Stijn and Tissen of PGGM on Balancing Risk, Return, and Sustainability in Investing

How do you invest in a way that balances risk, return and sustainability? Listen to Jason Mitchell discuss with Sander van Stijn, PGGM Head of Mandate Management, and Colin Tissen, PGGM Sustainability Lead, about how this shift first took hold, what pushed PGGM beyond index tracking toward a more intentional investment approach, and how those early ideas were translated into a formal, scalable framework.

Recording date: 05 December 2025

Sander van Stijn

Sander van Stijn is Head of Mandate Management and responsible for the strategic design and management of PGGM’s public and private market portfolios. His team defines asset class strategies, selects and monitors both internal and external managers, and ensures alignment with PGGM’s long-term investment objectives.

Colin Tissen

Colin Tissen is Sustainability Lead in PGGM’s Mandate Management team. Before that, he was a PhD candidate of finance at the Maastricht University School of Business and Economics.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I'm Jason Mitchell, Head of Responsible Investment Research at Main Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi everyone. Happy New Year. Welcome back to the podcast and I hope everyone is staying well. So what happens when sustainability stops being an overlay and becomes instead a core dimension of portfolio construction? After all, defining sustainability and impact is one thing, but making them investable, comparable and scalable is something else entirely. So in this episode, we explore what it really means to move from intention to implementation in sustainable investing. Now, what I find really interesting about all of this isn't the philosophical shift. It's the shift in practise. It's the evolution from a traditional two-dimensional investment framework focused on risk and return towards a three-dimensional model that gives sustainability equal weight alongside those two other pillars.

Now, this isn't a marginal adjustment. It's a deep re-engineering of how capital is actually allocated, how teams are organised, how performance is measured, and how accountability is enforced across an entire investment platform. That's why it's great to have Sander van Stijn and Colin Tissen from PGGM on the podcast. We talk about how this shift first took hold, what pushed PGGM beyond index tracking toward a more intentional investment approach and how those early ideas were translated into a formal scalable framework. We also explore the organisational and cultural challenges of embedding sustainability across investment teams, moving away from a centralised responsible investment function towards a fully integrated model, and how incentives, governance, and compensation structures had to evolve to make 3D investing real rather than just rhetorical.

Sander is head of mandate management and responsible for the strategic design and management of PGGM's public and private market portfolios. His team defines asset class strategies, selects and monitors both internal and external managers, and ensures alignment with PGGM's long-term investment objectives. Colin is sustainability lead in PGGM's mandate management team. Before that, he was a PhD candidate of finance at the Maastricht University School of Business and Economics. And last, it's worth adding that in full disclosure, Man Group is a proud partner in PGGM's asset reallocation efforts. Welcome to the podcast, Sander van Stijn and Colin Tissen. It's great to have you both here, and thank you for taking the time.

Sander van Stijn:

Thanks for having us. Looking forward to the conversation.

Colin Tissen:

Thank you for having us.

Jason Mitchell:

Absolutely. So Sander, let's start with some scene setting, specifically the path from index tracker to conscious investor. PGGM has evolved from, I guess you'd say, a traditional 2D model focused on risk and return to a 3D model. It triangulates risk, return, and sustainability/impact, where they are weighted, I think, equally. So first, talk about how they shift originally catalysed. How did you translate that original process into a formal investment framework?

Sander van Stijn:

Sure. Well, let's start with the original catalyst. Responsible investing has always been important to PGGM and our client, PFCW. We frequently poll our participants and they consistently signal that this is important to them. And that's probably not that surprising. Thinking about our participants working in the healthcare sector and in their work, they are frequently confronted with the consequences of certain products or corporate behaviour, the cost of which is passed onto society, whether that's tobacco, gambling, asbestos, or other externalities.

At the same time, PFCW has historically held investment beliefs favouring a low cost, broadly diversified passive investment approach. And the way that we have historically incorporated sustainability into our investment process was largely by three elements. One, excluding companies from our index portfolios or producing certain products or certain behaviour. Secondly, tilting our index portfolios where we've reallocated from companies with high CO2 emission towards companies with lower emissions or from companies with negative alignment to SDGs towards companies with positive alignment, and thirdly, by adding small satellite portfolio with very specific sustainability objectives.

