asset owners have made divestments out of fossil fuels. In fact, the total value of the institutions divesting is estimated to be US$40.5 trillion, according to data provided by the Global Fossil Fuel Divestment Commitments Database.  

Despite this trend, commentators like David Carlin, UNEP FI’s Task Force on Climate-Related Financial Disclosures (TCFD) Program Lead, have made the case for further engagement with the fossil fuel industry.  

Many asset owners find themselves on the horns of a dilemma. But as Dominique Dijkhuis, Director of Investment Policy at Dutch public sector pension fund ABP, tells ESG Investor, the “risk of investing in such companies is too big, especially in the long term”.  

“A liveable world requires a sustainable economy, therefore ABP will look at all its investments differently and from that angle.” says Dijkhuis. “In such an economy, companies cannot pass on the negative consequences of their business activities (externalities), such as greenhouse gas emissions or loss of biodiversity to the environment and society. 

“These companies run a major transition risk: If legislation were to force companies to operate sustainably, these companies would be hit hard.” 

Damage to the climate is inextricably linked to fossil fuels, so the Dutch pension fund has chosen to break with its investments in producers of coal, oil and gas, as it sees insufficient opportunity as a shareholder to push for the necessary, and significant, acceleration of the energy transition of these companies, she says.  

“Our engagement was insufficiently effective,” explains Dijkhuis. “Also, when governments take their responsibility towards a sustainable economy and start norming, pricing and stopping subsidies, these business models will suffer major negative effects (transition risks).” 

Staying on track 

In December, ABP announced its plan to reduce its CO2 footprint across its entire global investment portfolio by 50% in 2030 compared to 2019 and set aside €30 billion (US$32.5 billion) to invest in the climate transition, of which at least €10 billion will be used for impact investments in climate solutions in sustainable energy, such as solar panels, wind turbines and green hydrogen, as well as sustainable energy infrastructure, smart networks, clean mobility, and energy storage. 

These measures are part of the pension fund’s new and ambitious climate policy that reflects its long-term strategy to achieve a climate-neutral investment portfolio by 2050 and the agreements made as part of the commitment of the financial sector to the Dutch climate agreement 

This latest announcement represents the next step in ABP’s wider net zero journey. However, the pension fund begun work on divesting its fossil fuel holdings last year, phasing out investments in companies that generate more than 1% of their turnover from the exploration and production of coal, oil and gas.  

“We are on track; we have sold around €5 billion of shares and bonds in the first half of the year,” says Dijkhuis, noting that more sales will take place this autumn, with those numbers yet to be reflected in the pension fund’s figures, as it is still prepping those investments for sale.  

“Our asset manager, APG, invests for multiple pension funds and invests in pools in which other APG clients also have stakes,” says Dijkhuis. “The pool has its own policy and as other APG clients do not want to divest from fossil fuels this means that we must leave these pools.” 

She reiterates that ABP is fully engaged in leaving these pooled funds, with the asset owner wanting total control of its investment policies so that it can successfully implement its climate goals.  

When ABP first announced its plan to divest all its fossil fuel holdings in October 2021, the asset owner indicated that it expected the majority of its investments would be sold in the first quarter of 2023 – “that is still our expectation,” she says.  

Change or divest  

Beyond fossil fuel divestment, the Dutch pension fund continues to encourage companies to embrace the climate transition and actively engages in dialogue with even the most carbon intensive of sectors such as utilities, finance, transport, and companies operating in iron, steel, cement and chemicals industries. 

“We want to help and encourage the companies in which we do invest to make the climate transition,” she says. “That is why we are going to conduct intensive dialogues with large-scale energy consumers and companies with a major impact – the criterion here is whether companies can and want to change.” 

In real terms, this will see ABP expecting investee companies to regularly show the measures they are taking to achieve Paris climate goals, including:  

  • Reporting on emissions from production and in the supply chain;  
  • reporting on emissions from the use of the products (where relevant); 
  • short-, medium- and long-term greenhouse gas emission reduction targets in line with the Paris Agreement; and  
  • investments that show how the company will achieve those goals.   

“If companies do not move sufficiently in the climate transition, we escalate the dialogues. Then we will use our vote at shareholders’ meetings, support resolutions or (co-)submit resolutions,” says Dijkhuis.  

“If that does not bring about change, we will eventually divest.” 

Tougher choices 

Another component in ABP becoming more ambitious in reducing its carbon footprint is the revision of its sustainable and responsible investment policy. And for a major institutional investor, which invests approximately €480 billion, this is a comprehensive process that requires precision and thorough thought. 

This required the pension fund to re-examine its investment beliefs, set goals and adjust its inclusion, engagement, voting and impact policy around them.  

“We often hear there is a lack of data – that might be so,” says Dijkhuis. “But more importantly there is a lack of courage to make decisions. And yes, it is difficult, but that is what is needed […] mapping and acting on the impact of the world’s transitions on our portfolio and turning the impact of our investments on the world for the better.”   

When asked how investee companies were responding to deeper engagement as result of ABP’s refined investment and inclusion policy, Dijkhuis admits that the pension fund was successful with some and not others. But she stresses that businesses must bear responsibility or suffer the consequences if the ultimate goal of a sustainable economy is to be realised.   

“The principle of the pleasures but not the burdens cannot exist in a sustainable economy,” she says. “To get there, there is still a lot of change to be made. Unfortunately, we see very few companies that fit completely into a sustainable economy.” 

ABP will set minimum requirements for companies in the areas outlined and continue to tighten those requirements over time, with companies that fail to meet these requirements deemed no longer be investable for the pension fund, she says. 

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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