I met Piet Klop, Head of Responsible Investment at the big Dutch pension fund PGGM, so many years ago I forget how long it was. Through our shared interest in sustainable investing we’ve stayed in touch over the years, meeting at conferences and at events at PGGM. We most recently saw each other at the top1000funds “Sustainability in Practice” 2023 conference held at Oxford. He was on the panel for the session “3D investing for impact.” It was good seeing Piet and catching up with him. Unfortunately he missed the dinner with some great wine the night before his talk. When he asked what I was up to I told him the interviews I’ve been doing, including with investors. I told him I’d done three with asset managers (Amy O’ Brien of Nuveen, Sandy Boss of BlackRock, and Rini Greenfield of Rethink Food) and said I’d love to do one with an asset owner, starting with him! He kindly agreed.

 

Eccles: Piet, thanks for taking the time to talk with me. Please tell me a bit about your childhood.

Klop: I was raised a happy kid and in some ways I still am. Although in all honestly, I’m more short-term happy, long-term gloomy. My parents—both primary school teachers—instilled in us the idea that one should at least try to serve the common good.

Eccles: They sound like great parents. Where did you go to university?

Klop: I got a Masters’ degree from Wageningen Agricultural University as I was drawn to better land and water management, preferably in far-away places. That was when I still believed in engineering fixes.

Eccles: Sounds like some things have changed but I guess we’ll get to this later. What was your first job?

Klop: I did extended field research in irrigation schemes in Indonesia and Pakistan and got my first proper job in Yemen. Over a period of some four years I learned that: (i) more efficient irrigation techniques mostly led farmers to grow more ‘qat’ (a mild narcotic) as the cash crop of choice, and (ii) that aid programs typically don’t scale.

Eccles: What did you do after that?

Klop: Once I saw that engineering fixes alone weren’t cutting it, I thought of incentives as the key to impact. I decided to go back to school at the University of London where I got myself another Masters’ degree in Applied Environmental Economics.

Eccles: And after that?

Klop: I worked as a water engineer and environmental economist with the UN in New York (four years), then with the World Bank from its regional office in Nairobi, Kenya (also four years), and the Netherlands’ Ministry of Foreign Affairs in The Hague (another four years). In between, when I thought I had enough of the aid industrial complex, I spent three years at Dutch consultancies on smallish projects that proved to be not my cup of tea.

After trying engineering and economics (payments for environmental services, green tax systems, etc.) I got myself seconded to the Markets & Enterprise Program at the World Resources Institute in Washington D.C. for four happy years. That’s where we developed “Aqueduct,” the Water Risk Atlas, with a couple of blue chip companies trying to figure out where and how water scarcity and pollution may become material to their business (it has gone from strength to strength since). That gave me a taste of the impact potential of businesses and capital markets.

Eccles: You then went to PGGM, right? What year was that?

Klop: 2011.

Eccles: Interesting that you got that job with no financial background.

Klop: That’s right, I’m learning on the job. For me finance is just a means to an end, i.e. impact. That’s also why I’m at PGGM helping to manage vast amounts of capital to do a world of good. To that endeavour I bring real world impact expertise, with most of my colleagues coming from the other end, finance. So it really is the impact trail that got me from engineering to economics and then to finance.

Eccles: And here you are having strung three four-year stints together 🐥.

 

Klop: Yes, it’s been 12.5 years, and I can hardly believe it myself! I decided to join PGGM as the self-proclaimed champion of “responsible investment,” even though I didn’t know the difference between active and passive. I also discovered that ”responsible” didn’t mean that we were investing in solutions to real world problems. I got hired for engagement mostly to manage ESG risks. It took me and PGGM the better part of 10 years to really distinguish between ESG risk to the portfolio (outside-in) and impact by the portfolio (inside-out), including investing in solutions to real-world problems.

Eccles: Please tell me a bit about PGGM.

Klop: PGGM is the in-house asset manager for the US$ 250 billion pension fund for the health care sector (PFZW). Some 550 staff invest in 10+ asset classes, from listed equities to infrastructure. It recently committed to a 3D investment strategy which requires impact to be considered with risk and return.

Eccles: What are the issues on which you engaged with companies?

Klop: Water scarcity, flowing from my work at the World Resources Institute. Despite its spatial and temporal variability, water is important to quantify as a material risk to companies in sectors as utilities, materials and food and agriculture. It is also one of those system risks that is starting to affect macro-economic growth and inflation.

Eccles: I take it this is where Aqueduct comes in?

 

Klop: Exactly! Aqueduct is helping to quantify current and future water risk to countries, sectors, and companies. It actually made it onto the Bloomberg terminal. More extreme water shortages or flooding are two of the more immediate manifestations of climate change. Water scarcity risk can be quantified as a ratio of water dependency over water security. The challenge is to aggregate local risks into company risk, and to arrange for collective action to secure water supplies at the river basin level.

Eccles: Interesting and important work. Earlier you mentioned changing the definition of “responsible investment.” Can you please elaborate on that?

Klop: Happy to. Being a universal owner, PGGM believes that negative impact (inside-out) may boomerang as risk (outside-in) to the portfolio. Responsible investment started from managing not-yet-financial ESG risks to the portfolio, which is simply our fiduciary duty, and should not be contentious at all—although I know it is very much so in the U.S. However, exclusions and even engagement do not solve real-world problems. In 2015, we expanded the scope of responsible investment to also include “investment in solutions’” to four PFZW priority areas: climate, health, food, and water. We developed our own taxonomies of investible solutions to these themes.