Within this approach, we were still frequently confronted with companies that ended up on the front page of the newspapers because of serious human rights violations or pollution or what have you. And these companies were in our portfolio simply because they were in the index. They were not highlighted in our ESG screening process and therefore, had not been excluded. At the same time, we are running into the planetary boundaries really fast. And as this is happening, the risk profile of companies will increasingly be driven by exposure to these themes such as transition risk and physical risk, etc. And as a long-term investor with liabilities up to 80 years in the future, we want to get a better grip on what we invest in and how our portfolio is exposed to these risks. And this has led to a new set of investment beliefs and what we now call our 3D investment approach.

And coming to the new investment approach, know what you own is really a corner stone of this new approach. We are moving away from our index approach and excluding companies. We do not need 4,000 equity holdings to have a diversified portfolio. We are moving towards a more inclusionary approach in which we consciously select the companies we want to invest in. We want to understand and be able to explain why we invest in the company from all three dimensions, so that's risk, return, and sustainability. Now, asset managers typically take care of the risk and return part of the equation fairly well, but to be honest, I think the sustainability dimension is still too often, an afterthought. We want our portfolio managers to do a thorough underwriting of the sustainability profile of our investments and to include this into their decision making, ensuring that they evaluate and weigh all three dimensions in managing our portfolios.

And that doesn't mean that each and every company we invest in needs to be sustainable. We want our overall portfolio to score materially better in terms of sustainability than the market. And obviously, we need all our investments to meet minimum sustainability standards, but we still also invest in companies that score okay-ish on sustainability, but who contributes strongly in terms of returns and/or risk reduction. And we also want to invest in companies we call improvers. These are companies that are not very sustainable now, but need to transition and have concrete and credible plans to do so, but we want our overall portfolio to have better sustainability profile so that it's more robust for the transitions that society is going through, such as the energy transition, for example.

In implementing this approach, we had to overcome several challenges actually. I think firstly, when the new investment beliefs were formulated, we were not quite sure how to go about it and what we could actually achieve in terms of improvements. It's a bold thing to say that all three dimensions, risk return and sustainability are equally important, but what does that actually mean in practise?

So we started with a prototyping process for our listed credit and equity portfolios, where we invited several asset managers who we knew to be front-runners in sustainable investing to build prototype strategies for us. And they presented the processes and the paper portfolios and we discussed the various approaches with the board of trustees to further detail and [inaudible 00:08:01] our investment policy. Only afterwards did we start our manager selection process. Secondly, we had to change our entire governance structure and organisation because our previous approach was fairly top down in nature, which led to many different very detailed and fairly constrained investment mandates. And in order to facilitate a further improvement of the sustainability profile of portfolio without sacrificing returns, we really had to create a more flexible and agile investment chain.

And thirdly, and this is still very much a work in progress, how do we define and measure sustainability in a way that's meaningful? So using forward-looking metrics, that's objective, can be applied across different asset classes and can be easily communicated.

Jason Mitchell:

That's fantastic. That is a remarkable backdrop to what you guys are doing. But maybe Colin, what were some of the biggest organisational and cultural hurdles in moving from 2D to 3D? Did investment teams embrace the shift naturally or did it require a lot of structural change? And how has that reshaped the role and the function of what you do in the RI team more broadly at PGGM?

Colin Tissen:

Sure. Yeah, I think that change is always difficult. So I asked ChatGPT about a metaphor and it told me to talk about the river and the boat. So your current systems, that's your river, organisation, that's the boat and people working there on the boat and we are asking them to go in a different direction while we're just following the current, it's easy, it feels stable, less uncertainty, takes energy to go into a different direction. So it's natural inclination to resist change. Now, how can you overcome that? I think we did several things. So first thing we did is to make sure people are involved in developing new policies, new processes. Someone just talk about a new organisational structure and also have a new way of working. So we work more in MDTs, multidisciplinary teams, where we have people from an organisation from different departments discussing the same thing at the same time.

