Annual Responsible Investment Report - PGGM · Introduction 9 1. Frameworks for ... indicators of...

pggm.nl

Annual Responsible Investment Report

2014

15-6959 may 2015

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2014

2 PGGM

Statements 3

Management Statement 3Statement of the Supervisory Board 3

Foreword 4

Summary 6

Introduction 9

1. Frameworks for Responsible Investment 10

1.1 Beliefs and Principles for Responsible Investment 11 1.2 Policy Advice 11 1.3 Implementation of Responsible Investment 12 1.4 Investing in the Netherlands 14 1.5 Long-term Investment 16

2. Responsible Investment in Areas of Focus 17

2.1 Climate Change and Reduction of Pollution and Emissions 18 2.2 Water Scarcity 22 2.3 Healthcare 25 2.4 Food Security 28 2.5 A Stable Financial System that Serves the Real Economy 31 2.6 Good Corporate Governance 35 2.7 Safeguarding Human Rights 40

3. Responsible Investment in PGGM Funds and Mandates 44

3.1 Application of Responsible Investment in PGGM Funds 45 3.2 Application of Responsible Investment in Mandates 50

Outlook 2015 52

Appendices 53

Appendix 1. Abbreviations and Glossary 53Appendix 2. Overview of 2014 Results by Instrument 56Appendix 3. Overview of Instruments by PGGM Fund 57Appendix 4. Overview of Investments in Solutions 60Appendix 5. Engagement Figures 64Appendix 6. Voting Figures 65Appendix 7. Justification 66Appendix 8. Independent Assurance Report 67

Content

3PGGM

Management Statement

As the administrator for investment funds and the asset manager for pension funds, PGGM Vermogensbeheer B.V. (PGGM) supports its clients in their task of providing a stable and high-quality pension for their participants, now and in the future. PGGM is convinced that contributing to a sustainable world is part of building a valuable future for those participants – not only by fulfilling our clients’ wider social responsibility or by complying with laws and regulations or other standards, but also by helping them in fulfilling their primary task. This is why we invest the pension assets of our clients in responsible ways.

This report renders account of the activities carried out in support of responsible investment in 2014. This concerns advisory, as well as implementation-related activities. The policies pursued by our clients and PGGM’s responsible investment framework form the starting point for this. This framework seeks commonality within the PGGM investment funds (PGGM funds), while providing scope to meet clients’ specific policy requirements through internal and external asset management. That means the activities discussed in this report do not always apply to all clients.

In compiling the PGGM 2014 Annual Responsible Investment Report we have adhered to the international reporting principles of the Global Reporting Initiative (GRI) G4 (Appendix 7). In addition, where possible, we have reported on the indicators of the GRI Financial Services Sector Supplement (FSSS Final Version, 2008). We have not followed the GRI to the letter in this report, because it concerns the asset management activities and is not relevant at the PGGM N.V. level.

We have assessed the PGGM 2014 Annual Responsible Investment Report and declare that, to the best of our knowledge and belief, the information in this report presents a true and fair view of reality. The PGGM 2014 Annual Responsible Investment Report has been assessed and provided with an independent assurance report by KPMG Sustainability, an independent external auditor. This assurance report is attached in Appendix 8.

Zeist, 23 March 2015

Management of PGGM Vermogensbeheer B.V.

Eloy LindeijerMarc van den BergArjen PasmaBob Rädecker

Statement of the Supervisory Board

The Supervisory Board of PGGM Vermogensbeheer B.V. was instituted on 7 April 2014. As supervisory directors, we supervised the preparation of the PGGM 2014 Annual Responsible Investment Report and declare that, to the best of our knowledge and belief, the information in this report presents a true and fair view of reality.

Zeist, 31 March 2015

Supervisory Board of PGGM Vermogensbeheer B.V.

Else BosPaul Loven

Statements

PGGM4

In 2014, a number of pension funds whose assets are managed by PGGM took further steps to embed sustainability in their policies. For example, the Pensioenfonds Zorg en Welzijn (PFZW) (Pension Fund for the Healthcare and Social Sectors) published its 2014-2020 Investment Policy. Investments must not only provide for a good pension, but be sustainable, understandable and manageable as well. PFZW has formulated ambitious sustainability objectives, such as halving the investment portfolio’s negative footprint and quadrupling the positive sustainability contribution by 2020. The Stichting Pensioenfonds voor de Architectenbureaus (Pension Fund Foundation for Architecture Firms) also published a new Responsible Investment policy. For PGGM, these developments provide the impetus needed to assess investments in CO2-intensive industries and to look for energy transition opportunities, as well as companies that contribute to solving important social issues in the area of climate change, water scarcity, healthcare, and food security. Furthermore, in 2014, PGGM welcomed two new clients: Stichting Bedrijfstakpensioenfonds voor het Schilders-, Afwerkings- en Glaszetbedrijf (Sector Pension Fund Foundation for Painting, Decorating and Glazier Businesses) and the Stichting Pensioenfonds Smurfit Kappa Nederland (Pension Fund Foundation Smurfit Kappa Netherlands).

Since the financial crisis, the political establishment and society have increasingly called on pension funds to increase investments in the Netherlands as a means of increasing the availability of long-term capital for economic growth and for social themes, such as energy transition, innovation in the healthcare sector and the mortgage market. Because in addition to a good pension, participants also benefit from a healthy economy, we actively participated on behalf of our clients in the Cabinet’s debate with institutional investors on these themes. On 1 October 2014, the Netherlands Investment Institution (NLII or NII) was founded with a large number of institutional investors as its founding fathers, including PGGM and PFZW. The NLII has the task of matching supply and demand for long-term financing and increasing the attractiveness of investing in the Netherlands by consolidating projects. The NLII also is a key platform that together with the Dutch government makes it possible to create clear insight into structural financing issues related to the Dutch economy. PGGM is actively involved in various ways to provide pension funds with access to attractive investments in the Netherlands. For example, we invest in bank capital (risk sharing transactions) designed to facilitate SME financing and we have expanded investments in the private capital of Dutch companies, care homes and infrastructure.

Good corporate governance and well-functioning markets are essential for restoring society’s trust, which was seriously damaged by the financial crisis. This is why PGGM engages with banks and financial institutions on transparency, risk culture and risk management, and on the need for client focus. We have developed new guidelines for acceptable compensation in companies and financial service providers. We observe worldwide improvements in these areas. We are delighted that large Dutch banks, with whom we are in discussion, are actively following up on the recommendations of the Enhanced Disclosure Task Force (EDTF) concerning transparency, and consequently have made substantial improvements in their annual reporting.

In 2015, we continue to work on a sustainable financial system in close cooperation with other institutional investors and initiatives, such as the EDTF, and by actively contributing to the dialogue on new market standards for financial reporting. PGGM consequently joined the Investors Financial Reporting Programme of the International Accounting Standards Board (IASB). In addition, measuring the impact of investments in solutions on social issues is increasingly important, as is the continuous improvement of the integration of sustainability into all investment processes.

Eloy LindeijerChief Investment Management

Foreword

5PGGM

2014 Responsible investment overview

AREAS OF FOCUS INVESTING IN SOLUTIONS

ESG-INTEGRATION

EXCLUSIONS

ENGAGEMENT

Climate change and reduction of pollution and emissions

Water scarcity

Healthcare

Food security

A stable financial system that serves the real economy

Good corporate governance

Safeguarding human rights

Total: € 4.7 billion

New in 2014: € 123 million

Solution for climate change: sustainable energy in Europe

Solution for water scarcity: water purification plant in China

Solution for healthcare: healthcare fund in (among others) the Netherlands

Solution for food security: food production in Asia

Total: 124 companies and government bonds of 13 countries

New in 2014: 2 companies due to production of controversial weapons

Government bonds of the Central African Republic due to violation of human rights

ESG factors were analysed in 100% of the new investments in external investment funds in 2014.

Engaged in dialogue 510 companies

21 results related to environment

32 results related to social factors

80 results related to corporate governance

Voted at 3,395 shareholder meetings

37,281 votes cast

Recovered € 2,709,696 in investment losses via legal proceedings

VOTING

LEGAL PROCEEDINGS

6 PGGM

Through its activities in the field of responsible investment, PGGM

provides responsible, stable and good investment results that are

consistent with our clients’ ambitions for their pensions. These

activities are founded on the beliefs that (1) responsible investment

pays off by producing a positive risk-return profile; (2) sustainable

development results in good and stable returns over the long term;

and (3) capital is a driving force for sustainable development.

Responsible investment is an integral part of our investment approach. It means that we consciously take account of environmental, social and governance (ESG1) factors in our investment processes. We have developed a number of new instruments in recent years, such as an ESG Index, and are increasingly focusing on the actual social impact of our investments. This annual report is therefore structured on the basis of seven areas of focus selected in consultation with our clients. These areas of focus are material in terms of social impact and in terms of the risk return profile of the investments of our clients. In 2014, the objectives were based on quantitative agree-ments with our clients concerning the use of responsible investment instruments. Appendix 2 presents an overview of the activities associated with each instrument and the results achieved in 2014.

This annual report does not aim for completeness, but is a progress report over 2014. Transactions from previous years, including in sustainable energy, are not covered in this report. Previous annual reports contain additional information on such topics.

Responsible Investment in Areas of Focus

Climate change and reduction of pollution and emissions Reducing the negative effects of climate change requires more green growth, or economic growth based on more sustainable energy and a reduction in the wastage of raw materials. Political leadership is required to create

preconditions that keep investments in green growth attractive. In 2014, we therefore made our voice heard among policymakers throughout the world, for instance at the UN Climate Summit and at the European Commission (EC). The EC presented the ‘2030 Climate and Energy Plan’, calling for a CO2 emission reduction target of 40 percent, the percentage that PGGM had advocated. To limit the risks of climate change for investments, we have started to calculate the CO2 footprint of PGGM’s equity portfolio and we will present a reduction plan in 2015.

Water scarcity Water scarcity not only threatens population health, it also threatens economic growth. PGGM wants to enable economic growth, safeguard the continuity of companies and secure access to clean drinking water. In 2013-2014, PGGM invested in three Chinese water companies that purify industrial waste water and consequently contribute to solving the water scarcity and water pollution issues in North-east China. In addition, PGGM encouraged the CDP, an organisation that sets standards for transparency in water scarcity for listed companies, to increasingly shift the focus of their annual reporting on water to ‘business value at water risk’. This is the business value that is at risk due to exposure to water problems. This information is available effective from 2015. It enables investors to identify water opportunities and risks, and use this information as a basis for making their investment decisions.

1 Appendix 1 contains a list of abbreviations and a glossary.

Summary

7PGGM

Healthcare PGGM wants to contribute to strategic solutions designed to deal with issues concerning population health and access to healthcare. We do this by investing in healthcare solutions and by entering into a dialogue with companies on this issue. In 2014, PGGM invested in Gilde Healthcare Services II, a fund that invests in the healthcare sector, primarily in the Benelux and Germany. In addition, we called on multiple companies to become members of the Japanese non-profit Global Health Innovation and Technology (GHIT) fund, in order to collectively improve access to medicines. Six companies have since joined this fund.

Food securityJust like healthcare, food is a basic necessity and a key engine for social and economic growth. For instance in 2014, we invested via Black River Food Fund II in the Chinese AustAsia dairy farm that each day produces over 80 percent more milk than local farms. This level of efficiency is required to advance food security in China. In addition, PGGM is also engaged in a dialogue with market players and companies in the area of sustainable food production. For example, we successfully continued the engagement project for a sustainable palm oil sector: five palm oil producers have instituted a moratorium on the deforestation and cultivation of peat lands.

A stable financial system that serves the real economy We depend on the health of the financial system in order to achieve returns for our clients. Seven years after start of the financial crisis, trust in the financial sector is still low. As a financial institution, PGGM has a responsibility to contribute to a sustainable financial system that can restore society’s trust, a prerequisite for achieving good returns over the long term. In 2014, we described our role, as well as that of our clients, in a sustainable financial system. In addition, we assess the behaviour of parties in the sector with which we co-operate or in which we invest. We have developed new compensation guidelines, in which we set out what in our view is an acceptable compensation structure for listed companies and financial service providers. As a member of the EDTF, PGGM is working on improving the transparency of international banks concerning risks and risk control measures. In 2014, a number of banks in North America and Europe, including the Netherlands, improved their annual reporting.

Good corporate governance Good corporate governance is a precondition for the effective operation of a company. The risk and return on investments are highly dependent on efficient companies, markets and social systems. In the markets in which we invest for our clients, we are aiming for a suitable and cohesive system with standards for behaviour, competence and reporting. In 2014, we encouraged a number of companies to develop an acceptable remuneration policy. In addition, we called on various companies to account for a lack of independent supervision. As a result, a number of companies in Asia appointed independent external directors. However, we do not always achieve the desired result. For example, the IT company Oracle once again refused to consider proposals calling for the compensation structure to be adjusted and allowing shareholders to nominate independent directors. If the company continues to refuse to make the necessary adjustments, PGGM, in consultation with its clients, can decide to exclude Oracle.

Safeguarding human rights The attainment of fundamental freedoms and human rights is an important condition for achieving sustainable development. We include human rights in the screening process and in the research conducted in support of investment decisions and exert our influence on companies by engaging in dialogue and by voting in order to call them to account for their responsibilities. Parties that are involved in the systematic violation of human rights and that do not show any improvement are excluded in consultation with our clients. At the beginning of 2014, the exclusion of five Israeli banks on behalf of PFZW, on the grounds that they were financing settlements in the occupied Palestinian territories, triggered a series of positive, as well as negative responses. The negative responses suggested that the decision was a politically inspired one. This was not the case; the exclusion is in line with the responsible investment policy frameworks. We evaluated the process and drew lessons learned from it. For example, we need to involve stakeholders more extensively and at an earlier stage in sensitive decisions.

Responsible Investment in PGGM Funds and Mandates

In 2014, we published a new Responsible Investment Implementation Framework. The Implementation Frame-work uses six instruments. We apply ESG integration in all investment processes (1) and stimulate sustainable development by investing in solutions (2). We encourage companies that are in a position to apply ESG improvements to do so by voting (3) and by engaging in a dialogue with them (4). PGGM conducts legal proceedings (5) to recover

8 PGGM

investment losses and enforce good corporate conduct. We exclude companies from PGGM funds that produce controversial weapons or tobacco, or that systematically violate human rights or damage the environment (6). Within PGGM funds we search for commonality with our clients in the guidelines for responsible investment. In client mandates we implement the policy of individual clients. In order to support the differences in the focus of clients and exclusion lists as effectively as possible, the implementation of these instruments can differ somewhat by PGGM fund and mandate.

In relation to investments in solutions, PGGM in 2014 developed proposals for quadrupling investments in solutions over the period leading up to and including 2020 within the climate change, water scarcity, health -care and food security areas of focus. In 2014, these investments amounted to € 4.7 billion. We measured the social impact of all existing investments in solutions. In terms of climate change and water scarcity, we also assess the transition to a circular economy as a problem solving approach. At end 2014, PGGM developed a pilot version of a scan designed to measure the circularity of companies.

With regards to engagement, we increased our focus in the engagement programme in 2014. We primarily enter into a dialogue with legislators and regulators and with companies that have a halo effect in their sector, region or chain. This way we aim to exert greater influence on the improvement of standards at the market level. For example, in the Netherlands we are in discussion with the Ministry of Justice to develop a system of collective compensation proceedings in which a group of misled investors with a shared common interest can instigate legal proceedings. As of the fourth quarter of 2014, PGGM switched from engagement service provider F&C in the UK to GES in Sweden. GES has a focused engage-ment programme that constitutes a good supplement to PGGM’s engagement activities. The programme focuses on companies that do not operate in accordance with international guidelines in the areas of human rights, the environment and corruption. The engage ment activities carried out by PGGM are more focused on strategic areas within the selected themes and on focus markets.

9PGGM

Introduction

Responsible investment is always in development. In recent years we

developed a toolkit with instruments such as voting and engagement,

and we integrated ESG factors into investment activities.

Responsible investment has entered a new phase in which the focus

is shifting from processes to results. PGGM is convinced that financial

and social returns go hand-in-hand. We want to help our clients

realise a valuable future for pension participants on the basis of

sound financial and social returns.

By monitoring the social impact of our investments over multiple years, we will develop the knowledge and experience needed to support the movement toward a more sustainable investment portfolio. In this respect we are continuously looking for points of reference that enable us to take better investment decisions and to actively focus on social added value and on the negative impact of investments, for example on the environment. This approach is not limited to investing in solutions. We apply an integral vision to the entire investment portfolio, a perspective that serves as a basis for taking all investment decisions. In this report we illustrate where we stand in the year 2014.

To give substance to the focused contribution that PGGM as asset manager and administrator of investment funds (the PGGM funds) wants to make to a sustainable world, we identified seven social areas of focus in which we can have an impact, in consultation with our clients. These are areas of focus that our clients and their participants consider important and developments within these themes that we believe will have a material impact on the investments for our clients:

Climate change and reduction of pollution and emissions Water scarcity Healthcare Food security A stable financial system that serves the real economy Good corporate governance Safeguarding human rights

The annual report gets a new look

Due to these developments, the reporting on responsible investment has been given a new look. This year, the report has been structured in accordance with the above-referenced areas of focus and no longer on the basis of our toolkit. For each area of focus we report our targeted social contribution, what we did to accomplish it and what we achieved in 2014 (Section 2). We use all of our responsible investment instruments (Section 1) to make a social contribution within the areas of focus. This Annual Report also provides an overview of the responsible investment developments related to each PGGM fund and related to a number of mandates (Section 3). Quantitative overviews related to the activities are included in the appendices.

10 PGGM

1. Frameworks for Responsible Investment

“As asset manager of

pension funds, we assess

both financial and social

returns over the long term.”

11PGGM

1.1 Beliefs and Principles for Responsible Investment

Although there has been enormous growth in prosperity over the past century, stability and economic development are increasingly threatened by global issues. These include climate change, the scarcity of natural resources such as water and minerals, rising food prices and income inequality. The way in which such issues have been tackled in past decades is no longer viable. This will impact future investment results. Sustainability and viability are therefore key to our activities over the long term. To safeguard this, PGGM, together with its clients, has developed Beliefs and Principles for Responsible Investment and has published them on its website.

BeliefsFor PGGM, responsible investment means not only consciously taking account of ESG factors in investment decisions and exerting positive influence through the investments, but also looking critically at our own behaviour and that of the entities in which PGGM invests or with which it cooperates. Through its responsible investment activities PGGM seeks to contribute to responsible, stable, good investment results for its clients. This objective is based on the following beliefs:

Responsible investment pays off: PGGM firmly believes that sustainability factors materially influence the risk-return profile of the investments and that this influence will steadily increase in the future.

No good and stable return in the long term without sustainable development: PGGM firmly believes that sustainable development is necessary in order to generate good and stable investment returns for our clients in the long term.

The driving force of capital: PGGM firmly believes that by leveraging the driving force of investments for our clients it can and must make a positive contribution to sustainable development through its investment decisions.

PrinciplesPGGM aims to be an excellent cooperative pension fund service provider and to make a substantial contribution on sustainability issues. We have formulated ten basic principles for responsible investment that we implement in making investment decisions.

The basic principles are as follows:1. Responsible investment is an integral part of PGGM’s

investment activities.2. PGGM has a clear focus for responsible investment

activities.3. PGGM critically reviews its own behaviour and the

behaviour of parties in the financial sector with which it cooperates in order to achieve a stable and sustainable financial system.

