Blog Posts — September 16, 2021

APG’s Van Dijk: iSTOXX APG World RI Indices Bring Rules-Based Index Solution to Active Investment Framework

Qontigo has launched, in collaboration with Dutch pension provider APG, the iSTOXX APG World Responsible Investment (RI) Indices. The innovative suite incrementally ‘layers in’ ESG, carbon and Sustainable Development Investments (SDI) ambitions. Each index employs Qontigo’s line of Axioma portfolio optimization tools in order to minimize tracking error versus a broad market index and maximizes the various sustainability objectives. 

The indices not only allow APG’s pension fund clients to measure and report on the impact for each individual sustainability criteria but are also designed to help channel investments into Sustainable Development Goals (SDGs) and into other responsible objectives for APG’s managed portfolios. 

To find out more about the new indices and APG’s ambitions in responsible investing, we caught up with Ronald van Dijk, Deputy CIO at APG Asset Management. With EUR 613 billion under management, APG is one of the world’s largest pension providers and administrator of the retirement pot for one in four Dutch employees.

Ronald, APG Asset Management is at the forefront of Responsible Investing (RI). How do you incorporate those principles in the management of assets?

Our RI ambition was born years ago. At a company level we pursue voting and strong engagement with companies in our active portfolios to steer them towards more responsible practices. We have made ESG part of the daily activities of every portfolio manager, instead of having a dedicated ESG team. RI is part of our culture — we aim to be recognized in the industry as an ESG leader ourselves.

In terms of RI strategies, we started with exclusions-based strategies and nowadays our scope extends far beyond that. We have invested heavily in our own approach and methodology to defining the ESG leaders in every industry. We also continue to invest in climate risk and opportunities, for example, by imposing restrictions – which, by the way, continue to get stricter over time – on the carbon footprint of our products. 

More recently, we have added the goal to invest in companies that contribute to the SDGs. Here, we have also actively helped to come up with a methodology for defining what an SDI is and which companies are classified as such. We did this through the initiative of the Sustainable Development Investments Asset Owner Platform (SDI AOP), started with other asset owners, to create a global standard and an objective method to define SDIs. The initiative helps our clients, and indeed any investor, who opt to have an ambition level with regards to SDIs in their portfolios.  

You mentioned the SDI AOP, whose dataset helps assess and invest in companies contributing positively to the SDGs. How do the new indices leverage that data? 
We have identified different ambitions with regards to RI. Some pension funds keep it relatively simple, but others go for a full program. That’s why we have developed a series of indices with Qontigo that can cater to this entire spectrum, providing funds the option to set an SDI ambition in the index itself. Having an SDI component in the index is a unique proposition globally, and it’s the first time AOP data is used. 

The indices embed several RI elements and thus allow investors to compare two or more strategies and assess what the impact is of adding each element, for example an SDI ambition plus carbon footprint plus ESG leaders. For pension funds who are asked to demonstrate the impact of their individual RI policies, this index series helps them do that in a transparent way.  

And how do indices improve your approach to manage a sustainable portfolio?
Some pension funds opt for fully active portfolios; other funds, mainly for cost reasons, would like to have only active decisions on sustainability aspects in their portfolio. And a third category prefers a blend for liquidity reasons. Having the new indices and related index strategies in our product offering makes APG a more attractive asset manager for many pension funds. The index strategies for developed equities can be very well combined with our active strategies for other asset classes, where we use a similar approach to define ESG leaders, to measure carbon footprint, or to target SDIs. 

A strategy based on an index that is managed and calculated by an independent index provider brings in a rules-based and transparent methodology that helps the investor understand how the portfolios are constructed and what they will get. Of course, most investors like the idea of index investing because it is a cost-efficient solution. 

Specifically with the iSTOXX APG RI indices, what we have done with Qontigo is construct them in such a manner that the risk profile of the narrow index is similar to that of the benchmark. If you implement all kinds of RI elements in your portfolio naively, you face the risk of having more volatility than the broader market or being skewed towards a particular style factor. But we can neutralize the expected volatility and style exposures of the index returns by controlling regions, styles, size, sectors, etc. The optimization software in combination with the risk models of Qontigo makes this possible. As a result, the client gets the RI ambition in a cost-efficient way, and without reducing diversification, or systematically and unintendedly increasing exposure to a few risk factors.  

What would you say helps these indices stand out from other sustainable investing indices?
From a distance, many indices may look similar — just like a signature dish of a top chef may look like similar to the dish of your local restaurant… until you eat them! The combination of the SDI element in the iSTOXX APG RI indices, with the carbon, ESG Leaders and exclusions filters makes the meal here. Plus, having the flexibility to customize the indices further should you need it, is ideal, as many pension funds have their own modifications of a broader RI concept. The combination of customization and risk control are two ingredients that pension funds will look for in the future when it comes to index investing.

That’s a good way of putting it. And why did you partner with Qontigo for this project? 
We have learned that the interaction between asset manager and index provider is very important. We have worked with Qontigo for ten years and we have a great understanding of their optimization and portfolio construction techniques, and their data and risk models. Qontigo understands us and speaks the same language as us in terms of flexibility, customization and risk control benefits. If you are going to work on very bespoke, dedicated solutions for asset owners, you need this type of relationship.

We will evolve these indices over time; they won’t be static. Therefore, the interaction with the index provider over time is important. We have confidence that in the future we will still be able to partner with Qontigo in enhancing the STOXX index methodology because the entire RI space will evolve.

This, in fact, is a three-way collaboration where BlackRock will implement a portfolio with an initial investment of approximately EUR 1 billion tracking the iSTOXX® APG World Responsible Low-Carbon SDI Index. Why did you choose to work with BlackRock for this mandate?
As the world’s largest asset manager, BlackRock is known for its experience in managing index funds. Our objective is always to offer our clients the best possible products — and we seek to work with those partners whose capabilities and expertise can help us reach this objective. APG, Qontigo and BlackRock have a shared focus on quality and results, and believe that a flexible, data-led approach is key to converting responsible investment ambitions into real-life applications.

Finally, Ronald, what role does passive investing, overall, play in APG’s sustainability footprint?
We do not like to call it passive investing because there are a lot of active elements and choices in an index. Index investing can be a very interesting proposition for pensions that have a relatively low-cost budget or have a bias towards not paying for alpha. 

For us, index investing helps us combine our alpha mandates and index-linked mandates, our active approach and index approach, with a similar ESG methodology and consistent RI program. What we do is we provide options and choice to clients.