So when a strategy team thinks about maybe changing the climate strategy, we also have a portfolio management team there. We have our team there representing the views of all the investment teams. And it's also our role as mandate management to gather insights from the investment community. So both internal investment teams and external investment teams and to really see what's going on in the industry and learn from that and proactively take that up with other teams within PGGM.

So the first thing is involving people. The second thing is fitting in knowledge because I feel there's always many misconceptions about sustainable investing. People sometimes think that we're just going to build a green portfolio, only invest in sustainable companies or a green company. So I really want to focus on transitions, but it also means investing in brand companies with precision plans to improve in the future.

So what we did is we looked at how can we integrate sustainability better across the organisation. I used to be part of a central responsible investment team that doesn't exist anymore. So we decided to not have a central RI team anymore, but to let those people integrate into different teams within the organisation, spread out the knowledge across the organisation and to also ensure that within all teams, people build knowledge on all three dimensions. And that goes both sides. So people with technical background have to learn more about how investing works, how different asset classes work and also the other way around, before they manage to learn more about sustainability risks and how those actually work in practise.

Second thing we did is we have a new research team that expanded quite a bit. We have some economic researchers, but also researchers on climates, nature and biodiversity and on healthcare, which are really demand driven. So if investment teams have a question, they can fill in a certain form and then the research team will take that up. I think the last thing that at least I try to do is to give more lectures in the organisation. So I'll be giving lectures to the mandate management team about how stable investing works, what climate risk is. Really starting at the basics. So what is climate change from an earth balance perspective? How are these climate scenarios made? How do they translate into portfolio construction? We look at temperature ratings of companies. So really focusing on creating a better understanding of sustainability risks. I think the last thing that we looked at was incentives. So ideally, you want people to be intrinsically motivated, obviously, but incentives do work. So we now have sustainability KPIs into our compensation systems as well.

Jason Mitchell:

That's actually great to hear. I actually wanted to come back to what Sander had alluded to in the question for you, Colin. But this question about how you define sustainability and impact, maybe you can talk to that. Specifically, how do you make sure that that third dimension, sustainability impact is measurable, investible, and scalable, and not just, I guess, aspiration? What components do you see that are critical that go into this? So are they sustainable development impacts or peris alignment, carbon intensity, what other ones? How do you put that mosaic together?

Colin Tissen:

This is quite tricky because sustainability is a very broad concept. So you need to be very clear on what you actually want to steer portfolio. So I think about several different building blocks that we have in our investment model. So it's about avoiding harm, it's about mitigating ESG risks, it's about contributing to sustainability, and it's about intentional positive impact. And these buckets, they can overlap with each other. So if we think about avoiding harm, clients, PCW and certain minimum norms. So things you can absolutely not invest in. Think about coal production, tobacco production. We also have a human rights screening, that's the most basic part, avoiding harm. Then the second part was about ESG risks. So we look at climate transition risks, physical risks, companies, dependency on nature, but also, impact on nature and their financial mortality analysis of each portfolio. And that's mostly done by the investment teams that they get the assignments to measure these risks and to use them in their portfolio construction.

Now thinking about portfolio steering, we have several targets on sustainability and those are CO2 reduction. We try to go there via steering on Paris Alignment, and we have a goal on SDG alignment. So a couple of years ago, I believe it was 2017, we co-founded the SGI AOP, Sustainable Development Investments Asset Owner Platform, and it created the taxonomy of aligning companies as products and services with the SDGs. And we use that methodology to determine the extent to which companies make those product services accountable to SEGs. And then there's also ways to manage risk. So [inaudible 00:14:52] CO2 reduction Paris Alignment, SAG alignments are also lowering the risks of our portfolio.

And then the last thing we do is impact investing. And we don't use that word lightly. So this is a small part of the portfolio. We use the impact definition by GIIN, the global impact investing network, it has to be intentional, it has to be a measurable outcome. And we have set goals on impact investing for climate, so avoided emissions on nature and biodiversity and on people and health. This is a small part of the portfolio. And I think the final challenge that we came to was to make this measurable and also visible for the total portfolio, which we invest in many different asset classes. So I'm pretty proud that we now have this dashboard internally for the total portfolio, for each asset that we invest in can show the SDG alignment, the CO2 emissions and the Paris alignment, which also helps us to improve over time.