4. PGGM acts as an active owner on behalf of its clients and on behalf of the investment funds it administers.

5. PGGM critically reviews the behaviour and activities of entities in which it invests on behalf of its clients.

6. PGGM sets a minimum standard for investments for clients. When this standard is not met, we exclude companies or government bonds.

7. Through (part of the) investments for clients PGGM seeks to contribute actively to solutions to societal issues.

8. Collaboration with institutional investors and other market participants leads to synergy and greater impact.

9. PGGM actively seeks methods to demonstrate the financial and social impact of the choices with regard to responsible investment.

10. PGGM is transparent and accountable with regard to responsible investment activities.

1.2 Policy Advice

One of the services provided by PGGM is to advise clients on their responsible investment policy. The Responsible Investment and the Strategy and Fiduciary Advice depart-ments of PGGM Strategic Advisory Services B.V. (PSAS) closely cooperate in this area. As an investment company, PSAS is licensed to provide investment advice. Advice concerning responsible investment policy is substantively reviewed by the Investment Policy Committee. In 2014, we advised several clients concerning the refinement of their policy frameworks. PFZW and the Stichting Pensioenfonds voor de Architectenbureaus (Pension Fund Foundation for Architecture Firms) published a new Responsible Invest-ment policy. In addition, PGGM provided PFZW with advice concerning the translation of its 2014-2020 Policy Framework into a long-term investment policy. A number of ambitious goals designed to anchor sustainability in PFZW’s investments were formulated:

Quadrupling of the positive sustainability contribution. Halving the portfolio’s negative footprint. Systematically integrating sustainability in all steps of

the investment process.

http://www.pggm.nl/english/what-we-do/Pages/Asset-Management.aspx

12 PGGM

In 2014, PGGM also provided PFZW with advice concerning a responsible compensation policy. The objective of this policy is to take a position against the most excessive forms of compensation by listed companies and financial service providers. For companies, the remuneration, i.e. the fixed salary, the variable compensation in shares or in cash and the non-financial allowances, was reviewed. For financial service providers, the fees, i.e. the compensation received in exchange for the services provided, and the individual return on investments were reviewed. However, what is considered excessive varies by individual, market, as well as invest ment category. It therefore is a challenge to define this precisely. To implement this policy, PGGM starts off with the most excessive forms of compensation. We compare companies and financial institutions and specifically start from top to bottom with the most excessive compensation practices. PGGM has formulated guidelines for this purpose (Section 2.5.3).

1.3 Implementation of Responsible Investment

We aim to provide optimal support to our clients to help them develop and implement ESG activities. This involves continuously improving ESG integration (Section 3) and developing new activities, such as the expansion of investments in solutions, and measuring and reducing the CO2 footprint (Section 2). The effective implementation of these activities enables our clients to achieve their sustainability objectives. By communicating on these activities to stakeholders we aim to trigger wider interest and growth in the area of responsible investment.

The Responsible Investment Implementation Framework published in 2014 contains detailed implementation guidelines for implementing various activities in the field of responsible investment. Each client has its own policy with particular emphasis in this field. The Implementation Framework seeks commonality within the PGGM funds, while providing scope to meet clients’ specific policy requirements through internal and external asset management. That means that the following activities that we undertake in the field of responsible investment do not always apply to all clients.

PGGM manages various PGGM mutual funds in which multiple clients participate.

PGGM provides asset management services to individual clients.

PGGM advises clients on direct investments through mandates or funds other than those managed by PGGM.

The Beliefs and Principles for Responsible Investment apply to all of PGGM’s investment and advisory activities that fall within these three categories. The Implementation Framework applies to the PGGM mutual funds, to the activities of PGGM Treasury B.V. and to mandates managed internally by PGGM. The individual client’s policy prevails within these mandates. Within PGGM funds we search for commonality with our clients in the guidelines for responsible investment. When taking decisions on and within the Implementation Framework, PGGM goes through an extensive process that takes the clients’ considerations into account, usually through an opinion issued by the Advisory Board Responsible Investment (ABRI) and the Participants’ Meeting.

AIFMD License

In April 2014, we were notified that the Netherlands Authority for the Financial Markets (AFM) had granted PGGM an Alternative Investment Fund Managers Directive (AIFMD) license. PGGM was the first pension fund service provider in the Netherlands to receive this license. The AIFMD license provides investment funds with a ‘European investments passport’. The AIFMD license guidelines co-incided with plans within PGGM to separate investment policy advice and asset management. With this in mind, in 2014, a full-fledged Fiduciary Advice department was set up by the sister company PGGM Strategic Advisory Services (PSAS). This department formulates and evaluates client investment mandates. Accommodating Fiduciary Advice in a separate entity has created a true separation of activities.

13PGGM

PGGM Beliefs and Principles

PGGM Funds

1

Participants’ Meeting

Externally Managed

Mandates & Funds

3

Mandates Managed

Internally by PGGM

2

Responsible Investment

AdvicePGGM Responsible Investment Implementation Framework

(Implementation and Advice)

The assets which PGGM has under management and advice on behalf of its clients amounted to € 181.9 billion at year-end 2014, including € 172 billion within (1) the PGGM funds and (2) the mandates managed internally by PGGM. This report covers only the responsible investment activities carried out by PGGM in respect of the € 172 billion (total of 1 and 2 in Figure 1.1). Section 3 contains a summary of the activities and results for each PGGM fund and a number of internally managed mandates.

ABRI and Participants’ Meeting

The ABRI is an advisory body that consists of five independent external experts from whom PGGM and its clients can obtain advice and with whom they can discuss issues relating to responsible investment. To increase the opportunities for consultation in the PGGM funds, we also organise a Participants’ Meeting for clients, at least once a year. This meeting gives the various participants in a PGGM fund the opportunity to discuss and take decisions on fund-specific subjects with the PGGM fund manager and other participants. This meeting took place on three separate occasions in 2014. Subjects such as the exclusion of the Israeli banks, the conflict between Russia and Ukraine, issues concerning a sustainable financial system, own behaviour and an acceptable remuneration policy were discussed by the ABRI, as well as in the Participants’ Meeting. These subjects are dealt with later in this report.

Clients’ Responsible Investment Policy

Instruments for Responsible InvestmentWe apply six instruments in support of the implementation of responsible investment activities. We apply these instruments for the purpose of (1) contributing to social solutions; (2) encouraging companies in a position to make ESG improvements to do so; and (3) excluding companies that carry out activities that we do not want to support. Figure 1.2 illustrates the triptych for responsible investment.

What we want to stimulate1. Investments in Solutions Investments in solutions for social development are clearly defined investments that not only contribute to the portfolio’s financial return, but are also intended to generate social added value. We invest in solutions for climate change, water scarcity, healthcare and food security. Section 3 contains additional information about measuring social return.

What we want to improve2. ESG integration into investment processesThe environment, social aspects and the quality of corporate governance can affect our clients’ return on investment. Conversely, the companies and agencies in which we invest can have an impact on the world around them. PGGM therefore firmly believes that taking account of ESG factors in the investment processes contributes to good risk management and can ensure that achieving financial returns is coupled with sustainable social improvements.

Figure 1.1 Framework for Responsible Investment

14 PGGM

On the basis of the following three ‘active ownership’ activities, PGGM fulfils the rights and responsibilities associated with being a shareholder in listed companies:

3. VotingVoting is one of the most important rights a shareholder has. We therefore vote on the basis of our own judgement at shareholder meetings. Consequently, we contribute to good corporate governance. For each company, PGGM publishes its voting record on a special website.

4. EngagementAs a pension fund service provider we see it as our responsibility to engage with market participants and companies about their policies and activities. This way we attempt to achieve ESG-related improvements.

5. Legal proceedingsWhen necessary, PGGM institutes legal proceedings against companies on behalf of its clients as shareholder to recover investment losses and enforce good corporate conduct.

What we do not want6. ExclusionsPGGM wants to avoid making investments that are deemed unacceptable to us or our clients. This is why we do not invest in controversial weapons or tobacco. Furthermore, we can exclude investments in government bonds issued by countries or companies that violate human rights or that cause serious environmental damage, for example. In such instances, we first attempt to realise improvements by engaging in a dialogue with the company. If that fails, we can proceed with exclusion.

1.4 Investing in the Netherlands

A strong and sustainable Dutch economy contributes to a valuable future for the pension participants of our clients. In 2014, 10.5 percent of the pension assets of our clients, representing a total of over € 19 billion, was invested in the Netherlands by PGGM. Approximately 60 percent of this is invested in government bonds. PGGM is actively involved in various ways to provide pension funds with access to attractive investments in the Netherlands. For example, we invest in bank capital (risk sharing transactions) designed to facilitate SME financing and we have expanded investments in the private capital of Dutch companies, care homes and infrastructure. In 2014, PGGM acquired an interest in the funds of Nordian Capital Partners, a newly established investment company arisen from Rabo Capital. New capital for the purpose of investing in the Netherlands, for example in construction, technical services, food and the shipping industry, is made available via Nordian. Finally, PGGM exploited opportunities in the Netherlands to invest in energy transition and healthcare. In 2014, PGGM was intensively involved in shaping the NLII. Furthermore, PGGM is one of its shareholders. The NLII, as intermediary, wants to match the supply and demand for long-term financing and to increase the attractiveness of investment opportunities in the Netherlands. By consolidating and standardising small-scale projects, and by addressing issues, for example related to regulations, the NLII facilitates institutional investors to provide long-term financing. This allows them to fill the financing gap created due to the fact that it has become more difficult for banks to provide long-term financing. At the same time, many projects in the Netherlands, such as the renovation of schools and

Creating societal returns in the area of:

Climate change and reduction of pollution and emissions

Water scarcity Healthcare Food security

Instrument: Investing in Solutions

Making companies and markets more sustainable through ESG integration, active ownership and collaboration with financial service providers

Instruments: ESG integration (including

ESG Index) Engagement Voting Legal proceedings

Direct exclusions: Controversial weapons Tobacco

Exclusions after engagement on: Human rights and social

circumstances Environment Corporate governance

Instrument: Exclusions

PGGM’s Instruments for Responsible Investment

YESWhat we want to stimulate

CHANGEWhat we want to improve

NOWhat we do not want

Figure 1.2 Triptych for Responsible Investment

http://vds.issproxy.com/SearchPage.php?CustomerID=2531

15PGGM

CO2

INPUT

ASSETS UNDER MANAGEMENT IN THE NETHERLANDS

The Dutch economy represents 1%of the global economy;

PGGM invests 10.5% of its assets under management

In the Netherlands.

INVESTMENTS IN SOLUTIONS IN THE NETHERLANDS

INFLU

ENCE

ACTIVITIES RELATED TO DUTCH LISTED COMPANIES

OUTC

OMES

€ 19 billion invested in the Netherlands (10.5%)

€ 162.9 billion invested in other countries (89.5%)

€ 181.9 billion total invested assets

2014

89.5%

€ 513 million in:

Local heating network

Healthcare

Green deposits

Wind farm

Dutch companies with a sustainability policy

30Number of companies in the portfolio Engaged in dialogue Attended

companies shareholder meetings

8,4%Average return on the total investment portfolio: CO2 reduction corresponds

to the emissions of

19.500households.

Local heating network

10.5%

14Voted at

shareholder meetings

3713

FINANCIAL RETURN FOR PENSION PARTICIPANTS OVER THE PAST 40 YEARS

SOCIAL RETURN DUE TO INVESTMENTS IN SOLUTIONS

Figure 1.3 Responsible Investment in the Netherlands.

Source: Milieu Centraal, ‘Bereken je CO2-uitstoot’.

16 PGGM

investments in companies, are too small-scale for investors such as PGGM. This causes the costs per investment to be too high for an attractive return. The NLII, in close cooperation with government, is looking for structures that would make it possible to finance such projects.

Figure 1.3 provides an overview of responsible investment in the Netherlands. In total, over € 500 million has been invested in solutions in the Netherlands via PGGM. This includes investments in:

Gilde Healthcare Services, a fund that invests in health-care in various countries, including the Netherlands.

The Rabobank Duurzaam Deposito, a fund used by the Rabobank to make sustainable investments in the Netherlands.

The Ampèrefonds, this fund owns a 32 percent share in the Koegorspolder wind farm in the Province of Zeeland.

Ennatuurlijk local heating network (Section 2.1.3). The Responsible Equity Portfolio (REP), a portion of

which is invested in the Dutch companies Unilever and DSM. Unilever is a leader in the use of sustainable raw materials and the majority of its products meets or exceeds globally recognised nutrition guidelines. Unilever’s goal is to integrate sustainability into normal daily life. DSM too is a key proponent of sustainability and circularity. Together with the World Food Program, DSM is working to increase the nutritional value of emergency aid for 25 to 30 million people in 2015. In addition, DSM is a leader in the development of sustainable and innovative products and solutions with measurable ecological benefits.

In 2015, we will investigate the opportunities to further expand investments in social issues in the Netherlands on behalf of our clients.

1.5 Long-term Investment

Due to their long-term commitments, pension funds are long-term investors. Long-term investments best fit the pension commitments and carry lower risk than short-term investments. In view of the major importance of long-term investments for achieving the pension ambitions of our clients, PGGM develops various initiatives in this area, generally in close cooperation with other institutional investors. For example, PGGM participates in a network of Chief Investment Officers in the Netherlands (the CIO Exchange), in which experiences about long-term investments are exchanged. Furthermore, in 2014, PGGM joined McKinsey’s Focusing Capital on the Long Term initiative and the Canada Pension Plan Investment Board (CPPIB) that, among other things, attempts to stimulate long-term behaviour among investors and among the companies in which it invests. The shareholdership in NLII furthermore is an example of cooperation in the area of long-term investment.

Infrastructure

Various organisations are pointing to the existence of a major infrastructure financing gap throughout the world. This means that the demand for financing infrastructure is significantly larger than the supply. McKinsey estimates the demand for investments in land-based transport, telecom, electricity and water at € 52 billion up to 2030. The Netherlands too is faced with major investments in infrastructure, such as the Delta Plan and the Energy Accord of the Social and Economic Council of the Netherlands (SER), among others. In the letter announcing the NLII on Budget Day 2013, the Minister of Economic Affairs projected a further investment need for infrastructural projects amounting to approximately € 20 billion up to 2020. An increasingly larger portion of this is realised on the basis of Public Private Partnerships (PPP), whereby investors directly finance a project and share the risks.

Infrastructure is an attractive investment for several reasons. It is long-term and has a high, stable expected return, and sometimes includes an inflationary component that matches the obligations of pension funds. Furthermore, in spite of higher interest charges, the taxpayer receives more value for his money because projects are better planned and implemented, and because of optimal risk sharing between public and private partners. In the World Economic Outlook dated October 2014, the IMF contends that good infrastructure pays for itself because it contributes to economic growth. Investments in sustainability are a specific example of this. Investments in infrastructure conse-quently are perfectly suited to combining financial and social returns.

17PGGM

“To give substance to the focused contribution that PGGM

wants to make to a sustainable world, we formulated

seven social areas of focus in which we can have an

impact, in consultation with our clients. These are themes

that our clients and their participants consider important

and that can materially affect the investments made.”

2. Responsible Investment in Areas of Focus

18 PGGM

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SOCIAL RELEVANCE

WHAT WE ARE DOING (ACTIVITIES)

RELEVANCE TO PGGM AND ITS CLIENTS

WHAT WE ACCOMPLISHED IN 2014

Opportunities

Over € 39 trillion in investments in sustainable technolo-gies and clean energy is required to reduce CO2 levels, so that the global rise in temperature by 2050 remains limited to 2°C in relation to pre-industrial times.

A rise of more than 2ºC > unacceptable consequences for nature and society.

To ensure the global rise in temperature stays below 2°C, a CO2 concentration of less than 450 PPM (parts per million)

is required. In 2014, the 400 PPM limit was exceeded for the �rst time in history.

Average temperatures in the 20th century have risen by

0,6º C

This shift is expected to result in fossil fuel savings amounting to

€ 103 trillion

10

Over the next 100 years average temperatures are expected to rise by

1.1 to 6.4º C

Risksclimate change

restrictions on the exploitation of fossil energy reserves

risk of downward valuation of energy companies

Number of climate change-related engagement results:

Engaging with

Market players and policymakers

Investing in climate change-related solutions

Stimulating green growth at companies

European Council engagement result:

40% CO2 reduction target by 2030Total euros invested in climate change-related solutions:

€ 1.2 billion. New investments in climate change-related solutions in 2014:

GDF Suez Green Bond: Ennatuurlijk heating network

annual CO2 savings are equivalent to the CO2 reduction of

Total CO2 avoidance due to investments in sustainable energy funds (incl. wind farm)

> 39,000 households.

253,493 hectares of sustainably managed forests

(over 500,000 football fields)

Redwood: 10% savings in energy costs due to investments in solar panels for logistics centresAdecoagro: reduction in CO2 emissions via sugar ethanol > 80% compared to petrol

2 million solar panels

Voting and engaging with

Companies

N O2

CO2

CH4

CFC

6.41.1

CLIMATE CHANGE AND REDUCTION OF POLLUTION AND EMISSIONS

Sources: Groene Ruimte, ‘Dossier klimaatverandering en de groene ruimte’; US department of commerce, National Oceanic & Atmospheric Administration; Natuur & Milieu, ‘Pensioenfondsen investeren nauwelijks in duurzame energie’; International Energy Agency, ‘Energy Technology Perspectives 2014’

19PGGM

2.1.1 Why Climate Change as an Area of Focus?

Climate change has been a key area of focus for PGGM for years. The warming of the earth by two degrees centigrade can result in extreme weather conditions, drought and floods. This can have an adverse impact on society and on the valuations of companies in which we invest the pension assets of our clients. For example, investment risks could increase because property may become flooded, political instability may increase or because companies may lose value if they are no longer permitted to exploit their coal reserves to limit CO2 emissions (stranded assets). On the other hand, investments in wind farms, for example, can contribute to solving the climate change issue while at the same time creating financial returns.

2.1.2 What Are We Doing in This Area of Focus?

We are convinced that reducing the negative effects of climate change requires more green growth, i.e. economic growth based on more sustainable energy and a reduction in the wastage of raw materials. Green growth offers opportunities. On behalf of our clients, we are currently investing several hundreds of millions of euros in sustainable energy, such as wind energy at sea and on land, and in clean technology that contributes to greater efficiency and reduced wastage of raw materials. Where this is consistent with the pension ambitions of our clients, we want to grow these investments over the coming years. However, green growth does not just happen on its own. Political and executive leadership is also required to create preconditions that keep invest-ments in green growth attractive; policy that over the long term provides greater certainty of stable and high returns. By engaging in a dialogue with policymakers, PGGM attempts to ensure that the emission of greenhouse gases will be assigned a fair price, that innovation in the area of energy efficiency and sustainable energy is supported, that policy is reliable and that the undesirable effects of the supervision of financial institutions that impede investment in green growth are critically assessed.

2.1.3 How Did We Action This in 2014?

Demand for Climate PolicyIn 2014, we regularly made our voice heard by policymakers throughout the world. At the beginning of the year, together with the Institutional Investors Group on Climate Change (IIGCC), we participated in various meetings with EC officers to point out the need for an ambitious climate plan for 2030. A number of items that we lobbied for have been included in the EC’s ‘2030 Climate and Energy Plan’, namely a binding 40 percent reduction target in greenhouse emissions, reform of the CO2 trading system and a greater focus on improvements in the area of energy efficiency. This Plan, which was adopted by the European Council in October 2014, constitutes an important first step in the energy transition at the European level. In September 2014, during the United Nations Climate Summit, together with approximately 350 other major investors throughout the world, we declared that climate change constitutes a risk to investments. We indicated that the lack of leadership and policy for green growth is particularly an area of concern. In a joint declaration, the group of investors promised to make a greater contribution to solutions to climate change by increasing investments in green growth on the one hand, and by encouraging companies in which we invest to adopt behaviour that contributes to green growth, on the other hand. For example, we expect utility companies to develop plans that reduce their dependence on fossil fuels and we ask oil, gas and coal companies to develop strategies designed to use and produce more clean energy. We have asked governments throughout the world to develop policy that truly makes this possible. This is an important message that we will be repeating regularly during the run-up to the Climate Summit in Paris in December 2015.