When the Sustainable Development Goals (SDGs) came along, we simply mapped and expanded our taxonomies to fit the relevant SDGs with the SDI Asset Owner Platform with APG, British Columbia Investment Management Corporation, and AustralianSuper. The idea behind the platform is to develop a transparent and factual standard for measuring the contribution of companies to the SDGs. Hence the focus on revenues.

Eccles: How much have you invested?

Klop: Initially the target was €20 billion by 2020. Initially we didn’t make a distinction between impact alignment (mostly in liquid markets) and additional impact (potentially in private markets). The important thing was that we get started, creating impact awareness and building capacity (impact measurement), confidence, and data sets. In collaboration with UBS and various academic institutions we modelled the impact of companies, mapping their revenues against the taxonomies of solutions, and converting revenues to outcomes and impact. Although we modeled/measured impact we weren’t managing for (maximum) impact. Mere impact alignment didn’t really constrain the volume of investments and we nearly made the €20 billion target. Meanwhile we’re chasing an impact alignment target of 20% of assets under management in 2030 which would be some €48 billion.

Eccles: Can you elaborate on alignment vs. additional impact?

 

Klop: Impact is making a difference in real terms. For the exact definition PFZW decided to go with the Global Impact Investing Network (GIIN). Interestingly, the GIIN dropped the distinction between company and investor impact, i.e. as long as impact is intentional and is being measured, attribution (whose impact is it?) is deemed less relevant. This suits institutional investors like PGGM well as the bulk of their investments are made in liquid markets where (proving) investor additionality is a very high bar indeed. Of the €20 billion target for 2020, some 75% came from companies in one or more of the liquid portfolios (active and passive equities, bonds).

Impact measurement is still riddled with methodological challenges: impact compared to what? In fact companies and investors are happy to be able to measure outputs (e.g. number of wind turbines installed), outcomes (MWh of wind energy generated) rather than impact (tons of avoided carbon emissions) as the latter also requires data on the regional energy mix. A wind park in Poland is probably replacing brown coal, whereas that same wind park in ‘nuclear’ France may have a more limited carbon impact.

The most practical reference for measuring the real-world improvement is often a point in time (baseline), for example when the company is taken into the portfolio.

Eccles: Do you expect to earn the same returns?

Klop: The requirement that investments align with the solutions we identified does constrain the investible universe. But with expansive impact themes like health and climate, investment returns do not lag the broader market index over time.

We also recognize that positive impact, or at least reducing negative impact, can be obtained through operational improvements. However, we feel that we needed to draw the line between doing the thing right (operational impact) and doing the right thing (product impact).  For example Ben and Jerry’s ice cream—albeit delicious, and with a great production process—doesn’t count as a solution to anything, or at least not to one of the SDGs. Meat too is deemed not to be a solution to food security, which demands a transition towards plant-based proteins. These ground rules are encoded in the taxonomy per SDG.

Eccles: New but connected topic—active ownership. It’s expensive. Can you make good on the costs incurred?

Klop: So far so good. With the emphasis on impact under the 3D investment strategy, the case for active management (including impact ) may have strengthened.

Eccles: Are you only looking at positive impact?

Klop: Our alignment and impact measurement efforts are geared towards quantifying positive impact. However, we are not ignoring negative impact as we screen all of our investments on the basis of the OECD guidelines and human rights guiding principles. We do not “net” positive and negative impact, although the SDI Asset Owner Platform has started measuring revenues from products and services that negatively contribute to one or more SDGs.

Eccles: Piet, you’ve been very generous with you time but mind if I ask you one last question?

Klop: Shoot!

Eccles: Finance has been a growing sector in many countries, but many people think it now exists mostly to generate money for itself. What’s your take on this?

 

Klop: Finance needs to rediscover its social utility. We seem to have lost the idea the connection between finance and the real world.  As the credit crisis laid bare, we didn’t quite understand our risk exposures, let alone the real world impact of what we were invested in. With a changing climate, increasing environmental scarcities, and worsening social instability, the writing is on the wall: I think that in 10 years time finance will be judged on how it has contributed to the common good: clean energy, food security, health care. Our children and grandchildren will be asking us: “What were you thinking? All that money and no place to live anymore.” Investing with impact is a test we simply can’t afford to fail.

Eccles: I completely agree but need to ask you one last (I promise!) question. How realistic do you think it is that this will happen?

Klop: I’m optimistic about this. Fortunately, there are a lot of initiatives that seek to reconnect finance with its real world impact. Projecting lofty but distant goals, however, is the kiss of death. Net zero by 2050 doesn’t mean a thing if we don’t start decarbonizing our investments now. Although the financial tail can’t wag the real economy dog, it can and should do more than coming up with slow solutions to fast problems. A little like the “Truman Show” it can draw attention and open up reservoirs of opportunity. The way I like to see finance evolving is from signaling that impact matters, to aligning with companies that contribute to the SDGs, to measuring real-world impact and, eventually, to managing for impact.

Eccles: Piet, thanks again for your time. I hope to see you again soon. And let’s make sure you get some good food and wine this time!

Klop: My pleasure and I agree!