Jason Mitchell:

Yeah, that sounds like a pretty comprehensive framework. So congrats on that. But Sander, I wanted to change lanes a little bit. And correct me if I'm wrong, but it seems like there's a school of thought in the Netherlands that sustainability and systematic strategies aren't necessarily a natural combination, but it does also seem that systematic is helping to drive at the same time, the shift from at least passive indexing to greater levels of active investing. How do you think about the role of systematic in terms of active risk, tracking error, cost, fees, alpha, and the data perspective in your own shift to 3D investing? How do you see it as, I guess, a compliment to the much more concentrated, presumably higher TE portfolios of fundamental managers where the know what you own, principle really stands out from the typical breadth of systematic managers? Do you think systematic strategies could work in 3D in other asset categories, credit, etc?

Sander van Stijn:

Sure. Yeah. I think we've had a lot of debates about the different strategies to use for our 3D approach in the equity portfolio particularly. And we ultimately settled on using both approaches. And I think each of the approach has its own strengths and relative weaknesses. So I think if you think about know what you own, one of the cornerstones of our approach, I think fundamental stock pickers is really the best approach. There's a lot of context necessary to really be able to judge the sustainability profile of an investment, and clearly, fundamental strategies are really about a deep and thorough understanding of the companies and their sustainability profile. But the breadth is fairly limited because it's very labour-intensive.

The benefit of quant strategies is even though the data available is relatively more high level, it has the benefit of breadth. Looking at the liquidity profile of the portfolio, fundamental portfolios tend to be very concentrated in nature, typically 40 to 60 names, whereas systematic portfolios are very diversified and we have a big equity portfolio where roughly €50 billion in size, so liquidity matters.

Fundamental portfolios tend to have relatively high tracking errors with significant style builds incorporated as well and systematic strategies obviously have the benefit of being able to manage the tracking error very well as well as the overall style exposures. It's also true that fundamental strategies tend to be more expensive because it is more labour-intensive. And I think lastly, the difference between the two approaches is that impact investments, at least the way we try to incorporate it with the full theory of change, etc, are more easily integrated into fundamental strategies than systematic strategies. So I think comparing these two strategies, if you have a higher ambition on the sustainability side of things, you would probably favour the fundamental strategies, but this has to be weighed against the advantages of the systematic strategies in terms of being able to steer the overall portfolio risk profile, managed liquidity, and the overall course side of things as well.

So we decided to go for the best of both worlds and use both approaches, which I think over time, will migrate towards a blended approach. And I think certainly also in other asset classes, I think there's potential for these types of strategies. I think historically it's been a lot more difficult to run quantitative strategies in credit successfully, but I think recently, we've seen more and more asset managers be more successful in this area. I think yes, that's certainly a promising area.

Jason Mitchell:

Interesting. Really interesting. Colin, philosophically speaking, do you think of sustainability primarily as a constraint or do you see it as, I guess, a means to drive portfolio returns? There are some strong views about the compatibility or even incompatibility of portfolio returns and the idea of real world impact. I should note that the most recent podcast with Bob Litterman of the Black-Litterman asset allocation model, he's got a very strong view that they are incompatible. My own sense is that he's looking at it through the lens of constraints. But how do you reconcile the two? What kind of trade-offs are necessary in your view?

Colin Tissen:

We see it as a means to build a robust and resilient portfolio. So it's not just about constraints for us. If we look at how sustainability investing started, it was very focused on exclusions. So divesting, same stocks, [inaudible 00:20:11] companies, companies with high ESG risks, we actually want to move from exclusion to inclusion. It sounds a bit like a semantics discussion, but it's a different way of thinking. So how can we select companies in the portfolio that we believe on those three dimensions are outperforming well or create a balanced portfolio? So it doesn't mean that all companies have to be sustainable. If they provide a good risk return, is it investible to us also the other way around? And we want to focus on contributing to transitions. So don't want to have a portfolio which is green companies, but also companies that are transitioning, which we believe leads to then real world impact because those buy the companies themselves, so they lower their emissions, that's less emissions going up in the air. We also believe that those companies managing these positions correctly will perform better over the long term.