Measuring and Reducing EmissionsTo further limit the risks of climate change for investments, we have started to identify the CO2 footprint of our equity portfolio. To this end, PGGM signed the ‘Montreal Pledge’ in September. The signatories to this pledge promise to measure and report on the emission of greenhouse gases of their investment portfolio. For years, PGGM and other investors have been asking the companies in which we invest to report their emissions. We have been reporting PGGM N.V.’s footprint for several years. We are now expanding this footprint measurement to include insight into the emissions generated by the investment portfolio. Indeed, we not only want to make an active and focused

2.1 Climate Change and Reduction of Pollution and Emissions

20 PGGM

“The consequences of climate change

constitute risks to investments and

society. It is consequently important

for us to contribute to counteracting

climate change.”

contribution to climate change solutions with a specific portion of our investments; we also want to minimise the contribution of the rest of the portfolio to the CO2 problem and where possible focus on green growth. That starts with knowledge about the size of the footprint and the areas with the highest emissions. In 2014, we started to identify the CO2 footprint of the equity portfolio managed by PGGM. We are developing a method that we will use to calculate PGGM’s share of the total emissions represented by our ownership in each company. We will aggregate the amounts for the total CO2 footprint. We are using the emission data provided by a specialised data supplier for this purpose. In 2015, we will publish the total footprint of the equity portfolio and we will develop a reduction plan. This plan will include the focused use of all existing responsible investment instruments, such as engagement and voting, but we will also look at new instruments that will entail portfolio allocation decisions.

New Investments in Green SolutionsPGGM also made direct investments in climate change solutions in 2014. An example is the investment made by the PGGM Credits Fund in GDF Suez green bonds. These green bonds are used to finance projects in renewable energy, such as wind energy, and in energy efficiency, such as heating networks. The bond finances GDF Suez’ ambitious environmental policy whose objective is to increase the generation of renewable energy by 50 percent between 2009 and 2015, and to increase the energy efficiency of its business activities in Europe by 40 percent by 2018. Utilities are crucial to the growth of the market in green bonds. GDF Suez is a leader by disbursing € 2.5 billion up to date, with additional projects in the pipeline. PGGM wants to contribute to the standardisation of this market, so that green bonds will become a mature investment category. This is why the Fund Manager of the PGGM Credits Fund

has become a member of the Green Bond Principles Group.

In addition, PGGM Infrastructure Funds together with energy service company Dalkia has acquired the Ennatuurlijk heating network from Essent. Ennatuurlijk is a partner for sustainable energy initiatives in the Netherlands and following its acquisition a direction has been set whereby Ennatuurlijk will produce energy locally. It does this by collaborating on various projects, such as efficient heating and cooling, biomass energy plants, and biomass and manure digestion plants. For example, a single cow can provide seven households with sufficient heat on the basis of such digestion plants. In addition, Ennatuurlijk makes optimal use of the residual heat in its network. This way the company, together with its local partners, contributes to making the Netherlands increasingly sustainable. The annual CO2 saving realised by Ennatuurlijk corresponds to approximately two million solar panels.

The investment in Ennatuurlijk made the news several times last year, for example due to the questions asked by residents concerning the connection charges they pay for the heating networks. Ennatuurlijk indicated that it complies with the rates set by the Netherlands Authority for Consumers & Markets (ACM) in line with the Heating Supply Act, with the basic premise being that the costs are equal to central heating using gas. The investment in Ennatuurlijk highlights a dilemma that we more frequently encounter when we invest in solutions. On the one hand we encounter interest groups that encourage energy networks to increase their sustainable energy. These parties value the investment in Ennatuurlijk. On the other hand we encounter (local) interest groups that resist the legislative frameworks and the monopolistic character of the service. The latter group does not agree with

21PGGM

Ennatuurlijk’s pricing in accordance with the Heating Supply Act and consequently has instituted legal proceedings. Ennatuurlijk is prepared to cooperate in the investigation into the fairness of the rates by independent experts. This example demonstrates that investing in solutions to an environmental problem does not mean that there are no ESG risks in other areas, such as the social domain in this case. In making its investments, PGGM tries to take the interests of all stakeholders into account. This is also true of its investment in Ennatuurlijk.

Mexican WindmillsIn our 2013 Annual Report, we indicated that investing in solutions can at times be complex. We illustrated this on the basis of the investment of PGGM Infrastructure Funds in the Mexican Mareña Renovables wind farm. As a result of social and political resistance, the construction of this wind farm has not yet begun. In consultation with federal and local government organisations, opportunities were explored to develop this wind farm at an alternative site. In 2014, a new site was found, approximately 40 kilometres to the north of the original project. To avoid social problems with this project and to safeguard the right to consultation by the indigenous population as provided for in ILO Convention 169, the Mexican government has, for the first time for a project of this nature, initiated a consultation process. On the basis of an elaborate communication programme, the stakeholders were informed on the various aspects of the project, including the benefits and potential negative effects, such as noise pollution. In addition, the parties that are directly involved were given the opportunity to jointly decide on investments in social projects. The consultation is taking place in a complex political and social arena, in which the dissatis-faction about the fact that a similar consultation process did not take place in earlier wind farm projects still plays a key role. PGGM is closely monitoring the consultation process on the basis of regular updates provided by the local management team and by attending various sessions locally. If this process is successfully completed and if a number of conditions are met, we will in all probability invest in the wind farm at the new site.

Green Growth within the Existing PortfolioPGGM also exerts influence to promote green growth within the existing investment portfolio. For example, PGGM’s Private Real Estate team took the initiative to introduce the two real estate managers Investa and Redwood to each other so that they could share their ESG strategies. Redwood was inspired by Investa, a leader in sustainability, and subsequently took the initiative of signing a contract with an energy company for the installation, management and maintenance of solar panels on the roofs of logistics centres. Redwood expects the solar panels to be operational in the first half of 2015. The investment in the energy company is expected

to result in a 10 percent energy savings and thus provides for a higher return on the investments via Redwood.

Another example of green growth in the investment portfolio is Adecoagro, a producer of food and renewable energy in South America. In 2014-2015, Adecoagro will expand its combined sugar and ethanol plant in Brazil. As a shareholder in Adecoagro on behalf of PFZW, we support this development. After the expansion, Adecoagro will be able to process 10.2 million metric tonnes of sugar cane in its three plants. The new plant will be able to store 120,000 tonnes of sugar and 40,000 cubic metres of ethanol. In contrast to the exhaustible energy sources coal and oil, ethanol is a renewable energy source. It is produced from sugar cane plants that accrete year after year, provided they are replanted every six to eight years. The expansion of the production of clean, renewable sugar cane has the potential of significantly reducing global dependence on fossil fuels. In comparison to petrol, sugar cane ethanol reduces the emission of greenhouse gases by more than 80 percent. This represents the largest reduction in greenhouse gases in comparison to any other mass-produced biofuel at the present time. Furthermore, the sugar cane does not originate from land that was used by cereal farmers or for mills. This means that the production of sugar and ethanol does not conflict with safeguarding food security (Section 2.4).

2.1.4 Outlook

In 2015, we will publish a CO2 footprint reduction plan for the equity portfolio. In addition, we will continue to engage in a dialogue with companies in which we have invested in order to encourage them to reduce their CO2 emissions and wastage of raw materials. In addition, in 2015, we will increase our focus of the dialogue with policymakers whereby we will continue to remind them of the necessity of sound climate policy and demonstrate the role investors can play in the realisation of global climate agreements that hopefully will be formulated in Paris at the end of 2015. Finally, we will investigate opportunities to make more investments in climate change solutions over the coming years.

CLIMATE CHANGE AND REDUCTION OF POLLUTION AND EMISSIONS

22 PGGM

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SOCIAL RELEVANCE




Opportunitiesinvestment opportunities in water supply over the next 15 years:

€ 67,000 billion

Number of water scarcity-related engagement results:

CDP Water ranks companies on ‘business value at water risk’

Total euros invested in water scarcity-related solutions: € 244 millionNew investments in water scarcity-related solutions in 2014:

Chinese water puri�cation plant: > 210 million tonnes of clean water per year

Parkway Parade shopping centre Singapore: annual water savings of 30% through use of rainwater and water-ef�cient taps.

Savings equivalent to consumption by 343 households.

50% of the world population: shortage of clean water by 2030

without drinking water780 million people

2030demand for water will outstrip supply by 40%

Risksdrought results in water shortage for companies, particularly in the power generation, agricultural sector and mining industry

> € 90 billion in annual losses due to water shortages


Companies

Engaging with

Market players

Stimulating water savings by companies

Investing in water scarcity-related solutions

210milliontonnes

3

WATER SCARCITY

Sources: Unicef, ‘Water, sanitatie en hygiëne’; 2030 Water Resources Group, ‘Charting our water future’; UN Food and Agriculture Organization, ‘How to feed the world in 2050’; Bank of America Merrill Lynch, ‘Blue Revolution – global water primer’

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2.2 Water Scarcity

2.2.1 Why Water Scarcity as an Area of Focus?

Water scarcity is an increasing threat to economic growth and to human wellbeing. Insufficient access to clean water has been identified as one of the major global issues by the World Economic Forum. Particularly in dry countries, such as China, India and the United States, the water supply is under high pressure due to the rapidly growing demand for and the declining availability of water. In 2030, the expected demand for water will be 40 percent higher than the supply and almost half of the world population will be faced with shortages of clean water. This also affects the companies in which PGGM invests on behalf of its clients, especially in sectors that are highly dependent on water, such as power generation and agriculture. The continuity and profitability of these companies could be negatively affected by a lack of water. Aside from risks, water scarcity also provides attractive investment opportunities, for example in water purification plants. According to the Organisation for Economic Cooperation and Development (OECD), € 68,000 billion will be required over the coming 15 years for investment in water infrastructure.


PGGM can contribute to counteracting water scarcity in order to promote population health and economic growth. The objective is to sustainably increase water security for people and companies in regions where the availability, access to and the quality of the water supply is inadequate. PGGM’s engagement programme is focused on providing better insight into the business value at water risk, that is the business value that is at risk due to exposure to water problems. This involves risks to company production sites, as well as risks within the supply chain ranging from raw

materials to the use of end-products. We encourage market players to develop relevant and comparable water risk data for general information platforms for investors, such as Bloomberg. This would enable investors to assign a lower weight to companies with a high dependency on water and low water security. Relevant, comparable data could also lead to lower capital costs for companies that invest in the efficient use of water and limit water risks. In addition, PGGM invests in water scarcity solutions, in public markets on the basis of equity and bonds, as well as in private markets, for example via infrastructure in private equity. We want to increase the investments in solutions, such as wastewater purification and in water-saving technologies, such as water meters, drought-resistant crops and desalination plants.


Investment Risks Caused by Water IssuesThe Carbon Disclosure Project (CDP) is the largest platform for voluntarily reporting water-related information by companies. Until now, companies primarily provided information about their water consumption. However, that information is not sufficient for investors. Investors want to know what the water scarcity and pollution-related risks are for a company, and consequently their investment risks. This is why CDP, based on advice received from PGGM and Norges Bank, in 2014 increased the relevance of the annual Water Information Request for investors. PGGM subsequently encouraged the CDP to make the information provided by companies about water risks and the quality of their water risk management comparable. Providing comparable data at the company level makes it possible to rank companies. This also makes it possible for index investors to identify opportunities and threats.

‘To enable economic growth, safeguard the continuity of companies

and secure access to clean drinking water, a significant increase

in investments in water infrastructure and water management is

essential.’

24 PGGM

CDP’s commitment to score and rank companies in terms of water risk is an important step towards a larger platform, such as Bloomberg, where all investors have access to this material information. This information is available from 2015. Not all companies are prepared to release information about water issues, however. A number of companies refuse to share this information and do not wish to be ranked in this respect. An often heard excuse is that companies are, as of yet, unable to measure this information or do not want to measure it because it is not considered relevant business information.

Investing in Clean WaterIn 2013 and at the beginning of 2014, PGGM Infra-structure Funds invested in three Chinese drinking water and wastewater companies, Shenyang Shengyuan Water, Shengyang Zhenxing Environmental and Dahian Hengji Xinrun Water. Collectively they have a total processing capacity of 1.7 million tonnes of water per day. The companies are receiving a great deal of support from local governments because they contribute to solving the major water scarcity and pollution issues in Northeast China due to the fact that the river water in that region is seriously polluted by industrial wastewater. In 2013, one of the water purification plants processed over 200 million tonnes of polluted water.

2.2.4 Outlook

Water scarcity and water pollution are rapidly gaining the attention of investors due to the conspicuous droughts in different parts of the world and due to the investment opportunities, particularly in infrastructure. In 2015, PGGM will make efforts to create better insight into water risks in specific sectors, such as power generation and agriculture. In addition, PGGM will continue to pursue discussions with CDP, Bloomberg and various companies concerning the release of relevant standardised water data, so that investors can include water as a risk factor in their investment decisions. Finally, investments in water security within existing investment categories, such as infrastructure, will be increased. We support the external development of a water bond standard and internally we are designing a mandate for investments in water scarcity solutions.

Circular Economy

PGGM N.V. wants to make a contribution to the transformation of the present-day economy into a circular economy. This is not an objective in itself, but we see the transition to a circular economy as an important solution to climate change, water scarcity and the scarcity of raw materials. In 2014, we started work on developing a scan designed to measure to what extent companies are circular and how they can improve their circularity. The pilot version of this scan has since been completed. The challenge in developing the Circular Scan is that a great deal of information about circularity is still only available at the level of raw materials, rather than at the company’s total level. This makes it difficult to compare and rank companies, which means that the scan is not yet a useful tool for investors. We will continue to work on developing the scan in 2015.

In addition, effective October 2014, PGGM N.V. became a member of the Circular Economy 100 platform of the Ellen MacArthur Foundation (EMF). This is a global platform that brings companies, innovators and regions together in order to accelerate the transition to a circular economy. In an EMF subgroup, together with other financial parties and universities, we are researching the implications of circularity for the financial sector. We assess the implications of the circular economy in terms of the financial issues faced by companies.

WATER SCARCITY

25PGGM

2.3.1 Why Healthcare as an Area of Focus?

Healthcare is an important area of focus due to our historical connection with this sector, that our clients represent. Access to good healthcare is a basic necessity and a human right. In addition, healthcare has our attention because investments in this sector can result in social and financial returns. For example, there are many countries in which a substantial part of the population suffers adverse effects from illnesses that are readily treatable. We believe that improving access to good healthcare in these countries leads to both social return, as well as faster and more stable economic growth. Companies that focus on this area will ultimately be well positioned when economic growth in these countries gathers pace and new sales markets emerge.


Companies in the pharmaceutical industry and manufacturers of healthcare equipment play a major role in improving access to good healthcare. At many companies the initiatives are of a philanthropic nature. For example, many companies make one-time product donations in response to human disasters. However, this sector requires strategic solutions designed to deal with the issues. For example, by providing affordable health-care insurance policies companies could improve access to good healthcare for their employees thus reducing the absence due to illness rate. By investing in companies that work on strategic solutions, PGGM on behalf of its clients wants to contribute to improved (access to) healthcare. In addition, as an active shareholder we call companies to account for their behaviour and encourage them to find solutions and develop long-term plans designed to improve access to healthcare. In these discussions we focus on gearing prices to local incomes, sharing patents and researching and developing medicines to treat tropical diseases.


In 2014, PGGM, on behalf of PFZW, invested in Gilde Healthcare Services II, a fund that invests in the fast-growing, innovative companies, primarily in the Benelux and Germany, which make it possible to provide better care at lower costs. In addition, in 2014, we met with companies to discuss access to medicines in developing countries.

The Access to Medicine (AtM) IndexMany pharmaceutical companies understand the benefits of operating in developing countries. This is also apparent from the biennial AtM Index, which was published for the second time in 2014. PGGM endorses the importance of the AtM Index and its impact on improving access to medicines in developing countries. PGGM invests in the Danish pharmaceutical company Novo Nordisk via its Responsible Equity Portfolio (REP). This is a large manufacturer of medicines for diabetes, a disease that is increasingly affecting people in developing countries as well. PGGM discussed the AtM Index with this company. In the most recent AtM Index, Novo Nordisk, in part due to these discussions, showed the biggest movement, rising from sixth to second place. As such, the company has grown into one of the best performing companies in terms of improving access to medicines.

Access to Medicine in JapanThere also are a number of companies that do not perform well on the AtM Index, or that do not form part of the group of companies analysed. PGGM has engaged in discussions with such companies for many years, for example in Japan. Various companies in the healthcare sector in Japan have decided to form the GHIT non-profit fund. On the basis of their membership in this fund, five Japanese pharmaceutical companies, Eisai, Daiichi Sankyo, Astellas Pharma, Takeda and Shionogi, have provided research budgets for fighting infectious diseases in developing countries and for forgotten tropical diseases. This way they further intensified their AtM programmes. Other participants in the GHIT Fund include the Bill & Melinda Gates Foundation and the Japanese Ministry of Population Health and the Ministry of Foreign Affairs. For some years now, PGGM has been engaged in a dialogue with a number of Japanese companies in the healthcare sector in order to improve the AtM. In the spring of 2014, we also met with these two Ministries to discuss the GHIT Fund, as well as with the GHIT Fund’s CEO and with

2.3 Healthcare

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Companies

Engaging with

Market players

Investing in healthcare-related solutions

Global Health Innovation and Technology Fund engagement result: companies are joining a Japanese initiative for the development of medicines focused on diseases in developing countries.

Total euros invested in healthcare-related solutions:

€ 292 million

New investments in healthcare-related solutions in 2014: Gilde Healthcare Services II: > investments in healthcare in various countries, incl. the Netherlands.

OpportunitiesImproved access to healthcare can result in economic growth.

Non-infectious diseases kill 38 million people per year; three quarters of these people are in low to medium income countries.

Globally, at least

2.8 millionpeople die of overweight or obesity every year.

1.6 million HIV/Aids-related deaths in 2012.

In 2013, 33% of child mortality under 5 years of age caused by lung infections, diarrhoea, malaria, HIV/Aids, measles and meningitis could have been prevented by existing medicines. This represents 2.1 million children per year or

5,700 per day that could have been saved.

In 2015, 50% of the growth in revenue by the pharma-

ceutical sector comes from developing markets and 25% of total annual revenues is generated by these countries. This is equivalent to € 256 billion per year.

4Number of healthcare-related engagement results:

2 billion people globally without proper access to medicine.

