Monday, June 28, 2010

Energy Efficiency Investments at Holland's Largest Pension Plan

While the world leaders were discussing in Canada at the G20 meeting how to overcome the Global Crisis and what to do about deficits, with the US opting for an approach in which spending should not be cut too quickly whereas Europeans tend to focus on cost cutting first so as to create a more balanced budget, our eye fell on the attached presentation by APG's Michael Friendlander on Investments in Energy Efficiency and the role they can play in a pension fund's asset allocation.

 World Leaders met in Canada for the G20 (Toronto, June 26-27, 2010)

It was remarkable that the US and Europe reached an agreement. It was agreed that the goal is to reduce budget deficits by 50 percent by 2013. However, every country is free to choose its own pace/pattern of cost cuttings, savings and/or incentives. This will probably imply that the US will for some time to come continue with incentivizing the economy, even when this might imply increased costs and debts. Europe - to some extent forced by Euro doubts - will start a more sober budget policy right from the start.

Based on earlier discussions that we had with top-level officials in huge pension plans and sovereign wealth funds, we believe that the world is changing. Not just in that Emerging Markets are gaining in importance. Also to the extent that it is quite clear now that large institutional investors in Western nations are more 'cash-loaded' than their governments. It is therefore interesting to see what their most professional representatives, like the APG are telling the world.

Friedlander's presentation about Energy Efficiency Investments is a good one that gives us a nice insight in the philosophy of the Developed world's super investors. It is clear that - when looking at 'savings' and 'cost cutting' on the one hand, and international investment activities on the other - 'energy', 'energy efficiency', socially-responsible (SRI) investing and 'emerging markets as a catalyst' are all important themes that are linked together as well.

Holland's largest pension plan believes that ESG Investments should play an integral role in an institutional investor's asset allocation.

The presentation does also elaborate on the role of APG as so-called Fiduciary Asset Manager. Developments in the Netherlands have blurred the distinctions between commercial asset managers on the one hand and large pension plans on the other.

LMG agrees that efficient pension plan management is better done in larger organizations. However, when opting for active asset management approaches it remains to be seen if manager selection within or by a Fiduciary organization is 'top-of-the-bill'. An 80 percent internal management of mandates seems rather high when analyzing our databases: no single, large asset manager was outperforming in more than 30 percent of asset categories according to LMG.

APG is nonetheless one of the most professional pension plans in the world and we agree wholeheartedly with the ideas put forward here that pension plans could and should play a more active role in the global allocation of capital in the future. Especially at a time when governments in developed nations are struggling with large debts.

LMG believes that this is an interesting presentation, indicative of a new and more active role that large pension plans and sovereign wealth funds will play in a new world: next to governments when possible, or maybe even replacing governments in cases where the latter are tied by domestic, political (short-term) demands.

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