To your question on returns versus impact, I think the industry is using the word impact a bit too loosely nowadays. We only use it for a small part of the portfolio or we really follow the GIIN definition, has to be intentional, has to be measurable. Some examples of that, we have a new mandate at the intersection between infrastructure and private equity. It's about one billion, I believe, and that goes into energy transition solutions. So we recently invested in Elisa energy as an early stage developer of low carbon fuels. So think about similar aviation fuels, for example.

Maybe more unique to our approach is [inaudible 00:21:46] impact investing for the Dutch healthcare sector. We also have a small team working on that and they recently invested in Momo Medical and Momo Medical, they build bed sensors that identify whether the person in the bed is sleeping nicely or maybe about to get out of bed, about to fall out of bed and via an app, their caretakers now know better which rooms they have to check. So it saves time, but it also creates more time for personal care and it leads to less risk of falling.

Now, to the trade-offs, sometimes we see higher risk for impact investment. So the two examples I just talked about, mostly early stage investments, or of course, there are risks involved. We also see a bit smaller ticket sizes, and we sometimes have experience with these types of investments. So I think we can partially mitigate these risk by starting small, building experience over time, and we also believe that we can compensate in an invested portfolio. So if you take a bit more risk with your impact investments, you might be able to take a bit less risk somewhere else in your portfolio.

Jason Mitchell:

Sander, perhaps it's a little bit too early to say, but what's been your experience so far during the first half of the reallocation to 3D that PGGM has made? I'm thinking back to where you talked about the portfolio size of companies, but what does the move to downscale the number of holdings from 3,500 to 4,000 down to, I think, around 800 mean? In the context of that axiom in the investment world, diversification is the only free lunch in investing.

Sander van Stijn:

Yeah, this is another area that we've had many discussions about. And in building our 3D portfolio, we've really been looking to strike a balance between, on the one hand, more concentration in order to facilitate our know what you own approach, and secondly, sufficient diversification to create this balanced portfolio. And with 800 stocks, I think we are at least well aligned with recent academic insights on what is now called FOMO risk, which describes the phenomenon that the equity market premium stems from a relatively small number of stocks and really says that you probably need somewhere between 750 and 1000 companies to have a well diversified portfolio.

And at the same time, it's important to remember that the market index is not as diversified as one would think due to the concentration that results from the market cap waiting. So if you look at the effective number of stocks in the [inaudible 00:24:29] world, which is the inverse of the Herfindahl Index, that's roughly around 122 stocks, whereas our portfolio of 800 companies has roughly 140 effective companies in the portfolio.

So it's still a very balanced and diversified portfolio that's also illustrated by the tracking error of our portfolio relative to the market index, that's roughly 1.3% at this moment. I think over a full cycle, it will be somewhat higher, probably closer to 2%. But with that limited tracking error, we have been able to achieve material improvements in the sustainability profile of our portfolio relative to the market benchmark. So for example, we have increased our SEG alignment with roughly 80% relative to the benchmark. We have increased our Paris Alignment relative to the benchmark by roughly 70%. We've reduced the CO2 intensity by roughly 70%, but we've also been able to reduce the number of high ESG risk names by roughly 90%.

So I think those are pretty material sustainability improvements with a relatively modest tracking error. In terms of performance, given that the portfolios have only been live since Q2 this year, it's way too early to say anything meaningful. I think so far, our equity portfolio has lagged a little bit, mostly driven by the fundamental managers. On the other hand, our credit portfolio has outperformed a bit, but performance of these portfolios should really be judged over a longer term arise.

Jason Mitchell:

Yeah. Really interesting. Thank you for pulling back the curtains on how this works, Sander. Colin, I guess I'm thinking back to our conversation around defining impact, and there seems to be at least in listed markets, a real struggle in distinguishing real world impact from portfolio exposure to climate. No surprise, you and I have talked about this as well, but academics have observed this. I'm pointing to the Hartzmark, Kelly Shue paper Counterproductive Sustainable Investing, which carries really interesting implications for green firms versus brown firms around the cost of capital. But how do you balance real world impact? In other words, let's say a reduction in financed emissions against a more traditional view that is focused on risk adjusted returns in a portfolio's net carbon exposure.