HEALTHCARE

Sources: ‘World Health Organization, ‘Global Health Observatory (GHO) data’; Goguen & Connolly, ‘Global Wealth Creation: The Impacts on Emerging Markets’ Health Care’

27PGGM

HEALTHCARE

companies that not yet were GHIT members. We called on the companies to become members of the Fund and to show commitment to improving access to medicines in organised association. In the meantime, one of the companies, Chugai Pharmaceutical, announced that it would join the Fund as its sixth member. In addition to AtM we discussed ‘Access to Healthcare’ subjects more broadly with various manufacturers of medical devices. This way we encourage companies to review their responsibilities and opportunities in developing countries. Discussion about ObesityPGGM also engages companies in discussions on other healthcare-related themes. In the fourth quarter of 2014, we met with representatives of McDonald’s and The Coca-Cola Company to discuss health-related themes, particularly obesity. According to the World Health Organisation (WHO), child obesity is one of the largest health risks of the 21st century for developed and developing markets. There is a strong relationship between child and adult obesity. In the dialogue we ask companies such as McDonald’s and Coca-Cola to (1) improve the transparency and education of consumers by producers; (2) reduce the content of sugar, salt, trans fatty acids and other harmful ingredients in existing food and beverage products; and (3) adjust the marketing strategies focused on children. We specifically asked McDonald’s and Coca-Cola to more actively incorporate the health theme in their strategy and to improve their existing behaviour and product composition. Both companies indicated that they took the health theme seriously, and Coca-Cola in particular appears to plan to introduce fewer unhealthy alternatives to the market.

MylanIn the fourth quarter of 2014, news items appeared in the Dutch press concerning investments in the American pharmaceutical company Mylan. The company is rightfully accused of not taking any measures to prevent the rocuronium bromide neuromuscular blocking agent from being used for executions in the US. PGGM urged Mylan to take measures in this respect, such as refining its delivery and use conditions. However, PGGM’s influence as shareholder does not extend so far as to enable us to prevent products destined for regular medical use to be applied to administer the death penalty. In addition, PGGM for some time has been engaged in a constructive dialogue with Reprieve, the organisation that raises the misuse of such substances for the death penalty.

2.3.4 Outlook

In 2015, PGGM will continue to engage companies that perform poorly in the area of providing access to healthcare.These engagement activities include large and smaller pharmaceutical companies, as well as manufacturers of medical devices. The objective of these meetings is to motivate these companies to develop and improve policy and activities designed to provide proper access to healthcare throughout the world. In addition, we will investigate opportunities to make more investments in healthcare solutions over the coming years.

‘Strategic solutions are required to deal with the issues related to

population health and access to healthcare. Good healthcare can result in

social and financial returns.’

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OpportunitiesInvestments in ef�cient food production > required average annual investment in new food production technologies:

€ 74 billion. This is 50% higher than the current annual investment.

7Number of food security-related engagement results: Voting and engaging with

Companies

Engaging with

Market players

Investing in food security-related solutions

Stimulating companies to work on food security

Engagement result for 5 palm oil producers > no deforestation, cultivation of peat lands and exploitation of the local population

Total euros invested in food security-related solutions: € 775 millionNew investments in food security-related solutions in 2014: Black River Food Fund II > Chinese dairy farm on average produces

35 litres of milk per cow per day, or: +84% compared to local farmer

Sundrop Farms, sustainable agriculture pioneer: cultivation of vegetable and fruit crops in desert-like regions

883 million undernourished people throughout the world > 1 in 8 people suffer from chronic hunger

1.6 billion people throughout the world are overweight

Population growth:

8.3 billion people by 2030

Decrease in agricultural lands:

2025: 1 hectare of land to feed

5 people Compared to 1960: 1 hectare of land to feed 2 people

0,5 ha

19600,2 ha

2025

FOOD SECURITY

Sources: Worldometers; UN Food and Agriculture Organization, ‘How to feed the world in 2050’; Population Institute, ‘2030: The Perfect Storm Scenario’

29PGGM

2.4.1 Why Food Security as an Area of Focus?

The sustainable production of sufficient food for a world population of approximately 8.3 billion people by 2030 presents an enormous challenge. Climate change, water scarcity and drought furthermore affect the availability of land for food production. At the same time, it is estimated that half of the total food production worldwide is lost within the food chain or is discarded. Not only governments and the business community, but financial institutions as well, have a role to play in improving access to food. Investors can contribute to food security by investing in efficient food production, as well as calling companies that limit access to food to account for their actions. Food security is an important area of focus for PGGM, in which social as well as financial returns can be realised.


Sustainable food production requires solutions designed to reduce the loss of food in the food chain and to promote the reuse or recycling of residual waste, for example for generating energy. It also requires high productivity in terms of the use of the limited arable lands with the most efficient possible use of auxiliary resources, such as artificial fertilisers and crop protection agents. The cultivation of crops as raw materials to meet the growing demand for biofuels puts significant pressure on the capacity of fertile arable lands needed to grow food. In addition, due to the water scarcity and drought there is increased pressure on the limited quantity of land and water for agricultural production. In 2025, a single hectare will have to feed five persons, while in 1960 a single hectare fed only two persons. Another growing problem is that production and consumption sites are increasingly further apart geographically. This requires new technolo-gies for logistics and to increase food shelf life. To achieve food security over the long term means that there will

“PGGM’s aim is to promote global food security, so that people

have access to sufficient, safe and nutritious food for an active

and healthy life in a sustainable world.”

Food Quality

Food security not only concerns quantity, it also concerns food quality, namely broader access to healthier food. Low food quality can result in undernourishment caused by a lack of essential nutrients, which can adversely affect the development of the human body. As many as one in three persons worldwide is undernourished due to a shortage of vitamins and minerals. Furthermore, by consuming too many calories people can also become over-nourished, which can result in obesity. PGGM wants to devote its efforts to solutions that increase the food quantity and that improve food quality.

have to be changes throughout the entire food chain ranging from production, processing, storage and distri-bution up to food consumption. On behalf of our clients, PGGM concentrates on investment opportunities in solutions to food production, access to food and food quality. Things that come to mind include fertilisers, improved seeds and crop protection agents, storage infrastructure and logistics, transport and distribution, technology for high-yield precision agriculture with reduced auxiliary resources and nutritional supplements.

2.3 Food Security

30 PGGM


Solutions to Food Scarcity in AsiaTo contribute to global food security, the PGGM Private Equity Funds in 2014 invested in the Black River Food Fund II. This investment is in addition to the earlier investments in the Black River Food Fund I. Black River invests private capital in the food sector throughout the world, including Asia. Countries such as China have a major shortage of basic foods, such as milk. The food producers in these countries often are not sufficiently efficient to enable them to supply the entire population with food. The companies in which Black River invests are more efficient in converting animal feed into proteins, which improves food production and consequently food security. For example, the average milk production per cow at a small farm in China with 1 to 50 cows is 19 litres per day. AustAsia, a Chinese dairy cattle farm and one of Black River’s investments, produces an average of 35 litres per cow per day. This level of efficiency is required to promote food security in China.

Growing Food in the DesertAnother investment that contributes to food security is the investment made in Sundrop Farms by PGGM Private Equity Funds via KKR Asia. This is a sustainable agricultural pioneer that grows vegetables and fruit in desert-like areas throughout the world with barely any access to arable lands, fresh water sources and electricity or natural gas. The methods used by this company to grow vegetables and fruit crops result in a negligible CO2 footprint and have a minimal impact on the environment. Sundrop is able to achieve this by using solar energy to desalinate seawater and to supply greenhouses with electricity. Sundrop currently has a farm in South Australia that grows crops such as tomatoes and this farm operates successfully. In addition, there are plans to expand to the Middle East and to North America.

Sustainable Palm OilIn addition to investments that contribute to food security, PGGM is also engaged in a dialogue in the area of sustainable food production. This involves the efficient use of land and water, as well as respecting the rights of the local population and employees, and minimising environmental pollution. Since 2012, PGGM has been engaged in a dialogue with companies in the palm oil chain in this light. Palm oil is an efficient oil crop with a greater yield per hectare than sunflowers, for example. The demand for palm oil for use in products such as foods is significantly increasing at a rate of eight percent per year. However, the production of palm oil in countries such as Malaysia and Indonesia is a primary cause of the deforestation and cultivation of peat lands. This results in major greenhouse emissions (some 15 percent of global emissions), as well as the loss of biodiversity and the

degradation of the indigenous population’s way of life. For example, severe air pollution caused by forest and peat bog fires resulted in the closure of airports and schools in Singapore and Malaysia in 2013.

While PGGM perceives the added value of palm oil production for food security due to the crop’s efficiency, it considers it important that the practice of forest and peat bog fires be halted and be replaced by sustainable production. The Investor Working Group on Palm Oil of the UN Principles for Responsible Investment (PRI IWG), of which PGGM is a member, in its dialogue with the palm oil sector, first focused on the buyers of palm oil. They were encouraged to switch to the purchase of certified sustainable palm oil. This was successful, with hard commitments made by companies such as Unilever, Nestlé, Ahold and Walmart. Next we engaged in discussions with the producers of palm oil. In part under pressure of major buyers, NGO campaigns and increasingly more precise satellite images, the producer, Wilmar, which controls approximately 45 percent of the global trade in palm oil, at the end of 2013 adopted a policy that discourages the deforestation and cultivation of peat lands and the exploitation of the local population.

In 2014, Wilmar’s move, which caused quite a stir, was followed by a group of palm oil companies with which PGGM was engaged in a dialogue, namely Sime Darby, IOI and Kuala Lumpur Kepong. Consistently encouraged by the PRI IWG, this group, together with two other producers, published the Sustainable Palm Oil Manifesto in July 2014, which is in essence similar to the Wilmar policy. It was not possible to immediately put the Manifesto into effect because a definition needed to be developed for high carbon stock; precisely what are the forests or peat lands that are to be preserved? To show that the Manifesto is not an empty promise, the companies instituted an immediate moratorium on deforestation and cultivation in September 2014. It would appear that an integral, consistent dialogue within the palm oil sector is bearing fruit. This also important for other crops, such as soy for example, which requires a great deal of land.

2.4.4 Outlook

The expectation is that food security will continue to be an item on the global agenda, especially from the perspective of the quality, health and sustainability of food production. We are investigating opportunities to invest more in solutions in this area of focus on behalf of our clients in 2015 and where necessary will engage organisations in a dialogue about food security.

FOOD SECURITY

31PGGM

2.5.1 Why a Stable Financial System as an Area of Focus? ?

The financial crisis has resulted in very high levels of mistrust of the financial sector, which also includes pension funds and investment managers, with major consequences for society. The recovery of society’s trust is essential for our license to operate and we are consequently working on this together with our clients. A stable financial system is a necessary condition to be able to realise the long-term pension ambitions of our clients and helps restore the badly damaged confidence of pension participants.


PGGM has been promoting the need to improve standards in the financial sector for some time. We have been engaged in a dialogue with the sector for years; we have developed internal guidelines for financial institutions and participate in the international Enhanced Disclosure Task Force (EDTF) in order to increase transparency and improve the inter-comparability of banks. In addition, PGGM has joined the IASB’s investor dialogue, which is also aiming for a high degree of transparency and comparability in financial reporting. Furthermore, we contributed to Eumedion’s Integrated Reporting initiative. We focus on matters that we are able to influence in order to achieve substantive change, such as the remuneration policy and corporate governance. We do this on the basis of our various roles within the sector, such as our administrative role for our clients, business partner for other players in the sector and shareholder on the basis of investments in financial institutions.

A cultural change is required in order to make the financial sector sustainable. This applies to our own organisation, as well as to the parties with whom we collaborate or in which we invest on behalf of our clients. This means that we have to step outside our comfort zone and put the current state of affairs up for debate. We realise that we cannot do this alone. This is why we make our knowledge and experience available via networks involving other financial institutions and attempt to effect change in behaviour in close cooperation with them. To focus this change in behaviour we have formulated a number of questions, such as, what are the behavioural issues that are in conflict with a sustainable financial system and that affect our clients, their participants and us? What are the issues on which we can exert the most influence on the basis of our role or expertise? Which issues do we need to address now pursuant to laws and regulations or on the basis of reputational risk?

As a long-term investor, we realise that there is tension with current reality. Sometimes we exhibit behaviour or develop activities that are not in line with the long-term philosophy to meet the criteria set by legislators and regulators or that is not in line with what is customary in financial markets. This is why we are starting with ourselves to identify how we can modify our own behaviour. We are prepared to link consequences to actions on the part of parties with whom we collaborate when these actions compromise a sustainable financial system. Parting ways with counterparties is not excluded in this respect. We want to set a good example and in any case, at a minimum, do what we demand of the outside world. We are transparent in this regard and report on these matters in documents such as this Annual Responsible Investment Report.

“A sustainable financial system is a necessary condition to restore

society’s trust in financial institutions and to be able to realise the

long-term pension ambitions of our clients.”

2.5 A Stable Financial System that Serves the Real Economy

32 PGGM

WH

YW

HA

T & H

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SOCIAL RELEVANCE




RisksPension fund returns declined by

35% due to the 2008 �nancial crisis.

Number of �nancial institutions engaged in dialogue:

Number of stable �nancial system-related engagement results:

Developed remuneration and fees guidelines

- 3.3% in the Netherlands

- 4.5% in the Eurozone

- 4.3% in the United Kingdom

- 2.8% in the United States

- 3.0% in emerging European countries

As a result of the credit crisis, the Dutch government injected tens of billions of euros in public funds into saving major banks.

Engaging with

Market players


Companies

Behaviour Working Group

10014

Result areas:Number of improvements in remuneration policy: 3Number of improvements in board composition (independence): 5Number of improvements in transparency: 3Number of improvements in standards: 3

Due to the 2008 �nancial crisis the Gross Domestic Product in 2009 declined by:

A STABLE FINANCIAL SYSTEM THAT SERVES THE REAL ECONOMY

Sources: De Nederlandse Bank, ‘Timeline Fortis / ABN Amro’; De Nederlandse Bank, ‘Timeline ING’; IMF, ‘World Economic Outlook april 2015’; Pulitzer Center, ‘Untold Stories: Latvia: Sobering Lessons in Unregulated Lending’; Allianz Global Investors, ‘International Pension Issues 4|09’

33PGGM


Critically Assessing Behaviour At the beginning of 2014, we created the Behaviour Working Group. The objective of this working group is to identify behaviour that is not in line with a sustainable financial system. In addition, the working group investigates our own role and that of our clients in a sustainable financial system. To achieve reform, we first of all specifically critically look at our own behaviour. In addition, the working group critically assesses the behaviour of parties in the sector with which we cooperate or in which we invest. In 2014, this working group developed a vision that describes what we mean by a sustainable financial system. PGGM views a sustainable financial system as a long-term sustainable and healthy financial system with a focus on clients. In addition, we believe that the financial sector must be subservient to the real economy and must create value for relevant stakeholders in a broader social context on the basis of a long-term perspective. We have developed an action plan that we will use in 2015 to check our own behaviour and that of other parties in the financial sector using this vision as a baseline. We will do this in different ways, for example by developing a reference framework and by engaging in a dialogue with relevant financial parties, and with legislators and regulators.

In addition, in 2014, the Behaviour Working Group conducted research into the utility and necessity of bench-marks, identified agency issues (conflicts of interest between client and administrator) in our direct chain from pension fund to external manager and developed guidelines to clamp down on excessive compensation in companies and financial service providers. We work closely with other parties in this area through various means such as the CIO Exchange, a dialogue about a sustainable financial system and the changes required for this, that we have jointly created and are structurally engaged in. Working on a Better StructureThe financial crisis has exposed the vulnerabilities of the financial structure, including the high dependence on bank financing in Europe. Awareness has grown that capital market financing, which is more common in the United States, can contribute to a more stable system. In 2014, PGGM devoted itself in various ways to increasing opportunities to provide long-term financing for pension funds. In addition to the previously mentioned NLII, PGGM has also worked on the foundation of the Dutch Mortgage Institution (NHI), which, among other things, aims to narrow the banks’ financing gap, which is defined as the portion of the mortgage portfolio that cannot be financed by bank and savings deposits. The details are nearly

completed, but its foundation is still dependent on approval by the EC. In addition, the working group involved with the creation of the NHI is also still in discussion with Eurostat concerning the processing of the bonds to be issued by the NHI.

New Remuneration GuidelinesThe Behaviour Working Group in 2014 advised PGGM’s clients about remuneration in capital markets and the objectives for change. A key result of this initiative is the remuneration guidelines for the PGGM funds. Remuneratie includes the fees that financial service providers receive for the services they provide and the compensation received by individuals for the work done. The guidelines go into effect in 2015 and reflect the expectations we share with our clients in terms of acceptable compensation structures for listed companies and financial service providers. We believe that it is time for shareholders to take a position in relation to the size of compensation packages. We believe that companies should abandon the current practice of measuring compensation against comparable companies. Instead, companies should base such compensation on appropriate internal criteria. In summary, the objectives of the guidelines are as follows:

To limit excessive remuneration. To endorse variable compensation if financial

performance meets or exceeds a challenging level that also provides due consideration to the impacts on society and the environment.

To support a long-term perspective. To simplify the compensation structures.

The guidelines reflect how we want to implement this, for example, in dialogue with the companies in which we invest, in our voting behaviour and in negotiations with financial service providers.

Bank Transparency about RisksAs a member of the EDTF, PGGM is working on improving the transparency of banks concerning their business model, risk profile, risk control measures and risk culture. Improving the comparability of annual reports is an important aim in this respect. PGGM asks the banks with which it has a shareholder or client relationship to implement the EDTF recommendations. Major progress was made in this area in 2014 (2013 reporting year). An assessment of the 2013 annual reports prepared by 41 banks shows that, of the 18 most important recommendations, half of the banks had completely implemented them and almost 30 percent had implemented them partially. During meetings with banks, PGGM encourages them to improve their transparency. Another objective of these meetings is to gain greater insight into the challenges faced by banks on the road


34 PGGM

“On the basis of the driving force of capital we want to

fulfil a leading role on behalf of our clients in terms of

working on a stable financial sector.”

towards improved transparency. In cooperation with other Dutch investors, PGGM also encourages banks in the Netherlands to improve their transparency. The picture that emerges from a review of 2013 annual reports is that the large Dutch banks have made significant improvements in their annual reporting, in line with the EDTF recommendations.

2.5.4 Outlook

To continue working towards a sustainable financial system we will formalise a number of behaviour-related agreements in 2015. We will identify our own behaviour that is in line with a sustainable financial system. In addition, the Behaviour Working Group is conducting further research into subjects such as long-term mandates and the essence of a responsible tax policy. This last subject area, as well as the debate concerning acceptable fee structures for external private equity managers is on the 2015 agenda of the Dutch CIO Exchange on a sustainable financial system. Finally, in 2015 we will initiate the implementation of the remuneration guidelines. We will use a pragmatic and phased implementation and will regularly report on this.


35PGGM

2.6.1 Why Good Corporate Governance as an Area of Focus?

Good corporate governance is a universal, fundamental principle and a precondition for the effective operation of a company. It applies to all companies, regardless of where they are domiciled or the activities in which they are engaged. The risk and return on investments are highly dependent on efficient markets, social systems and companies. Good corporate governance is essential for creating long-term company value for all its stakeholders, including shareholders. It enables us, as a universal investor, to exert influence in support of the sustainability, continuity and social added value of listed companies and effectively operating (financial) markets. This is why our clients value this in the companies in which PGGM invests on their behalf.

“Good corporate governance enables universal investors to exert

influence in support of the sustainability, continuity and social

added value of effectively operating (financial) markets and listed

companies.”

Corporate Governance Code Monitoring Committee

On 11 December 2013, the new Corporate Governance Code Monitoring Committee (MCCG) was instituted by the Ministry of Economic Affairs. Else Bos, PGGM N.V.’s CEO, was appointed by the Minister as a member of this committee. The committee’s objective is to promote the currency and usability of the Dutch Corporate Governance Code (Code). This Code contains minimum corporate governance requirements for Dutch companies and institutional investors. The Code was last updated in 2008. In 2014, the MCCG began to identify the areas to be addressed by an updated Code. On 29 January 2015, the MCCG presented the monitoring report concerning compliance with the Code in the 2013 financial year. The report concludes that compliance with the Code continues to be high and that self-regulation in the field of corporate governance works well in the Netherlands. The Committee also indicates that the Code should put more emphasis on risk management and culture as a driving force for good corporate governance.

Corporate Governance also is a high priority for the EC. The EC is currently dealing with different relevant proposed guidelines, for example about the long-term involvement of shareholders and the quality of corporate governance reporting. The Member States are transforming these guidelines into local laws and regulations. In its response to these proposals, the MCCG emphasises that a self-regulating Code or a combination of a self-regulating Code and legislation, is a more effective and efficient instrument in the Netherlands than legislation designed to change the behaviour of shareholders and directors.


Shareholders are co-owners of the companies in which they invest. Such ownership entails rights and responsibilities. In the markets in which we invest on behalf of our clients, we monitor whether companies are managed efficiently and responsibly and whether the companies report on the policies pursued. We vote at shareholder meetings and we engage companies in a dialogue if we see that corporate governance improve-ments are possible or necessary. We aim for an appropriate and coherent system of checks and balances in the relationships between the executive board, the supervisory board and shareholders with a certain set of standards governing behaviour, the exercise of powers and the associated accountability. Although at a basic level there

2.6 Good Corporate Governance

36 PGGM

WH

YW

HA

T & H

OW

SOCIAL RELEVANCE




OpportunitiesInvesting in companies with good corporate governance and not in companies with poor governance can increase annual performance by 10% to 15% compared to the benchmark (from 1990 to 2001).

Number of companies we engaged in dialogue about good corporate governance:

It can lead to stability on �nancial markets, investments and economic growth > the equity markets in countries with good corporate governance standards are

3 times as large (in relationship to the Gross Domestic Product) as those in countries without corporate governance standards.

Good corporate governance has a broader positive impact thanjust on shareholders.

RisksThe failed acquisition of Autonomy by HP resulted in a

€ 8.8 billion write down, which caused a sharp drop in the price of the HP share with

tens of millions of losses to investors as a result.

Engaging with

Market players

Engaging withCompanies

Informed voting

Legal proceedings

Number of good corporate governance-related engagement results for companies:

Number of results concerning improved access to justice for investors:

Recovered € 2,709,696 in investment losses via legal proceedings

Globally voted at 3,395 shareholder meetingsWe voted according to policy at99.7% of all shareholder meetings

Result areas:Number of improvements in remuneration policy: 11Number of improvements in board composition (independence): 43 Number of improvements in transparency: 7Number of improvements in standards: 5

66

315

2

GOOD CORPORATE GOVERNANCE

Sources: Claessens, ‘Corporate Governance and Development’; University of Oxford, ‘From de stockholder to the stakeholder (How Sustainability Can Drive Financial Outperformance)’

37PGGM


appears to be a consensus concerning the general principles of good corporate governance, major regional differences can be observed.

Several key focus points within the good corporate governance theme are an acceptable remuneration policy, independent supervision, proper provision of information and access to justice. The sections below provide examples of our activities in these key areas of focus in 2014.


Acceptable Remuneration PolicyFor all companies in which we invest on behalf of our clients we consider it important that they have a remuneration policy with suitable internal criteria that promotes the creation of sustainable return over the long term and a more sustainable world (Section 2.5.3). This is why we made our voice heard in relation to remuneration in the dialogue with companies and at a number of shareholder meetings in 2014. For example, we asked companies to reduce the remuneration of board members and to simplify remuneration structures. At the American real estate company SL Green, variable remuneration was largely linked to time rather than performance. Directors received their bonus simply by staying in the employ of the company. PGGM considers it important for shareholders to be able to have insight into the criteria used to judge directors and that these criteria must be related to performance. Following discussions with the company, SL Green acceded to PGGM’s requests and the remuneration currently is fully performance-dependent. This is fairly unique for American companies. Another company that has made its bonuses for new directors dependent on performance after discussions with PGGM is the British real estate company Shaftesbury. Furthermore, the company has formulated clear result objectives in the area of corporate social responsibility.

Independent SupervisionIn addition to the remuneration policy, PGGM also critically reviews the degree to which supervisory bodies in companies are independent. Supervisors must be independent in their supervision of the executive board. PGGM believes that clearly separated roles for the supervisory and executive boards, where the supervisory board does not have an executive function and the executive board does not have a supervisory function, contributes to good corporate governance and suitable checks and balances. This particularly applies to the separation of the chairman of the supervisory body’s role and the CEO’s role which we believe contributes to better decision making. However, in many companies the

chairman and CEO positions are occupied by one and the same person. For example, this is the case in France in almost all 40 companies listed on the French CAC40 stock market index. PGGM participated in an engagement project with other investors in order to effect the separation of the chairman and CEO functions in these companies. In 2014, we added this theme to the agenda of Renault’s shareholder meeting, among others. At the insistence of PGGM, the senior independent director, an independent supervisory director with more extensive powers, on Renault’s Supervisory Board was given additional powers. This was an important step in improving the decision-making process. In addition, a number of external independent directors were appointed by a number of companies, including General Electric, Toyota Motor Corporation, Canon, Taishin Financial, Otsuka Holdings, Formosa Chemicals, NTT Docomo, and Seven and I Holdings. This is in part the result of engagement projects under-taken by PGGM and other investors in Asia, particularly in Japan.

Difficult Dialogue with OracleDevelopments related to the remuneration policy and the board’s composition at Oracle, an IT company, provide reason to address this once again in this report. In 2014, the remuneration proposal was rejected by the majority of shareholders for the third year in a row due to its excessive size. The company’s remuneration structure is among the highest in the United States. Although Oracle is not obliged to adjust its remuneration structure, the fact that the board of directors has done little about the strong signal it received from its shareholders is of concern. PGGM has been trying to engage Oracle’s directors in discussions since 2010, however, the board has not been receptive to this. Due to the lack of responsibility on the part of the company and the refusal to engage in a dialogue, PGGM in 2014 took additional steps. The Nathan Cummings Foundation initiated a shareholders proposal that was jointly submitted by PGGM and several other shareholders. The proposal is designed to give shareholders the possibility of nominating their own independent non-executive directors. By supporting this proposal we were attempting to give minority shareholders more control over the composition of the executive board. Most independent shareholders voted in favour of this proposal. Nevertheless the proposal did not receive majority support because Larry Ellison, as a major shareholder, holds over one quarter of the shares and consequently swung the vote so that it just failed to receive majority support. At the end of 2014, Larry Ellison relinquished his position as CEO. However, he remains chairman of the board. PGGM is not satisfied with this change in positions. The company’s governance structure, combined with the concerns about the remuneration policy, provide reason to continue to exert pressure on Oracle. If the company continues to refuse to make the

38 PGGM

“Independent supervision

contributes to good corporate

governance.”

necessary adjustments, PGGM, in consultation with its clients, can decide to exclude Oracle. Proper Provision of InformationIn Section 2.5.3 we addressed the importance of transparency at banks. However, financial transparency is not only important for financial institutions, it is also important for other companies. Indeed, institutional investors base their investment decisions on company financial information. To contribute to the integrity of the financial markets in which investors operate and take their investment decisions, transparency is essential. The legal proceedings instituted by PGGM on behalf of its clients against the American company Hewlett Packard (HP) is an example of this, because investors were misled about the actual state of affairs. Following the acquisition of Autonomy in August 2011, HP concealed the disappointing results of the acquisition for many months, which is in conflict with the laws and regulations concerning the proper provision of information to investors. The failed acquisition resulted in a sharp drop in the price of the HP share with significant losses for investors as a result. This is why investors have instituted a class action against HP in order to recoup investment losses.

PGGM is acting as the lead plaintiff in these proceedings on behalf of the relevant PGGM equity funds in which its clients participate. In November 2013, the court issued its first important ruling. In this ruling the court recognised that part of the information provided by HP concerning the acquisition of Autonomy and the associated implications was misleading. In 2014, the discovery phase was completed during which all parties were required to provide information concerning events in the relevant period. PGGM also appeared in court to explain why it decided to invest in HP, among other things. The group of aggrieved investors that qualify for compensation will be defined on the basis of the collected information.

Access to JusticePGGM considers easy (collective) access to justice by investors to be essential for all markets in which it invests. This is why we engage legislators and regulators in various countries in discussions in order to encourage them to provide, retain or improve this legal protection. In the United States (US), the ‘fraud-on-the-market theory’ forms an integral part of the class action system. This theory is based on the principle that the price of shares in a developed market is set on the basis of comprehensive

39PGGM

material public information. Lacking this assumption, investors would have to individually prove to what degree certain information influenced their investment behaviour, as well as explain the impact of the lack of complete information on price. In this situation it is impossible to proceed on a collective basis, and companies would have the upper hand over individual investors. The fraud-on-the-market principle in the US was thoroughly challenged by listed companies. They called on the Supreme Court to issue a ruling on the issue as to whether the theory should continue to prevail in class actions. PGGM, together with a large group of institutional investors, has initiated action to stop attempts to kill this class action system. On 23 June 2014, the Supreme Court reconfirmed the fraud-on-the-market theory (in the Halliburton case).

PGGM is also in discussion with the Dutch Ministry of Justice in order to introduce a system of collective compensation proceedings into the Dutch legal system. The Class Action (Financial Settlement) Act (WCAM) has been in effect in the Netherlands since 2005. This Act allows a collective settlement to be declared generally binding. However, the WCAM does not provide for the possibility of claiming financial compensation and consequently lacks the big stick that is needed to settle mass claims by groups of shareholders. PGGM committed itself to this. After years of an opposing lobby by listed companies, the Ministry of Justice in the summer of 2014 published a Preliminary Design for a System of Collective Compensation of Damages. This document proposes an action in which representative interest organisations can represent groups of aggrieved investors. This is an important milestone. PGGM, in cooperation with Eumedion, has provided feedback on this preliminary design. Hopefully the Ministry will publish a specific legislative proposal in 2015.

2.6.4 Outlook

The MCCG will initiate work on updating the Netherlands Corporate Governance Code in 2015. Work on a Corporate Governance Code is well underway in Japan. PGGM, together with other institutional investors, will respond to this draft Code. In addition, we will continue to intensify collaboration with our good corporate governance networks and like-minded institutional investors. On the basis of market engagement and dialogue with companies, we continue to implement active ownership as a means of promoting good corporate governance.


40 PGGM

WH

YW

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SOCIAL RELEVANCE




RisksCrises in organisations due to negative behaviour, such as the violation of human rights, can directly result in a drop of

50% or more in the share price.

Strikes by dissatis�ed employees can have a �nancial impact > strike by platinum mining workers in South Africa in 2014 resulted in

over € 2 billion in lost revenues.

Human rights are violated in

160 countries throughout the world.

Poor working conditions in the chain, for example in the clothing industry: collapse of Rana Plaza factory building in 2013 >

1,100 deaths and 2,500 injured

Violation of human rights in armed con�icts in at least

35 countries

Millions of people work under conditions that are equivalent to forced labour.

Number of companies engaged in dialogue about social factors: 264

Exclusions due to violation of human rights or involvement in controversial weapons

Number of human rights-related engagement results:

23

Total euros invested in human rights-related solutions: € 379 million.

124 companies excluded, including 2 that are new in 2014 due to their involve-ment in the production of controversial weapons

Government bonds of 13 countriesincluding the exclusion of government bonds of the Central African Republic in 2014 due to human rights violations

Of which social issues in the supply chain:

8


Companies

Engaging with

Market players

35

Investing in human rights-related solutions (e.g. �ghting poverty and micro�nancing)

SAFEGUARDING HUMAN RIGHTS

Sources: Amnesty International, ‘Jaarboek 2013’; Amnesty International, ‘Annual Report 2014|15’; World Justice Project, ‘Business case human rights’; Freshfields Bruckhaus Deringer, ‘Knowing the risks, protecting your business’; Business Day, ‘Special Report: Platinum strike – an industry teetering on the precipice’

41PGGM

2.7.1 Why Human Rights as an Area of Focus?

The focus on human rights, including compliance with international working standards, is a key aspect of responsible investment for our clients and their participants, and for PGGM. The attainment of fundamental freedoms and human rights is an important condition for achieving sustainable development, in which vulnerable groups are not discriminated against. Concerns expressed by participants or other stakeholders about investments are often related to the human rights theme. In addition, failure to respect human rights can be an investment risk, for example because it results in project delays or company fines, especially in sectors with a high risk of human rights violations, such as the oil and gas or mining industry. In addition, involvement in human rights violations also affects the companies’ license to operate, as well as the institutional investors that invest in these companies.


Due to the ratification of the UN Guiding Principles on Business and Human Rights (UN Guidelines) by the UN Human Rights Council in 2011 there is clarity concerning the various roles of governments and the business community in relation to human rights. According to the UN guidelines, companies are expected to deal with any adverse effects on human rights in which they are involved. In addition, companies are expected to prevent or reduce the violation of the human rights of third parties, if the effects are related to their business operations. PGGM uses the UN Guidelines as a guideline to assess whether companies do enough to control human rights risks. To prevent the violation of human rights, PGGM encourages companies, especially those in high-risk sectors, to implement the UN Guidelines.

International guidelines can also apply to us as an asset manager. A debate is currently underway under the auspices of organisations such as the OECD, concerning the definition of the scope of responsibilities of institutional investors (text box on next page). PGGM implements the international guidelines in various ways. Investments in passive portfolios, index-based equity or bond packages, are audited several times a year in terms of different aspects, including human rights. If the results of these audits provide reason to do so, we exert our influence to call these companies to account for their responsibilities by engaging them in a dialogue. PGGM believes in the power of cooperation among different investors and the influence of a joint dialogue. This is why we are involved in various different engagement projects via the PRI on the basis of our active role in the Clearing House Steering Committee. In addition, as a shareholder we have an opportunity to exert influence via our PGGM funds by voting, for example when a shareholder’s proposal concerning (the lack of) a company’s human rights policy is placed on the agenda.

For more active investment strategies in which promising investments are consciously selected, we include the human rights-related risks in the due diligence process conducted prior to making the investment. Where necessary, for example for investments in countries or sectors with a high risk of human rights violations, additional questions are included. Depending on the outcome of the due diligence process, specific agreements are made with the portfolio managers concerning the management of these risks and on reporting any human rights-related incidents. Furthermore, we highlight responsibilities related to compliance with human rights and working standards in our contracts with external portfolio managers.

Finally, we can exclude companies or parties that are involved in serious or systematic violations of human rights. In line with PGGM’s Implementation Guidelines, a

“PGGM considers the attainment of fundamental freedoms and

human rights as an important condition for achieving sustainable

development. This contributes to the license to operate of the

companies in which we invest.”

2.7 Safeguarding Human Rights

42 PGGM

decision of this nature generally follows an engagement process in which an attempt is first made to reduce the violation of human rights on the basis of a dialogue. PGGM immediately excludes companies from investment if they are involved in the production of and/or trade in weapons whose use leads to a violation of fundamental human rights.

In addition, we were accused of applying double standards because supposedly we were not calling companies with operations in other disputed regions to account. However, PGGM has been engaged in a dialogue with companies about their operations in various regions of conflict, for example with companies that extract phosphorous from the disputed Western Sahara. As a result of the response to the exclusions, we organised meetings with stakeholders in 2014, including participating organisations such as NGOs, and Jewish and Christian interest groups. During these meetings we listened to all views, explained the policy frameworks for responsible investment and explained how the decision to exclude follows from this policy.

We regret that the perception created as a result of this decision was in part responsible for creating unrest. Jointly with our clients and the ABRI, we have therefore evaluated the decision-making process and communications. We have concluded that the exclusion demonstrates that we, as a responsible implementing organisation, attach significance to compliance to international agreements by the companies in which we invest on behalf of our clients. In addition, we drew lessons learned from it for the future. For example, we need to involve stakeholders more extensively and at an earlier stage in sensitive decisions.

Other Exclusions in 2014In 2014, a small number of changes was implemented to the list of company exclusions. Two companies were added and one company was removed. The French Zodiac Aerospace company is no longer involved in cluster bombs and is therefore no longer excluded. The company manu-factured parachutes for the submunitions of cluster bombs, but at the request of PGGM has formally confirmed that it has terminated this activity and furthermore indicated that it will not resume such activities in the future.

In relation to the French company CNIM, we received information of its involvement in nuclear weapons. Inquiries made with the company showed that CNIM was indeed involved in the development of a launching system for the French M51 nuclear rocket, which resulted in the company’s addition to the list of exclusions. Finally, the Russian company Motovilikha Plants was added to the list. This company produces rocket launchers capable of firing cluster weapons. Because the systems are not specifically designed or modified to carry cluster weapons, the strict application of the exclusion guideline normally would not result in the addition of this company to the list of exclusions. However, the Dutch authority responsible for supervising the Dutch ban on investing in cluster bombs has decided to add this company to its high risk category. This decision was sufficient for PGGM to add Motovilikha Plants to the list of exclusions.

The OECD Debate

In 2014, we resumed discussions with the OECD concerning the application of their guidelines for Multinational Enterprises to investors. The OECD Guidelines are rules of conduct designed to inspire companies to engage in responsible enterprise. The guidelines reflect what is generally meant by suitable and justified business conduct. As a minority shareholder in companies and investment funds, the guidelines raise issues concerning the extent to which these responsibilities apply to investors in different investment categories. We conducted a review of our procedures last year to assess whether they comply with the OECD Guidelines for Multinational Enterprises. Although this review shows that with a few adjustments we effectively adhere to these responsibilities, without any further pronouncement by the OECD it nevertheless appears to be difficult to determine whether the procedures are in fact sufficient. In 2015, together with other investors and stakeholders, we will continue our dialogue with the OECD on these guidelines and the expectations to be met by investors.


Exclusion of Israeli BanksAt the beginning of 2014, it became clear that as of 31 December 2013, the PGGM funds had ceased to invest in five Israeli banks, namely Bank Hapoalim, Bank Leumi, First International Bank of Israel, Israel Discount Bank and Mizrahi Tefahot Bank. The banks are involved in financing the continuous expansion of settlements in the occupied Palestinian territories. According to the International Court of Justice these settlements are illegal. From the dialogue conducted with these banks it became clear that they were not prepared to terminate their involvement in financing these settlements. This motivated PGGM to proceed with exclusion on behalf of PFZW. The exclusions caused quite a stir among various stakeholders in the Netherlands and abroad. These included positive, but certainly also negative reactions, with frequent suggestions that it was a politically inspired decision or for that matter a boycott of Israel. This is not the case. We are still investing in Israeli companies.


43PGGM

Human Rights and Government BondsPGGM added the Central African Republic (CAR) to the list of exclusions for government bonds in 2014. The United Nations (UN) and the European Union (EU) have imposed sanctions on the present government due its incitement of violence in the country and the repression of the population. The exclusion decision consequently was a direct application of the exclusion policy. Because our clients had not invested in CAR government bonds, this did not impact the investment portfolio in any way.

On 31 July 2014, a European weapons embargo against Russia was announced. The EU took this limiting measure pursuant to Russia’s actions to destabilise the situation in Ukraine. PGGM discussed the situation in Ukraine with the ABRI and in a Participants’ Meeting with clients because the ESG risk of the Russian government bonds has increased. The sanctions against Russia were specifically focused on limiting the probability of a conflict, in which Europe is a party. The fact that Russia is a member of the Council of Europe and the Organization for Security and Cooperation in Europe (OSCE) provides for prospects for a diplomatic way out. The one-year term would appear to be consistent with this. If solutions are found within this period, the sanctions will be lifted. PGGM and its clients will wait out this term and will not exclude Russian government bonds during this period.