Colin Tissen:

I'm quite familiar with the Hartzmark and Shue study. And I think our climate strategy aligns with their findings. So what we do is we have a target on our finance absolute emissions for the portfolio, but we're going to get there by steering on Paris Alignment, steering on forward-looking metrics. So we're now shifted towards the net-zero investment framework by the IRDCC. So what we're going to do now is rather than just focusing on our finance emissions, because then you have the argument is that really, impact, you can just divest from a [inaudible 00:27:30] company. Those emissions are still there, so nothing changes. So now it's shifting towards an approach where we have targets on investing more in companies that have science-based emission reduction targets that are aligned with the Paris agreements. We're going to increase our allocation towards companies that are aligning with those goals.

I think it better also aligns with the findings of Hartzmark and Shue. So we can still invest in brand companies, but they have to have a strong transition plan. And philosophically speaking, you can also think about okay, what does it mean to be a sustainable investor? Do you want to get a portfolio that just has similar companies in there, or do you want to look at the companies that you really need for the world to make certain transitions? So there are some sustainability funds out there that let's say the world would... All sectors would stop existing besides the sectors in that portfolio, would the world still function? And the answer often is no, because these funds don't invest in the mining sector, for instance, where we need those minimals to make EVs or other transition solutions.

So we really changed our mindset there. So really focusing on forward-looking metrics and then also using engagements to convince these companies to set better emission reduction plans. And by that, via stewardship, how to contribute also to real world impact.

Jason Mitchell:

Sander, building a 3D framework, you've alluded to this a little earlier, but it requires specialised teams, like governance redesign, data capabilities, basically a general system overhaul in my mind. What implications does that carry from manager selection? Do you look for managers doing everything well or specialist managers that lend specific subject matter expertise in a way where PGGM or you put together a mosaic of all these capabilities? And I guess to what degree, particularly given the backlash in ESG and how that's spilled over to some managers, but to what degree do you start to distinguish managers at a firm level versus at a fund or strategy level?

Sander van Stijn:

Yeah, I think moving to 3D investing has certainly changed our manager selection approach or process. I think it's no longer just about the investment skills and financial risk management. It's about whether a manager can actually operationalize sustainability alongside the financial performance, and that requires a different mindset, that requires deep sustainability knowledge and expertise, but also, cultural alignment. And I think on the strategy level, in an ideal world, we would look for managers who do everything well because that would mean that all of our sustainability objectives are fully integrated into the decision making process and the trade-off between the three dimensions is made in the most efficient manner. But in reality, we do a bit of both.

So, we select four managers with a broad scale set that add value on all the three dimensions, and the integration of the latest sustainability insights is at the core of their investment process. This allows for flexibility. If our sustainability standards or target changes, it also enables to react to changing market circumstances as well, both financial as well as in terms of sustainability. But we also look for managers with complementary and unique strengths. So for example, one of our equity managers is managing a portfolio that focuses on sustainability improvers because we believe that they have a unique method to identify such improvers.

But it's not just about the knowledge and expertise that's being applied in the strategy itself, in managing the portfolio. We are also increasingly looking for like-minded asset managers. Obviously, first and foremost, asset managers need to be able to manage our portfolio as well, but we see our new 3D approach as a journey. It's going to evolve over time, and we are looking for partners to help us along the way. We want to learn from them and work together on various initiatives, and that's a lot easier when there's cultural alignments between our organisations.

And that's why we're not just looking at the sustainability knowledge and expertise that a manager brings to the table, but also, at industry initiatives that managers participate in, ledgers they have signed onto, but most importantly, to what extent they also walk the talk. So for example, how does their voting policy and behaviour compare for portfolios where investors have fully delegated this to their asset manager?

Jason Mitchell:

Look, it's a really tough time in sustainable finance. There's obviously been some jurisdictional regional pushback in areas and anti-ESG sentiment. What's your message? What do you think managers and asset owners, institutional investors need to really focus on if they care about this space?