Working ConditionsIn 2014, the engagement service providers F&C (for PGGM up to an including the third quarter) and GES (for PGGM as of the fourth quarter) focused on working conditions in the supply chain of international companies. Good results were achieved in this area among eight companies in various sectors and countries. For example, various technology companies, such as Apple, Microsoft and Intel have improved their risk management related to social issues in the chain.

In addition, we have asked F&C and GES to investigate potential violations of labour law in the construction of the FIFA World Cup facilities in Qatar. A Dutch Trade Union Confederation (FNV) report issued in 2014, stated that various companies in which PGGM invests on behalf of its clients might potentially be involved in this. GES observed that the allegations are not always properly substantiated in every instance. For example, the company Boskalis mentioned in the report is no longer active in Qatar. Other

companies mentioned in the report, Hochtief and Vinci, have since entered into discussion with international and national trade unions and NGOs concerning their policy on working conditions. GES is monitoring the progress of this dialogue. Furthermore, GES, on behalf of PGGM, has asked Hyundai Engineering & Construction some pointed questions, for example about withholding the passports of workers in Qatar.

2.7.4 Outlook

In 2015, PGGM wants to publish its own human rights policy in which we indicate how we implement our responsibilities in the area of human rights not only within asset management, but also within the Procurement and Human Resources departments. In addition, we will continue to engage in a dialogue with companies for which we have concerns about the management of risks in the area of human rights.

“PGGM believes in the power of cooperation among different

investors and the influence of a joint dialogue.”


44 PGGM

“The responsible investment

playing field has continued to

evolve. ESG integration goes

beyond the financial aspect

alone. We also look at

reputation, behaviour and the

impact on a better world.”

3. Responsible Investment in PGGM Funds and Mandates

45PGGM

3.1 Application of Responsible Investment in PGGM Funds

PGGM manages PGGM funds as well as mandates, i.e. individual client assignments, for its clients. The responsible investment policy of the relevant client is applied in the case of mandates. We apply the PGGM Responsible Investment Implementation Framework to PGGM funds and internally managed mandates. We take ESG factors into account in investment decisions within this Implementation Framework, because this can lead to a positive contribution to the risk return profile, as well as to an improvement in the sustainability performances of the investments. In this Section we highlight the status of the implementation of the guidelines for each individual ESG instrument within the PGGM funds. In addition, we explain the implementation of ESG factors within a number of mandates.

Table 3.1 illustrates how we apply the various implemen-tation guidelines to each ESG instrument for responsible investment within the PGGM funds. The degree to which the guidelines are implemented varies by fund. The table in Appendix 3 illustrates how we applied these guidelines to each PGGM fund in 2014.

3.1.1 ESG IntegrationStructurally and systematically taking into account the effect of ESG factors on the investment risk and return is a process we call ESG integration. We apply this in various ways within all PGGM funds. However, ESG integration goes beyond the financial aspect alone. We also take elements such as reputation, behaviour and the impact on a better world into consideration. We therefore no longer use a model to evaluate ESG integration in PGGM funds as we did in prior years. The model was used to score every investment category in terms of the three phases ESG identification, imple-mentation and internalisation, considering only the financial aspects. This model does not reflect the refinement that PGGM wants to apply. The responsible investment playing field has continued to evolve. Elements such as the impact of our own behaviour on the financial world do not stand out in the old model. This is why we will be working towards a new model in 2015, in which reputation, behaviour and investment in social solutions also are key considerations. The purpose of the new model is to account for our actions, as well as to set a new goal. Figure 3.1 illustrates how we can measure the maturity of the various PGGM funds. The diagram illustrates the maturity curve for the four elements mentioned above.

PGGM Developed Markets Equity PF Fund € 24.1PGGM Emerging Markets Equity PF Fund € 7.4PGGM Developed Markets Alternative Equity PF Fund € 21.6PGGM Private Equity Funds € 3.8PGGM Listed Real Estate PF Fund € 10.4PGGM Private Real Estate Funds € 8.5PGGM Credits Fund € 5.3PGGM High Yield Fund € 3.5PGGM Emerging Markets Debt Local Currency Fund € 6.4PGGM Infrastructure Funds € 2.7PGGM Fund of Hedge Funds* € 0.5PGGM Commodity Fund € 6.5PGGM Inflation Linked Bond Fund € 0.5PGGM Government Bond Fund € 0.4Total for PGGM funds € 101.1

Application of PGGM Responsible Investment Implementation Framework to PGGM funds Applicable; (Partly) Implemented.

ESG

Inte

grat

ion

Votin

g

Enga

gem

ent

Activ

e Li

tigat

ion

Excl

usio

ns

Inve

stin

g in

S

olut

ions

AUM

(bi

llion

s)

* PFZW has decided to no longer consider investments in hedge funds a Strategic Investment Category as of 2015. The complexity and high costs of this category were the reasons for phasing out the PGGM Fund of Hedge Funds in 2014. In terms of the degree of sustainability, PFZW believes that hedge funds no longer fit into the portfolio in view of the high levels of remuneration in the hedge fund sector and the often limited consideration for society and the environment.

Table 3.1. Application of PGGM Responsible Investment Implementation Framework to PGGM funds

46 PGGM

The curve runs from refusal to acceptance, after which it goes through an experimental phase to full internalisation of the responsibilities associated with responsible investment. The elements can be at different levels among different investment teams and can evolve independently of each other within an investment team.

ESG Integration in PGGM Equity FundsSince 2013, PGGM has been using an in-house developed Index designed to apply ESG factors within the three passively managed PGGM equity funds, equity in developed markets, equity in emerging markets and alternative strategies in developed markets. The ESG Index consists of a selection of companies drawn from the FTSE All-World Index, selected on the basis of their ESG performance. All companies are assigned an ESG score each year, after which, for each sector, the companies that are ranked in the bottom tenth percentile in terms of their performance are excluded from the ESG Index. These companies

consequently fall outside the investment universe of the PGGM funds. Analyses of the results over the past two years show that the ESG scores of the ESG Index each year are higher than those of the FTSE All World Index. In addition, a slightly upward trend in ESG scores is perceptible in recent years. It is still too early to make any definitive pronouncements about the risk return profile of the ESG Index. However, we do apply a narrow bandwidth within which the ESG Index is allowed to deviate from the FTSE All World Index. The ESG Index has been staying within this range. Any performance-related effects are therefore slight.

ESG Integration in the PGGM Private Equity FundsThe PGGM Private Equity Funds are working together with other investors on a next version of the ESG Disclosure Framework for Private Equity that would enable them to better monitor ESG implementation by private equity managers. In addition, the manager of these PGGM funds

Maturity of ESG integration by investment teams

Formalised ESG processes, incl. ESG in investment memos, applies ESG standards, and trains investment managers

From ‘ESG costs money’ to ‘convinced of risks and opportunities’

From refusal to acceptance

Low

High

Financial / process Reputation Behaviour / identity Investing in solutions

High

Experiment

Internalisation

Evident in entire team’s behaviour

Asks for help in the event of ESG reputation risks

Insensitive to client reputation risks

Independently considers reputation risks

Understands principles governing behaviour in the financial sector and applies them

Does not understand relevance

Full ownership

Knows the investable impact universe

Does not know what impact is, or only considers ESG and impact because this is what the client wants

Does maximum possible in terms of impact investments and measures impact independently

Maturity

From

Ext

rins

ic t

o In

trin

sic

Mot

ivat

ion

Figure 3.1 ESG Integration maturity curve

47PGGM

supplies the Chair of the private equity PRI Steering Committee for the private equity workstream. In this context, PGGM collaborated on the publication of a guide that describes how private equity managers can integrate ESG. Finally, these PGGM funds are a member of the ESG Round Table of the European Private Equity and Venture Capital Association (EVCA), which is working on ESG standards for private equity within a European context.

ESG Integration in the PGGM Private Real Estate FundsThe PGGM Private Real Estate Fund (PREF) each year asks external real estate managers to complete the elaborate GRESB (Global Real Estate Sustainability Benchmark) questionnaire. This enables us to compare real estate funds in terms of ESG policy, management, implementation and ESG performance. Figure 3.2 shows the accumulated PREF scores for 2012, 2013, and 2014. This shows that the PREF GRESB scores are higher than the average total GRESB scores in terms of implementation and measuring ESG factors; the horizontal axis. For example, on average PREF is more energy efficient than the GRESB average. The downward trend in the area of ESG Management and Policy, the vertical axis, can be explained by the fact that GRESB has changed its score for a number of management and policy-related questions and has refined the validation process. The graph below shows the same trend at the GRESB Global Average level. In 2014, we engaged with the lagging real estate funds.

ESG Integration in the PGGM Infrastructure FundsThe PGGM Infrastructure Funds collaborate with other major investors to develop an instrument for infrastructure to monitor sustainability comparable to GRESB. The objective is to develop this instrument into a global standard.

3.1.2 Investing in Solutions On the basis of investing in solutions, which in addition to generating financial return also create social added value, PGGM on behalf of its clients contributes to solving global problems in the area of climate change, water scarcity, healthcare and food security. PGGM has been involved for some time in the continued development of criteria for defining investments in solutions, coming from qualitative and subjective criteria to more quantitative and objective criteria. This development is currently in an interim phase. In deciding to make an investment in solutions, we not only take the positive social contribution into account, but the potential negative effects, such as human rights violations, as well. Appendix 4 provides an overview of all current investments in solutions and their social impact, by PGGM fund.

GRESB survey 2014: Private Real Estate

PGGM PREF 2013

PGGM PREF 2014

PGGM PREF 2012

GRESB Global Average 2013

GRESB Global Average 2014

0

20

40

60

80

100

0 25 50 75 100

+

Green Talk

Green Starters Green Walk

Green Stars

Implementation & Measurement

Man

agem

ent

& P

olic

y

Figure 3.2. GRESB scores

48 PGGM

Measuring ImpactWe consider it important to measure the social impact of the investments in solutions, because it enables us to monitor whether these investments in fact really contribute to solutions for a better world. This is why we ask fund managers and the companies in which we invest to report on ESG activities and results. For each investment in solutions we draw up a fact sheet, that includes:

The challenges: these are the social themes to which the investment contributes.

The solutions: the way in which the investment contributes to these themes.

The indicators: a (quantitative) substantiation of the contribution based on indicators.

The objectives: any specific long-term objectives pursued by the respective company or project.

The broader impact: any positive impact which the company or project has on the sector, region or value chain.

The additional positive impact: any positive impact which is not specifically being pursued.

Measuring the impact and determining our contribution is not always easy. For example, how much water would have been purified if PGGM had not invested in the Chinese water purification company (Section 2.2.3)? It is even more difficult to determine precisely how China profits from the 210 million tonnes of purified water. Exactly what problems caused by polluted water are being solved? These are questions to which PGGM does not have ready answers.

In 2014, we measured the impact of all investments in solutions (Appendix 4). This posed a challenge particularly for private equity investments, because these are based on a portfolio of different types of underlying investments whose impact had not been measured previously. Social impact is rarely measured in the investment world at present, and not at all for investments made in multi-national companies. This is why, in 2015 and beyond, we will continue to improve our measurement method and to encourage other financial institutions and companies to measure their impact. The ultimate aim is to be able to report on the total social impact.

3.1.3 EngagementIn consultation with our clients, PGGM aims to maximise the focus of its engagement activities. The objective is to increase the impact and profile of these activities. This means that several existing engagement activities were completed or halted in 2014. In addition, we have lowered implementation costs. Engagement activities were primarily focused on improving standards at the market level; market engagements. We frequently engaged in dialogue with legislators and regulators and focused on the development and implementation of voluntary best practice standards. In the dialogue with companies we primarily focused on the so-called ‘halo companies’, i.e. companies that have a halo effect within their region, sector or chain. These companies may be leaders or laggards. Our engagement activities are intended to deliver a demonstrable change, for example in the behaviour and/or activities of a company, or in a market standard. Appendix 5 describes the themes and the regions that were the subject of discussions and where we achieved results in 2014.

The Swedish GES, who effective from the fourth quarter of 2014 is our engagement service provider, has a specific programme that constitutes a good supplement to PGGM’s engagement activities. The programme focuses on companies that do not operate in accordance with international guidelines in the areas of human rights, the environment and corruption. The engagement activities carried out by PGGM are more focused on strategic areas within the selected themes and on focus markets. PGGM cooperates closely with GES, particularly in areas where we can add our weight in order to effect change or where escalation in the engagement process is warranted.

Engagement within PGGM FundsWe apply engagement within the passively managed PGGM equity funds and within the PGGM Listed Real Estate PF Fund (LREF). ESG topics are a fixed feature in discussions with companies in the investment universe for LREF. In addition, this PGGM fund established best practices for ESG reporting. Simon Property Group and Kimco in the US and Wereldhave in the Netherlands published a sustainability report and a number of companies increased their transparency following an engagement process. Finally, the fund manager became

“We consider it important to be able to demonstrate the social

impact of investments, because it enables us to monitor our added

value for a better world.”

49PGGM

chairman of the independent Institutional Investor Advisory Committee. The objective of this Committee is to improve corporate governance in the European listed real estate market.

Voting within the PGGM FundsWe vote from the passively managed PGGM equity funds and the LREF. Each year in November, when most companies commence work on preparing the agenda for the next shareholder meeting, we once again identify the areas for improvement for the companies represented in these PGGM funds. In some cases this has resulted in a modification of the draft resolutions on the agenda. Development Securities in the United Kingdom, Riocan in Canada and Deutsche Wohnen in Germany have announced significant improvements to their remuneration policy. Appendix 6 lists the regions and the subjects on which PGGM voted in 2014. 3.1.5 Legal ProceedingsWe apply legal proceedings within the passively managed PGGM equity funds and within the LREF. To recover investment losses and enforce good corporate conduct where possible, PGGM as a shareholder institutes legal proceedings against companies on behalf of its clients. There must be clearly demonstrable grounds for instituting legal proceedings. That may be the case, for example, if a company has committed fraud or other forms of evident misconduct leading to losses for shareholders.

Legal proceedings can be brought in various ways. The main forms are direct action, i.e. bringing independent legal proceedings against a company, or a collective action, such as a class action in the United States. In this case a group of aggrieved investors with a common interest institutes legal proceedings. In most cases our involvement in class actions is passive. In 2014, the amount received by PGGM funds on behalf of their clients pursuant to legal proceedings was approximately € 2.7 million. Sometimes PGGM is actively involved in a class action, such as the legal proceedings against HP. In 2015, PGGM will continue to pursue the legal proceedings against HP, as well as the ongoing proceedings against the former Fortis (Ageas), Vivendi and Olympus. In addition, PGGM will continue to pursue the dialogue with the Ministry of Justice concerning collective compensation proceedings in the Netherlands (Section 2.6.3).

Partnerships

PGGM believes in the power of cooperation with other investors and with institutions such as regulators and universities. Where possible, we closely work together with other institutional investors in our engagement activities in order to achieve greater efficiency. When investors join forces they can use the driving force of money to exert greater influence on companies to encourage them to implement improvements. For example we are in partnership with others such as APG, AP Fondsen, CalPERS, MN, Norges Bank, Railpen and USS and we participate in institutional investor networks, such as Eumedion, a lobbyist for all Dutch institutional investors, and the PRI.

To improve standards and behaviour we are engaged in a constructive dialogue with market players, including legislators and regulators. In terms of behavioural change, we believe that the development of best practices with an ‘apply or explain’ regime has an important role to play. Partnerships in which PGGM participates in this context include organisations such as the IASB, the International Corporate Governance Network (ICGN) and the Asian Corporate Governance Association (ACGA). A complete overview of these partnerships is listed on PGGM’s website.

3.1.4 VotingTo vote at shareholder meetings we use custom-made voting guidelines, the PGGM Investments Global Voting Guidelines, which are updated annually. As far as possible these specify how we will vote for our clients on a large number of subjects that arise on the agendas of share-holder meetings. We continued our endeavours to improve the voting chain in 2014. The current voting process is unnecessarily complex. The casting of a vote at a share-holder meeting requires many steps and the company provides no subsequent confirmation that it has received and counted the voting instructions correctly. PGGM believes that the parties involved in the voting process should introduce such a vote confirmation. This would improve transparency within the chain. To further improve the voting process, PGGM as a participant in the PRI Vote Confirmation Working Group will create a partnership project with the parties involved in the voting process in 2015.


50 PGGM

3.1.6 ExclusionsWe apply the exclusion policy within all PGGM funds. PGGM seeks to prevent holding investments that contribute financially to practices incompatible with the identity of our clients and their participants, as well as our own identity. When taking decisions on exclusions, PGGM goes through an extensive process that takes account of clients’ considerations and the advice provided by ABRI. Clients may opt to adhere to PGGM’s fund policy and the exclusions that follow from this, or they can opt to give PGGM a mandate to implement their own exclusion policy. Clients can also decide independently to exclude individual entities, products or categories.

3.2 Application of Responsible Investment in Mandates

3.2.1 Mandates Managed Internally by PGGMPGGM manages a number of mandates under contract to clients. Sometimes this involves transition or phase-out portfolios. In other cases this concerns specific investment assignments that deviate from the PGGM funds. Below we highlight three mandates to which ESG factors apply and that further evolved in 2014. Other mandates, such as private real estate and private equity, are monitored in the same way as the PGGM funds where PGGM can influence the availability of reports when we take over existing client mandates from other asset managers.

Responsible Equity Portfolio (REP)PGGM invests for PFZW for the long term in stable, profitable listed companies that are highly focused on ESG factors. For the time being we invest in Europe and North America within this mandate. A differentiating factor is the major shareholder positions which enable PGGM to play an active influential shareholder’s role in order to improve the behaviour of these companies in the ESG domain, where necessary. We apply the engagement, voting and legal proceedings instruments within this mandate. We also measure the ESG impact of these companies. It is not possible for us to aggregate this impact at the portfolio level. This is due to various reasons, for example because not all companies demonstrate how their processes or products contribute to solving social problems.

Corporate Bonds Emerging Markets/High Yield Emerging MarketsThe objective of PFZW’s corporate bonds and High Yield in emerging markets mandates is to compose a diversified portfolio of Emerging Markets Corporate Credits (EMC). PGGM can integrally incorporate the ESG factors as part of the investment process in this investment category. In 2014, effort was devoted to formalising the PGGM Responsible Investment Implementation Guidelines for EMC. The document reflects our vision and beliefs concerning this investment category and the approach used in actual practice. The focus within the existing mandate primarily is on avoiding downward risk.

Why Vote?

PGGM votes at practically all shareholder meetings throughout the world. Voting is one of the most important rights a shareholder has. We are an active shareholder on behalf of our clients and consequently consider voting a right and a duty. We realise that we cannot always achieve the results we are aiming for as a minority shareholder. For example, in 2014 in the United Kingdom, PGGM voted against or abstained from voting in relation to 23 percent of remuneration policy proposals. Unfortunately, ultimately there was not a single British company in which we invest where a majority of votes prevailed against the remuneration policy. This highlights the dilemma we encounter of wanting to fulfil the voting right and the duty to vote versus the limited influence of a minority shareholder. On average, the PGGM funds hold 0.2 percent of a company’s issued shares in their portfolio. This is not exceptional compared to other institutional investors. Indeed, investing in various companies with small percentages is beneficial for the investment portfolio’s

risk return profile. The downside is that it is not often that we are able to determine the outcome of a vote on the basis of these percentages.

Nevertheless, for the above-referenced reasons we vote structurally and on the basis of our own voting guidelines at the shareholder meetings of the companies in which we have invested. We have outsourced part of the voting to the proxy service provider ISS, which votes on the basis of our guidelines. In addition, we receive voting advice from Glass Lewis. This way we implement our voting rights efficiently and therefore at a lower cost. Furthermore, we often collaborate with other shareholders in the voting process, so that our joint vote has greater influence. We firmly believe that our voice contributes to the creation of shareholder value over the long term.

51PGGM

In addition, EMC is exploring the possibility of allocating a portion to investments in solutions within existing guidelines. With this initiative EMC aims to make a contribution to PFZW’s objective of quadrupling the positive contribution of investments by 2020.

Structured CreditPGGM assumes the credit risk of the loans taken out by banks within PFZW’s Structured Credit mandate. These transactions offer the relevant banks an additional instrument to control their capital position and to meet higher solvency requirements. ESG management capacities are taken into consideration in the analysis of the banks with which PGGM executes risk sharing transactions. For example, PGGM always meets with the ESG officer of the counterparty. In 2014, PGGM commenced work on the further objectification of this analysis.

3.2.2 Externally Managed MandatesThe External Segregated Mandates (ESM) department can select external mandates for any client, segregated from the PGGM funds and internally managed mandates. ESM is responsible for the selection and monitoring of external managers in liquid markets, on the basis of our clients’ specific policies and guidelines. In this way, we can offer more customised solutions to our various clients. The PGGM Responsible Investment Implementation Framework is not applicable by ESM, and instead we apply client-specific responsible investment policy. For example, when new external managers are contracted, an assess-ment is made as early as possible in the process to determine whether and how a client’s exclusion policy can be applied.

52 PGGM

Outlook for 2015

2014 was a highly dynamic year in which the trend towards a sustainable long-term investment portfolio gained momentum due to our clients’ assignments. As a cooperative asset manager we attempt to support this task to the best of our abilities and to connect clients in their joint ambition focused on solid financial pension results and a high-quality future. PFZW has profiled itself as a leader in this trend for some time, both nationally and internationally, and thus in part determines the rate of change and the level of ambition of our organisation. Aside from sustainability, understandability and manageability also play a role in shaping new investments that make it possible to realise the pension ambition. We are seeing other clients and their participants make comparable movements at different speeds.

The opportunities for investing in the Netherlands will require a great deal of attention from pension fund directors and their service organisations over the coming years. Here too sustainability and the impact on the participants’ immediate living environment will play a key role. It is expected that the NLII will play a key role in this movement, including the promotion of public-private partnerships in this domain. The acceleration of developments such as the energy transition in the Netherlands is enthusiastically embraced by PGGM through means of targeted investments. We expect that our platform for private markets and especially the infrastructure portfolio are well positioned for this.

Changes to the pension system, such as the changes to the Financial Assessment Framework (FTK), will make their impact more clearly felt over the coming years. PGGM N.V. has initiated a change management process, with the objective of providing the same quality to our clients at lower costs. PGGM wants to be and continue to be a leader in the field of responsible investment. Responsible investment is important to our clients and is a reason for them to outsource their asset management to PGGM.

In this environment, tension may arise among the four key areas of focus formulated by PFZW and that are also areas of focus for other clients (pension ambition, sustainability, understandability and manageability) and the rate at which we can serve clients with divergent requirements and priorities. Last year, PGGM identified the opportunities available to reduce the negative footprint of the investment portfolio and to increase its positive impact. The objectives related to responsible investment that we agreed upon with our clients in 2014 were rather more based on processes and instruments. Effective from 2015, objectives will increasingly be determined on the basis of the targeted responsible investment results. This will make it possible for all clients to incorporate investing in solutions in their investment plans with a better focus. In addition, in consultation with clients, the focus of engagement activities will shift from the number of companies with which we are engaged in a dialogue to a more focused approach aimed at impact and dialogue at the market level. Furthermore, we will intensify our efforts in the area of creating a sustainable financial system and in relation to ESG integration in all investments and investment and policy advice. With these developments we aim to support our clients in order to once again contribute to a high-quality future for pension participants in a sustainable world in 2015.

53PGGM

Abbreviation

ABRI

Active Ownership

AFM

AIFMD License

AtM Index

Behaviour Working Group

Benchmark

Business value at water risk

CDP

CIO Exchange

Class Action

EC

EDTF

EMF

Engagement

Expanded Form

Advisory Board Responsible Investment

Netherlands Authority for the Financial Markets

Alternative Investment Fund Managers Directive License

Access to Medicine Index

Carbon Disclosure Project

Chief Investment Officers Exchange

European Commission

Enhanced Disclosure Task Force

Ellen MacArthur Foundation

Explanation

Advisory body that consists of five independent external experts from whom PGGM and its clients can obtain advice and with whom they can discuss issues relating to responsible investment.

On the basis of its ‘active ownership’ activities, PGGM fulfils the rights and responsibilities associated with being a shareholder in listed companies.

Netherlands supervisory authority for financial institutions whose objective is to promote honest and transparent financial markets.

License for harmonised European rules that the managers of alternative investment funds must comply with effective from 22 July 2013.

Index that ranks all companies in the healthcare sectors in terms of their contribution to access to medicine in developing countries.

PGGM working group whose objective is to describe PGGM’s role, as well as that of its clients, in a sustainable financial system.

Previously established, objective standard for the performance of an investment portfolio or investment fund.

Business value that is at risk due to exposure to water problems.

Platform for voluntarily reporting water-related information by companies.

Network of chief investment officers in the Netherlands.

System of collective compensation proceedings in the United States.

Unofficial designation for the Commission of the European Communities, comprising the day-to-day management of the European Coal and Steel Community, the European Atomic Energy Community (Euratom) and the European Economic Community (EEC).

Partnership created for the purpose of increasing transparency and improving the inter-comparability of banks.

Global platform that brings companies, innovators and regions together in order to accelerate the transition to a circular economy.

Dialogue conducted by PGGM with companies in which PGGM has investments and market players in which PGGM is involved on the basis of investments, with the objective of encouraging these companies to make improvements in ESG factors-related standards, policies and activities.

Appendix 1. Abbreviations and Glossary

54 PGGM

ESG

ESG Index

ESM

Fraud-on-the-market Theory

FTK

FTSE All World Index

GHIT

GRESB

GRI

Green Growth

IASB

IIGCC

ILO

Investments in Solutions

Lead Plaintiff

LREF

Mandates

MCCG

NLII/NII

OECD

Environment, Social & Governance

External Segregated Mandates

Financial Assessment Framework

Global Health Innovation and Technology

Global Real Estate Sustainability Benchmark

Global Reporting Initiative

International Accounting Standards Board

Institutional Investors Group on Climate Change

International Labour Organization

PGGM Listed Real Estate PF Fund

Corporate Governance Code Monitoring Committee

Netherlands Investment Institute

Organisation for Economic Cooperation and Development

ESG factors are factors related to the environment, social conditions and corporate governance. ESG integration is the integration of ESG factors into the investment processes.

Index designed by PGGM in which companies from the FTSE All World Benchmark are ranked in terms of the ESG factors.

PGGM department responsible for the selection and monitoring of external managers in liquid markets, on the basis of our clients’ specific policies and guidelines.

This theory is based on the principle that the price of shares in a developed market is set on the basis of comprehensive material public information.

Supervisory regime that applies to the financial position and the financial policy of pension funds and insurance companies.

Stock market index.

International non-profit organisation whose objective is to improve access to medicine. Companies can join this organisation.

Annual questionnaire used to compare real estate funds in terms of their ESG policy, management, implementation and ESG performance.

Global standard for company reporting on ESG factors.

Economic growth based on more sustainable energy and less wastage.

Independent international body charged with developing reporting standards for annual reports and financial statements.

Platform for cooperation among investors to anticipate the opportunities and threats associated with climate change.

International organisation whose objective is to promote social justice and internationally recognised human rights and labour rights.

Clearly defined investments that not only contribute to the portfolio’s financial return, but are also intended to generate social added value.

Party officially appointed by the Court in a class action to represent the class.

PGGM fund for listed real estate.

Segregated client investment assignments.

National committee whose objective is to promote the currency and usability of the Dutch Corporate Governance Code (Code).

Private institution whose objective is to increase the long-term financing opportunities for institutional investors in the Dutch economy as a supplement to bank financing.

Partnership of 34 countries responsible for coordinating social and economic policy.

Abbreviation Expanded Form Explanation

55PGGM

Abbreviation Expanded Form Explanation

OSCE

Participants’ Meeting

PFZW

PGGM

PPP

PREF

PRI

PRI IWG

PSAS

Remuneration

REP

Stranded Assets

UN

UN Guidelines

WCAM

WHO

Organization for Security and Cooperation in Europe

Pensioenfonds Zorg en Welzijn (Pension Fund for the Healthcare and Social Sectors)

PGGM Vermogensbeheer B.V.

Public Private Partnership

PGGM Private Real Estate Fund

UN Principles for Responsible Investment

PRI Investor Working Group on Palm Oil

PGGM Strategic Advisory Services B.V.

Responsible Equity Portfolio

United Nations

UN Guiding Principles on Business and Human Rights

Wet Collectieve Afwikkeling Massaschade (Class Action (Financial Settlement) Act)

World Health Organization

Organisation that aims to promote collaboration among 55 member states in the military, economic and humanitarian domains.

Participants’ meeting that gives various clients the opportunity to discuss or take decisions on fund-specific subjects with the PGGM fund manager and other participants.

Sector pension fund and PGGM client.

PGGM Vermogensbeheer B.V. manages the pension assets of a number of pension funds.

Partnership in which government and private sector companies join forces to realise a project.

PGGM fund for private real estate.

Network of investors supported by the United Nations with the collective objective of introducing the six principles associated with responsible investment into actual practice.

Partnership whose objective is to promote sustainable palm oil production.

A PGGM entity authorised to provide investment advice to clients.

Financial allowances, non-financial allowances and/or other components that have an economic value in exchange for work and/or services.

PFZW mandate for long-term investments in stable profitable listed companies that are highly focused on ESG factors.

Downward adjusted valuation of companies, such as oil companies that are permitted to only exploit a small part of their fossil fuel reserves in order to limit the warming of the earth to a maximum of two degrees centigrade. This helps prevent the serious consequences of climate change.

Organisation in which almost all countries in the world are members. It promotes peace and defends the rights of the impoverished in the world.

Guidelines developed by the UN Human Rights Council in 2011 concerning the various roles of governments and the business community in relation to human rights.

This Act enables consumer groups and companies to have the agreements they concluded concerning damages or compensation declared generally binding.

Specialised UN organisation whose goal is to promote world population health.

56 PGGM

Responsible Investing Quantitative Indicators Year-end 2013 Results Year-end 2014 Results

Investing in solutions

Size of investments in solutions/commitments (€ millions)* € 4,121 million € 4,658 million

New investments in solutions/commitments (€ millions)* € 331 million € 123 million

ESG Integration

% of new investments in external investment funds in 2014 for which ESG factors were analysed**

N/A 100%

Engagement***

Number of companies engaged in dialogue*** 673 510

Value of companies engaged in dialogue as % of managed equity portfolio as at 31-12-2014

51% 37%

Number of environment-related changes at companies resulting from dialogue (engagement results) in 2014

37 21

Number of social-related changes at companies resulting from dialogue (engagement results) in 2014

54 32

Number of corporate governance-related changes at companies resulting from dialogue (engagement results) in 2014

103 80

Voting

Number of shareholder meetings (AGMs) at which voting rights were exercised 3,155 3,395

Number of votes cast 33,121 37,281

Number of AGMs at which voting rights were exercised as % of total number of AGMs*****

99.9% 99.6%

Number of AGMs at which voting rights were exercised as % of the Stemfocuslijst (Voting Focus List)

100% 100%

Legal Proceedings

Active proceedings 5 7

Proceeds from passive legal proceedings € 1.5 million € 2.7 million

Exclusions

Number of companies excluded 124 124

Number of countries excluded (government bonds) 12 13

Number of new exclusions in 2014 Companies: 2Countries: 1

% of total managed assets covered by Exclusion Policy**** 99% 99%

Scope of exclusions in relation to FTSE All World Benchmark 3.1% 3.1%

Overview of Results

* PGGM calculates the investments in solutions on the basis of market value and commitments. A number of investments were made several years ago and the commitment period of these investments has expired. This is why we now use the market value for these investments. For new investments we report the total commitment. ** This indicator was measured for the first time in 2014. *** The total number of companies engaged in dialogue in 2014 declined in comparison to 2013, because PGGM created greater focus in its engagement activities effective from 2014. As a result of this, the total number of engagement results also declined and the percentage of the total value of the equity portfolio to which the engagement activities pertained is lower than it was in 2013. However, the focus of engagement activities remains on companies that represent the most value in the equity portfolio. For example, we spoke with more than half of the companies in which PGGM has an equity position of more than € 250 million. **** GRI indicators from the Financial Services Sector Supplement (2008 version). ***** The results concern the number of meetings at which PGGM voted excluding blocking markets. ****** The basis for measuring these percentages changed in relation to previous years. Effective this year, it was decided to only include exclusions that result from the PGGM Exclusion Implementation Guideline. In the past we also included several benchmark adjustments established on different grounds. For comparison purposes, we recalculated the 2013 percentage on the basis of this new approach. For this reason the 2013 percentage reported here differs from the percentage reported in the 2013 Annual Responsible Investment Report.

Appendix 2. Overview of 2014 Results by Instrument

Appe

ndix

3. O

verv

iew

of In

stru

men

ts

by P

GG

M F

und

Appe

ndix

3. O

verv

iew

of In

stru

men

ts

by P

GG

M F

und

PG

GM

Fun

d N

ame

PGG

M F

und

Des

crip

tion

ESG

Inte

grat

ion

€ M

illio

ns

inve

sted

in

solu

tions

at

31-1

2-20

14

Num

ber o

f AG

Ms

at w

hich

PG

GM

vo

ted

Num

ber o

f AG

Ms

at w

hich

PG

GM

vo

ted

as %

of

tota

l AG

Ms

Num

ber o

f co

mpa

nies

en

gage

d in

di

alog

ue

Valu

e of

co

mpa

nies

en

gage

d in

di

alog

ue a

s %

of

PG

GM

fund

as

at

31-1

2-20

14

% o

f tot

al

man

aged

ass

ets

in P

GG

M fu

nd

cove

red

by

Excl

usio

n Im

plem

enta

tion

Fram

ewor

k

PGG

M D

evel

oped

Mar

kets

Eq

uity

PF

Fund

Inve

sts

in e

quity

in

deve

lope

d m

arke

ts, s

uch

as

the

Uni

ted

Sta

tes

and

coun

trie

s in

Wes

tern

Eur

ope.

Equi

ty is

sel

ecte

d fr

om t

he

ESG

Inde

x un

iver

se.

384

38.2

%100%

PGG

M E

mer

ging

Mar

kets

Eq

uity

PF

Fund

Inve

sts

in e

quity

in e

mer

ging

m

arke

ts, s

uch

as C

hina

, B

razi

l, R

ussi

a an

d In

dia.

Equi

ty is

sel

ecte

d fr

om t

he

ESG

Inde

x un

iver

se.

165

24.0

%100%

PGG

M D

evel

oped

Mar

kets

Al

tern

ativ

e Eq

uity

PF

Fund

Inve

sts

in e

quity

in

deve

lope

d m

arke

ts.

The

inve

stm

ent

proc

ess

is

char

acte

rised

by

inve

stm

ents

in

thr

ee a

ltern

ativ

e st

rate

gies

inst

ead

of a

m

arke

t-wei

ghte

d st

rate

gy.

Equi

ty is

sel

ecte

d fr

om t

he

ESG

Inde

x un

iver

se.

3,3

95

99.6

%363

33.0

%100%

PGG

M L

iste

d R

eal E

stat

e PF

Fu

ndM

anag

es a

glo

bal p

ortf

olio

of

list

ed r

eal e

stat

e eq

uity

, w

hich

is in

vest

ed in

rel

atio

n to

the

FTS

E EP

RA/

NAR

EIT

Glo

bal R

eal E

stat

e In

dex

(exc

ludi

ng A

ustr

alia

).

ESG

Inte

grat

ion:

Res

pons

ible

In

vest

ing

in R

eal E

stat

e G

uide

lines

(PG

GM

.nl).

28

48.8

%100%

Res

pons

ible

Inve

stm

ent

with

in t

he P

GG

M F

unds

PG

GM

Fun

d N

ame

PGG

M F

und

Des

crip

tion

ESG

Inte

grat

ion

€ M

illio

ns

inve

sted

in

solu

tions

at

31-1

2-20

14

Num

ber o

f AG

Ms

at w

hich

PG

GM

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ted

Num

ber o

f AG

Ms

at w

hich

PG

GM

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ted

as %

of

tota

l AG

Ms

Num

ber o

f co

mpa

nies

en

gage

d in

di

alog

ue

Valu

e of

co

mpa

nies

en

gage

d in

di

alog

ue a

s %

of

PG

GM

fund

as

at

31-1

2-20

14

% o

f tot

al

man

aged

ass

ets

in P

GG

M fu

nd

cove

red

by

Excl

usio

n Im

plem

enta

tion

Fram

ewor

k

PGG

M E

mer

ging

Mar

kets

Deb

t Lo

cal C

urre

ncy

Fund

Glo

bally

inve

sts

in t

he

gove

rnm

ent

bond

s of

em

ergi

ng c

ount

ries

liste

d

in lo

cal c

urre

ncie

s.

The

inve

stm

ent

proc

ess

is

dom

inat

ed b

y in

divi

dual

co

untr

y se

lect

ion

by e

xter

nal

fund

man

ager

s.

In s

elec

ting

and

mon

itorin

g m

anag

ers

we

take

into

ac

coun

t ho

w E

SG

fac

tors

in

fluen

ce t

he in

vest

men

t pr

oces

s. F

or e

xam

ple,

w

heth

er m

anag

ers

mak

e

use

of E

SG

-rela

ted

indi

ces.

100%

PGG

M C

redi

ts F

und

Inve

sts

in in

vest

men

t gr

ade

corp

orat

e bo

nds,

tha

t is

in

rela

tivel

y sa

fe, c

redi

twor

thy

corp

orat

e bo

nds.

The

port

folio

man

ager

in

clud

es s

usta

inab

ility

sc

ores

in t

he in

vest

men

t pr

opos

als.

25-5

0100%

PGG

M C

omm

odity

Fun

dG

loba

lly in

vest

s in

co

mm

odity

der

ivat

ives

.N

/A100%

PGG

M G

over

nmen

t B

ond

Fund

Take

s po

sitio

ns o

n th

e eu

ro

gove

rnm

ent

bond

mar

ket.

Lim

ited

oppo

rtun

ities

for

ES

G in

tegr

atio

n be

caus

e in

vest

men

ts a

re li

mite

d to

on

ly a

few

Eur

opea

n co

untr

ies.

100%

PGG

M H

igh

Yiel

d Fu

ndIn

vest

s in

hig

h-yi

eld

bond

s an

d lo

ans.

In s

elec

ting

and

mon

itorin

g m

anag

ers

we

take

into

ac

coun

t ho

w E

SG

fac

tors

in

fluen

ce t

he in

vest

men

t pr

oces

s. F

or e

xam

ple,

w

heth

er m

anag

ers

mak

e us

e of

ES

G-re

late

d in

dice

s.

100%

PGG

M F

und

of H

edge

Fun

dsIn

vest

men

ts in

sel

ecte

d he

dge

fund

str

ateg

ies.