Sander van Stijn:

Well, I think we're having many discussions on this topic with our asset managers, also our U.S-based asset managers. And I think at the end of the day, we're very much looking at what they are doing. I think asset managers are less vocal in this environment. So far, our impression is that they are not necessarily changing their behaviour, but we're monitoring that very closely, but we're happy to at least get that message so far. And I think at the end of the day, it's really about your fiduciary duty. It's really about building a portfolio that is robust and resilient for all the transitions that society has to go through. So it's not just a hobby. It's really about taking your fiduciary duty and building a portfolio that's prepared for the challenges that society is facing.

Jason Mitchell:

It's interesting about walking the talk. So I've got a question for you, Colin. It's refreshing to see PGGM's willingness, both in its asset allocation efforts and as well as its thought leadership, assume a bigger, much more visible role in responsible investment with regulators and policymakers less willing to lead and asset managers now more limited in their scope. It seems like there's a real big opening for asset owners to have greater agency in driving the agenda and setting higher expectations. Talk more about this. How do you think of your role as an asset owner evolving in the sustainable finance ecosystem vis-a-vis the political pressures? What expectations would you set for asset managers when it comes to commitment and capacity building and sustainable investing?

Colin Tissen:

I think we have a very strong role to play as asset owners, together with PCW. Is that if you want to make 3D investing in success, you also have to get others on board. [inaudible 00:34:28] in engagement. If you go engage a company on an ask that nobody else is asking for, it's very unlikely going to have a success there. So we want to use our voice to show to the world what our new investment policy looks like, what the difficulties were there, and what lessons are there to be learned.

And so several ways that we try to do this, like this podcast, for instance, joining conferences. Also, together with Geraldine Leegwater, our CEO of investment management, I wrote a chapter on system level investing. So Jon Lukomnik, William Burckart, who wrote a book on moving beyond one portfolio theory. They're publishing a practical guide on sustainable level investing next year with a chapter explaining our new investment policy, but also a new organisational structure. This is shared knowledge with the U.S. of the sector.

Other examples are that we co-founded the SIOP a couple of years ago measuring the SEG alignment of companies. We also have our private equity team giving workshops through GPs on decarbonization. So different ways that we try to broadcast or show what we are doing at PGGM, but also ways to learn from others. And when it comes to expectations for managers, I think Sander already talked about it, but when we do manager selection, we didn't want to move away from a check the box exercise like, are you a POI signatory, are you a C1-plus signatory? That's not meaningful anymore, in my opinion, because everyone's a POI signatory. So we want to focus on the action, not on the promises.

Does the manager invest efficiently in the stewardship? Are there sufficient resources going there? Are they investing in data on sustainability and analytics that they can run? So really, finding managers that don't use sustainability as a marketing label, but where it's really integrated in their firm and also in their strategies.

Jason Mitchell:

Interesting. Sander, there's this really interesting ongoing discussion weighing the merits of a total portfolio approach TPA versus strategic asset allocation SAA, let's say. One argument goes that TPA has the benefits of dynamic rebalancing and allocation potentially to climate opportunities. They can react to non-linear risks and integrate forward-looking climate data much better than strategic asset allocation. It's also interesting to me to see a number of, I would call them more climate aware asset owners adopt this. CalPERS recently, NZ Super, CPPIB, as well as others. But how do you weigh the two? What kind of flexibility gains have moving to TPA had and provided in a sustainability impact context?

Sander van Stijn:

Yeah. I think TPA and strategic asset allocation are often contrasted this way. We see them more as a different decision framework based on the same underlying portfolio theory. So in our case, the board, to their credit, they recognised that they were taking risk, return and sustainability decisions in isolation and in a piecemeal fashion, asset clause by asset clause. And the adoption of the TPA philosophy with the board concentrating their attention on the strategic goals and delegating the operational decisions to the PGGM organisation and the portfolio managers and holding management accountable for the choices that they make, that goes hand in hand with our 3D approach. Of course, they could also have opted for a strategic asset allocation approach in 3D investing, but that would require much more time and effort from their side to be spent on the many different 3D dimensions into the portfolio construction.

But fact of the matter is, the board of trustees have a limited amount of time. They have a limited governance budget available to run the overall pension plan. So our move to the TPA approach is really one of building a much more flexible and much more agile investment chain. And to be honest, in all fairness, we've just only started building out our TPA capabilities, but we've already been able to relax quite some restrictions in the different mandates that we have implemented so far. So, yeah.