N/A

28%

*

PGG

M In

fras

truc

ture

Fun

dsIn

vest

s in

ext

erna

l fun

ds t

hat

spec

ialis

e in

infr

astr

uctu

re,

and

dire

ct, o

wn

inve

stm

ents

in

infr

astr

uctu

re p

roje

cts.

ESG

Inte

grat

ion:

PG

GM

R

espo

nsib

le In

vest

men

t Po

licy

for

Infr

astr

uctu

re

guid

elin

es (PG

GM

.nl).

350-3

75

100%

PGG

M P

rivat

e Eq

uity

Fun

dsS

elec

tion

of g

loba

l prim

ary

and

seco

ndar

y pr

ivat

e eq

uity

fu

nd m

anag

ers'

fun

ds t

hat

are

amon

g th

e to

p 2

5%

in

the

wor

ld m

easu

red

in t

erm

s of

ret

urn

and

man

agem

ent

com

pete

ncie

s. In

add

ition

, co

-inve

stm

ents

are

mad

e in

co

llabo

ratio

n w

ith p

rivat

e eq

uity

man

ager

s.

All m

anag

ers

are

sele

cted

in

acc

orda

nce

with

the

R

espo

nsib

le In

vest

ing

in

Priv

ate

Equi

ty F

ram

ewor

k (P

GG

M.n

l).

425-4

50

100%

PGG

M P

rivat

e R

eal E

stat

e Fu

ndIn

vest

s in

a d

iver

sifie

d po

rtfo

lio o

f re

gion

and

se

ctor

-spe

cific

non

-list

ed r

eal

esta

te fun

ds.

ESG

Inte

grat

ion:

Res

pons

ible

In

vest

men

t in

Rea

l Est

ate

guid

elin

es (PG

GM

.nl).

100%

PGG

M T

reas

ury

B.V

.PG

GM

, in

the

nam

e of

PG

GM

Tr

easu

ry B

.V.,

hold

s fin

anci

al

inst

rum

ents

for

the

acc

ount

an

d ris

k of

its

clie

nts

and

PGG

M fun

ds.

Sus

tain

abili

ty s

core

s in

se

lect

ion

polic

y fo

r ba

nks

and

coun

terp

artie

s.

75-1

00

100%

* T

he P

GG

M F

und

of H

edge

Fun

ds h

as b

een

in t

he p

roce

ss o

f be

ing

phas

ed o

ut s

ince

last

yea

r. O

nly

a sm

all p

art

of t

he o

rigin

al in

vest

men

ts in

the

fun

d st

ill r

emai

ns. Th

e Ex

clus

ion

Polic

y is

app

lied

to a

lim

ited

exte

nt t

o th

ese

rem

aini

ng in

vest

men

ts. An

inno

vativ

e pl

atfo

rm w

as u

sed

for

the

part

of th

e PG

GM

Fun

d of

Hed

ge F

unds

tha

t ha

s be

en p

hase

d ou

t. T

his

plat

form

pro

vide

d in

sigh

t in

to t

he p

ortf

olio

and

mad

e it

poss

ible

to

appl

y th

e ex

clus

ion

polic

y to

a g

reat

er e

xten

t th

an u

sual

in t

he h

edge

fun

d m

arke

t.

60 PGGM

Mandate of Investments Portfolio

Hg Renewable Power Fund

Triodos Amperefonds

BNP Clean Energy

Dong Energy/ Walney

Mareña/EES

ShenyangShengyuan Water Company Ltd

Glennmont Clean Energy Fund II

Ennatuurlijk

Shenyang Zhenxing Environmental Protection Company Ltd. Luda (Dalian Hengji Xinrun Water Co. Ltd.)*

Albright Capital Management

Area of Focus

Investment Category

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Infrastructure

Private Equity

Description

The fund invests in sustainable energy projects and companies in Europe.

The fund invests in sustainable energy projects in Europe.

These funds invest in sustainable energy projects in Europe.

This investment concerns an offshore wind farm in the Irish Sea.

This investment concerns an onshore wind farm in Mexico.

This investment concerns a water purification plant and drinking water supply in China.

These funds invest in sustainable energy projects in Europe.

This concerns an investment in a heating network in the Netherlands and three combined heat and power plants (CHPs) linked to heating networks in Helmond, Eindhoven and Enschede.



ACM invests in (public and private) equities, bonds, loans, currencies and currency derivatives, interest rate swaps and credit derivatives in emerging markets. The fund uses the political analyses and local expertise of The Albright Stonebridge Group.

Euros Invested (range in € millions)**

0-25

50-75

175-200

75-100

0-25

0-25

100-125

100-125

0-25

0-25

100-125

Example of Impact Achieved in 2013

Avoidance of 44,200 tonnes of CO2 in 2013




Wind farm not yet constructed.

210 million tonnes of clean water supplied in 2013.

No operational projects in 2013

New in 2014 (year-end 2013)

210 million tonnes of clean water supplied in 2013.

New in 2014

No impact indicators available, because this is an older investment for which it is difficult to measure impact retroactively.

Appendix 4. Overview of Investments in Solutions

61PGGM

AlpInvest Clean Tech PE

IFC

Black River Food Fund

Black River Food Fund II*

Gilde Healthcare Services II*

Tsing Capital

VenturEast Life Fund III LLC

Climate Change Capital

Private Equity

Private Equity

Private Equity

Private Equity

Private Equity

Private Equity

Private Equity

Other

AlpInvest invests globally in private equity funds that specifically focus on activities and technologies that improve the sustainable and efficient use of natural sources and reduce the ecological impact.

The fund co-invests with IFC in a range of sectors in Sub-Saharan Africa, Latin America and the Caribbean Region.

The fund invests in private capital in the food sector, primarily in Asia. Black River selects companies in the sectors i) food production (e.g. milk, chicken meat, fish); ii) food processing (e.g. baby milk powder); iii) the logistics sector, primarily the cold logistics sector, such as the transportation of refrigerated and frozen products.

The fund invests in private capital in the food sector, primarily in Asia. Black River selects companies in the sectors i) food production (e.g. milk, chicken meat, fish); ii) food processing (e.g. baby milk powder); iii) the logistics sector, primarily the cold logistics sector, such as the transportation of refrigerated and frozen products.

The fund, among other things, invests in Dutch healthcare.

The fund focuses on investments in clean technology and the environment in China.

VenturEast invests in small to medium-sized enterprises involved in the Indian Life Sciences sector. The fund provides these companies with growth capital and knowledge as a means of stimulating the continued development of these companies.

The strategy is to create Emission Reduction Rights (ERR) by investing in clean technology in developing countries and selling these ERRs on CO2 exchanges over time.

250-275

225-250

75-100

50-75

25-50

0-25

0-25

0-25


Area of Focus

Investment Category

Description Euros Invested (range in € millions)**



Companies created 63,000 jobs

68% more milk production per cow compared to small Chinese farms

New in 2014

New in 2014

Savings of 80,272 tonnes of water per year.

Savings of 650,000 tonnes of CO2 per year


62 PGGM

GMO / Renewable Resources

Conservation Forestry Fund II-B

RaboFarm

BlackRiver

Adecoagro (International Farm Holdings)

NCH

Rabobank Duurzaam Deposito

GMEF

SIMF I & II

Other

Other

Other

Other

Other

Other

Other (incl. micro financing)



GMO globally invests in forestry by directly or indirectly acquiring lands with a forest resource or land that is subsequently used to plant trees. The key fundamental source of return is the growth of trees and the sale of wood.

Conservation Forestry invests in forestry in the United States This investment combines institutional capital with the capital provided by nature conservation organisations. The key fundamental source of return is the growth of trees and the sale of wood.

The fund focuses on acquiring agricultural land in Eastern Europe. The land is leased to operating partners that produce for global markets.

The fund globally invests in agricultural land and operational agricultural activities.

Adecoagro is active in the production of food and renewable energy in South America. Key activities in Argentina, Brazil and Uruguay comprise the production of cereals, rice, oil-bearing seeds, dairy products, sugar, ethanol, coffee and cotton.

This fund focuses on acquiring and/or leasing agricultural land, which is then farmed, particularly in Ukraine and Russia. By consolidating small pieces of land and applying modern agricultural techniques relatively cheap production is achieved for global markets.

The collected deposits are linked to the Rabobank’s outstanding sustainable financing.

The fund, via funds, invests in the shareholders’ equity of local banks – Micro Financing Institutions (MFIs) – in emerging markets.

The fund, invests in the shareholders’ equity and in the loan capital of local banks – Micro Financing Institutions (MFIs) – in emerging markets.

100-125

75-100

100-125

100-125

100-125

200-225

75-100

0-25

0-25


Area of Focus

Investment Category



59,723 hectares of sustainably managed forests (comparable to approximately 120,000 football fields)

193,770 hectares of sustainably managed forests (comparable to approximately 387,000 football fields)

150 hectares of land upgraded to agricultural land.

3,185 hectares of unused land put into production as agricultural land

8,961 hectares of unused land put into production as agricultural land

60,000 hectares of unused land put into production as agricultural land in 2013

No direct impact indicators available because this investment comprises many small loans related to multiple themes.

5,289,763 people received financing

2,167,600 people received financing

Multiple themes

63PGGM

REP Portfolio

EDF Green Bond

GDF Suez Green Bond*

Equity

Corporate Bonds

Corporate Bonds

Under this mandate, investments are made in stable, profitable, listed companies that are well-positioned in terms of ESG factors. The investment universe comprises European countries and North America.

EDF allocates the collected funds exclusively to future sustainable energy projects, primarily in Europe and North America.

This investment concerns a green bond for sustainable energy projects.

2000-2500

0-25

0-25


Area of Focus

Investment Category



Aggregation is not yet possible, because not all companies report the impact and because the indicators are ambiguous.

Reduced the EDF Group’s CO2 emissions to 116.3 g/KW (the goal was to stay within 150 g/KW)

New in 2014

Multiple themes

* New in 2014

** PGGM calculates the investments in solutions on the basis of market value and commitments. A number of investments were made several years ago and the commitment period of these investments has expired. This is why we now use the market value for these investments. For new investments we report the total commitment. The basic principle is to publish all information about investments. There are a number of exceptions to this rule. However, this does not necessarily mean that we do not publish anything about these exceptions. For example, in such instances we often publish an indication of the market value of an investment instead of the precise value. This is why it was decided to specify a range for all investments in solutions in this overview, instead of a precise amount.

64 PGGM

In line with the shift in the focus of engagement activities – from the number of companies with which we are engaged in a dialogue to a more focused approach aimed at impact and dialogue at the market level – we only report on engagement figures in the appendix this year. In 2014, in the context of engagement, PGGM engaged in a dialogue with 510 companies. We carry out part of these engagement activities ourselves. In addition, we outsourced part of our engagement activities to the engagement service providers F&C (up to and including the third quarter) and GES (as of the fourth quarter). This enables us to reach a broad range of the companies in the portfolio. The stated figures refer to the combined activities of PGGM and the engagement service providers. At 111 companies we achieved a total

of 129 engagement results, or steps taken by these companies focused on ESG improvement. In addition to engagement focused on companies, we seek dialogue with market players such as legislators and regulators. In 2014 we engaged in a dialogue with 37 market players, most of which were aimed at improving corporate governance standards in markets in which we invest. We achieved a total of 5 engagement results for 4 market players. We are involved in engagement activities throughout the world. These activities are spread across various subject areas. The diagrams below show that Asia represents a major share of the engagement activities. This is because a relatively high number of companies in the equity portfolio are (also) domiciled in Asia (40 percent).

Engagement Activities Engagement Activities

Engagement Results Engagement Results

Asia

Europe (excl. the Netherlands)

Netherlands

North America

Other4%

21%

10%

41%

24%

Asia


Netherlands

North America

Other

1%

30%

13%

30%

26%

Environment

Social

Governance49%

23%

28%

Environment

Social

Governance

60%

16%

24%

Appendix 5. Engagement Figures

Distribution by Region

Distribution by Region

Distribution by Theme

Distribution by Theme

65PGGM

In 2014, PGGM voted at 3,395 shareholder meetings on a total of 37,281 agenda items. We most often voted at shareholder meetings in Asia (42 percent) and in North America (20 percent). In 22 percent of all votes we voted

against the management recommendation. Most of the management proposals (56 percent), as well as most shareholder’s proposals (41 percent) dealt with the appointment of directors.

Distribution of 2014 Shareholder Meetings by Region

Distribution of 2014 Management Proposals (by category)

Distribution of Voting Behaviour by 2014 Agenda Items

Distribution of 2014 Shareholder Proposals (by category)

Netherlands


North America

Asia

Rest of the world

20%

1%

17%

20%

42%

Anti-takeover scheme

Appointment of directors

Increase in share capital

Remuneration

Mergers and acquisitions

Other

5%

22%

1%

56%

8%

8%

Agenda items voted

in accordance with

management recommendation

Agenda items voted

against management

recommendation

22%

78%

Remuneration

Corporate governance

Appointment of directors

Health and the environment

Social conditions

Other

28%

2%

11%

9%

41%

9%

Appendix 6. Voting Figures

66 PGGM

In this 2014 Annual Responsible Investment Report, we provide information for our clients, their participants and other interested parties on the activities undertaken by PGGM in the field of responsible investment in 2014. Where we refer to clients in this report we mean both the clients of PGGM participating in the PGGM funds and the clients for whom PGGM manages mandates. If we state that we invest in a certain portfolio, we always mean that we do so on behalf of our clients. The information in this annual report only covers responsible investment activities carried out by PGGM. More extensive information on PGGM N.V. and PGGM Cooperatie U.A. can be found on PGGM’s website and in the 2014 PGGM N.V. Annual Report. This PGGM 2014 Annual Responsible Investment Report provides information on the 2014 financial year running from 1 January to 31 December 2014. The report is a progress report and does not provide a comprehensive overview of activities and current investments. It is limited to the responsible investment activities carried out by PGGM Vermogensbeheer B.V. in 2014. Unless stated otherwise in the respective sections, the data has been obtained from our financial and Responsible Investment databases.

Reporting and Transparency

Transparency is an important element for PGGM. We aim to be a reliable partner and provide clarity about what we do and why. We publish this Annual Responsible Investment Report every year on our website, and publish quarterly voting and engagement figures and quarterly reports for our clients. In addition, we write articles and position papers on specific subjects. Finally, we also enable our clients to provide their participants and other stakeholders with annual information on the investment portfolio and on the parties with which PGGM does business on their behalf.

Selection of Material Subjects

As an asset manager with a widely diversified portfolio, it is not easy for us to define the most essential subjects that affect our activities in the field of responsible investment. We have selected the relevant subjects on the basis of a materiality analysis, for which we have consulted various media sources. The materiality of the subjects for PGGM as an asset manager and its clients has also been taken into account.

Guidelines Followed

In compiling the PGGM 2014 Annual Responsible Investment Report we have adhered to the international reporting principles of the GRI G4. The GRI principles relate to both substantive choices (materiality, involvement of stakeholders, the sustainability context, completeness) and the quality of the reporting (balance, comparability, accuracy, timeliness, clarity, reliability). In addition, where possible, we have reported on the indicators of the GRI Financial Services Sector Supplement (FSSS Final Version, 2008). We have not followed the GRI to the letter in this report, because it concerns the asset management activities and is not relevant at the PGGM N.V. level. Further information on the sustainability activities at the corporate level can be found in the PGGM N.V. Annual Report.

The six Principles for Responsible Investment (PRI) of the United Nations have also provided a guideline for reporting. As a signatory to the PRI, we also report annually to the PRI on our activities. Finally, we use PGGM-specific indicators for our responsible investment activities which PGGM has agreed with its clients. These indicators are stated in Appendix 2.

Audit

KPMG Sustainability has audited the PGGM 2014 Annual Responsible Investment Report. See the Assurance Report in Appendix 8.

Appendix 7. Justification

http://www.pggm.nl/english/Pages/default.aspx


67PGGM

To the Readers of the ‘Responsible Investment Report 2014’ of PGGM Vermogensbeheer B.V.

We were engaged by the management of PGGM Vermogensbeheer B.V. (further ‘PGGM’) to provide assurance on the information in the ‘Responsible Investment Report 2014’ (further ‘The Report’). The management of PGGM is responsible for the preparation of The Report, including the identification of material issues. Our responsibility is to issue an assurance report based on the engagement outlined below.

What was included in the scope of our assurance engagement?Our assurance engagement was designed to provide limited assurance on whether The Report is presented, in all material respects, in accordance with the reporting criteria. We do not provide any assurance on the achievability of the objectives, targets and expectations of PGGM. Procedures performed to obtain a limited level of assurance are aimed at determining the plausibility of information and are less extensive than those for a reasonable level of assurance.

Which reporting criteria did PGGM use?PGGM applies internally developed criteria as described ‘Appendix 7 Justification’ on page 66 of the Report. It is important to view the performance data in the context of these criteria. We believe these criteria are suitable in view of the context of our assurance engagement.

Which assurance standard did we use?We conducted our engagement in accordance with the Dutch Standard 3000:” Assurance Engagements other than Audits or Reviews of Historical Financial Information”. This standard requires, among others, that the assurance team possesses the specific knowledge, skills and professional competencies needed to provide assurance on sustainability information, and that they comply with the requirements of the Code of Ethics for Professional Accountants of the International Federation of Accountants to ensure their independence.

How did we reach our conclusion? Our procedures included the following:

A risk analysis, including a media search, to identify relevant issues for PGGM in the reporting period in relation to responsible investment;

Reviewing the suitability of the internal reporting guidelines of PGGM;

Evaluating the design and implementation of the systems and processes for the collection, processing and control of the information in the Report;

Interviewing relevant staff at corporate level responsible for the sustainability strategy, policies, communication and management in relation to responsible investment and other staff at corporate level responsible for the delivery of information for The Report;

Evaluating internal and external documentation, based on sampling, to determine whether the information in The Report is supported by sufficient evidence;

We have discussed necessary changes to the information in the Report during our procedures with PGGM and concluded that these changes have been adequately implemented in the final version of the Report.

What is our conclusion? Based on the procedures performed, as described above, nothing has come to our attention to indicate that The Report is not presented, in all material respects, in accordance with the reporting criteria.

Amstelveen, 31 March 2015

KPMG SustainabilityPart of KPMG Advisory N.V.

Drs. W.J. Bartels, RA partner

Appendix 8. Independent Assurance Report

68 PGGM

This annual report is published by PGGM Vermogensbeheer B.V.

For further information, please contactDr Marcel JeuckenManaging Director Responsible Investment

PGGM Vermogensbeheer B.V.Noordweg Noord 1503704 JG Zeist, The NetherlandsPO Box 1173700 AC Zeist, The NetherlandsTelephone: +31 (0)30 277 9911E-mail: [email protected]

www.pggm.nl

Design and infographics: MissionFromMars Design, Branding & Visual IdentitiesGraphic design by PI&Q, Zeist

Colophon

DisclaimerWe provide the PGGM Annual Responsible Investment Report 2014 as a service for our clients and other interested parties. Although we have taken the utmost care in compiling this report, we cannot guarantee that the information is complete and/or accurate in all cases. Nor do we guarantee that its use will lead to the correct analyses for specific purposes. Therefore we can in no case be held liable for – among other things but not exclusively – any deficiencies, inaccuracies and/or subsequent amendments. The use of this report is not permitted without our prior written consent, other than for the stated purpose for which we have compiled this report.

In the event of discrepancies between different versions of the PGGM Annual Responsible Investment Report 2014, the Dutch version shall prevail.

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