Jason Mitchell:

Interesting. Well, what's the next frontier in sustainable asset allocation? Just as 2D transformed into 3D investing, what do you see as a future fourth dimension? Is it systems change by diversity or just transition considerations? What could redefine how pension funds allocate capital in the future in a sustainability context?

Sander van Stijn:

Well, to be honest, I think optimising a portfolio across three dimensions is already challenging enough, particularly considering that these three dimensions each have their own flavours and dimensions as well. Biodiversity is certainly one of the areas that will be integrated further into our 3D approach as is transitions investing, certainly. I think one other topic that's coming up is resilience. I think the war in Ukraine exposes Europe to structural vulnerabilities. And I think as Europe wants to become more strategically autonomous, we need to think about being an asset manager for a Dutch pension fund, what can be our contribution to Europe's resilience, and how do we ensure that our investment portfolio is sufficiently resilient to geopolitical shocks, for example?

To be honest, we don't have the answers yet, but yeah, this might be one of the biggest questions that we'll have to answer. And it's really integrating the current geopolitical situation into our 3D approach and how that interacts with various sustainability themes. That's really one of the big questions that we'll have to answer going forward.

Jason Mitchell:

Great, great. Colin, I couldn't resist, but I built in a last question which points to the, I think in my mind, a seminal paper that you had co-authored with people like Rob Bauer titled Private Shareholder Engagements on Material ESG Issues. I had reread through it and I remember when it first came out, but the paper's results show that successful material governance engagements generated the most consistent financial performance and roughly around 250 basis points over 14 months overall with governance specifically showing significant stock returns and improved profitability metrics. What do you think explains this governance premium? It's great to see this empirical evidence, but do improvements in governance create, I guess, a multiplier effect across all ESG dimensions or is it that there's something specific about the nature of governance issues that makes them more immediately actionable and measurable? What lessons from the success of governance engagements also could be carried over to socioenvironmental engagements?

Colin Tissen:

Yeah. Just thinking about why is this the most economically and significant effect if you compare it to environmental social engagements, I think you have a longer track record on engagement on governance. I also think that investors have a more consistent view of which governance or what good governance looks like. If you think about sustainability, about climate strategies as mixed views out there. So if you then look at share price reactions to environmental engagements, it's a bit more noisy, I would say. Not from this study, but personally, I think that corporate governance is a minimum requirement to also manage sustainability risks correctly. So I think there should be a lot of focus and engagement on governance and also looking at whether the board has efficient expertise to manage sustainability risks.

Now, one thing that we looked at in another study, which I quite found interesting, so going back to questions on lessons learned on how to improve engagement. What we looked at was spillover effects of engagement. So we checked whether one person was on the board of several different companies, and then if there was a successful shareholder proposal at one company, did you see changes at the other company that the director is also part of the board at? So we actually found that when there's a proposal with [inaudible 00:42:48] on ESG resolutions, basically meaning that the [inaudible 00:42:53] of the proposal and the company had an agreement, we saw an increase in the ESG scores of these companies. We also saw an increase at the ESG scores of companies connected to that other company via board positions. So it's a bit of a spillover effect of engagement. And I think that's why, this is a correlation of studies, so I cannot say anything about [inaudible 00:43:17] effects, but it does show that maybe focusing a bit more on governance can also improve financial and social risk management.

Jason Mitchell:

Yeah, great paper. Thanks for highlighting it. But it's been fascinating to talk about how PGGM is evolving its investment approach to include more active sustainability driven strategies, what that means functionally for responsible investment in the asset allocation process and why asset owners like PGGM are uniquely positioned to lead the next phase of sustainable finance. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, Head of Responsible Investment Research at Man Group, here today with Sander van Stijn, Head of Mandate Management at PGGM and Colin Tissen, Sustainability Lead on PGGM's mandate management team. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Sander, Colin, thanks so much for your time today. This has been super, super interesting.

Colin Tissen:

Thank you, Jason. Thanks for having us.

Jason Mitchell:

I'm Jason Mitchell. Thanks for joining us. Special thanks to our guests and of course, everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.