In private infrastructure, APG aims for larger stakes to increase influence

APG on behalf of its clients uses its influence to improve companies’ sustainability and long-term performance. In this series, we explore how stewardship is applied in the different asset classes and strategies making up APG’s diversified portfolio. In this first installment, Jan-Willem Ruisbroek and Cameron Talbot-Stern zoom in on infrastructure. “We’re glad to see ever more infrastructure investors incorporating sustainability in their stewardship activities.”

APG is a global investor in infrastructure with a diversified portfolio of nearly € 25 billion in assets under management, including investments in transport (e.g. electric vehicle chargers, toll roads, rail, ports), telecom (e.g. fiber optics), power (e.g. wind and solar farms), and water and waste water infrastructure. Recent investments include Gemini, a solar and storage project in the US, and Glaspoort, a joint venture with KPN for the rollout of fiber-optic connections to homes in less urbanized parts of the Netherlands.

Tangible benefits

“Our aim is to not only achieve solid returns for our pension fund clients, but also to generate tangible benefits that contribute to the well-being of society”, says Jan-Willem Ruisbroek, Head of Global Infrastructure Investment Strategy at APG. Over one-third (€ 8.5 billion) of APG’s infrastructure portfolio contributes to the Sustainable Development Goals, in particular SDG 7 (Affordable & Clean Energy), SDG 9 (Industry, Innovation and Infrastructure) and SDG 11 (Sustainable Cities & Communities). But investing in solutions to the world’s challenges is not the only way in which APG and its clients contribute to a better world.

According to the Principles for Responsible Investment (PRI) private-market investors, in particular those with direct exposure to real assets, are in an excellent position when it comes to stewardship, due to the large and sometimes controlling interests in their investments. “APG generally aims to obtain a significant stake in an infrastructure asset, typically 20 to 50 percent of the equity, as this increases our influence,” Jan-Willem explains. “In very general terms, the larger the stake we own, the more we have to say about the asset’s strategy and operations and the better we can encourage investees to improve their environmental, social and governance (ESG) practices.”

APG uses the below best-practices in negotiations on governance and controls in private infrastructure investments.

(In)formal influence

However, in private markets – contrary to capital markets (e.g. listed equity) – voting rights for shareholders are less regulated. “In private companies voting rights and relationships between individual shareholders are captured in case-by-case contractual agreements,” Jan-Willem says. “These agreements include a stipulation on the equity (ownership) thresholds required for an investor to have a say in operational or strategic decisions. In some cases, this may also include the right to seats on supervisory boards. In principle, shareholders can decide themselves how they want to control the company, and the amount of control each shareholder has results from negotiations at the time the investment is done.”

This means that in private markets, an investor’s formal influence is typically a function of the size of their stake, the number of votes they have in the shareholder meeting and how this relates to the stakes and voting power of other investors. “In cases where APG does not have a controlling stake, we aim to form consortiums with like-minder investors. By collaborating with other investors that share the same goals, we may still exert significant influence over a company that APG invests in.”

In addition, and perhaps equally important is the informal influence that investors can exert through the power of persuasion, Jan-Willem explains. “Of course, this requires them to have access to all the requisite information, constructive relationships with other investors and board members, and the expertise and experience needed to come up with convincing arguments.”

Sustainability performance

APG looks at a range of material ESG issues that might affect infrastructure investments over an assets’ lifetime. For instance, on climate, health & safety and community relations. Assessing these issues is part of the due diligence process prior to making any infrastructure investment and is a key component of risk management during the holding period. “We use GRESB Infrastructure Assessments, an independent ESG measurement tool, that APG helped to establish in 2016 to evaluate sustainability performance from a management, policy and implementation perspective,” says Cameron Talbot-Stern, who leads ESG integration for APG’s private markets infrastructure portfolio. APG requires all new infrastructure investments to take part in GRESB Infrastructure Assessments on an annual basis. For the 2022 survey year, 90% of APG’s assets under management reported to GRESB.

This helps APG to identify and prioritize those environmental, social and governance issues where the most material improvements can be made. Cameron: “We can then engage with management and encourage the company to act on these issues, using both the formal and informal mechanisms at our disposal. I am glad to see ever more infrastructure investors incorporating sustainability in their stewardship activities, which gives us opportunities to seek collaboration with like-minded investors.”

Influence

Jan-Willem represents APG on the supervisory board of two infrastructure investments; in one case, he also chairs the remuneration committee. “We believe it is important for an executive’s compensation package to include relevant ESG-related performance targets. For instance, improvement in the company’s GRESB score, reduction of greenhouse gas emissions and progressing to net zero emissions targets, reduction of accident rates or increased board diversity. Being part of or even chairing such a committee obviously provides additional influence in our relationship with the company.”  

In some cases, it is possible to already address ESG issues in the process leading up to an investment. “It all depends on the leverage we have in relation to the company’s requirements for new capital,” Jan-Willem says. “The market for good infrastructure investments is very competitive. Promising companies can usually choose between multiple potential investors. In such cases, we may try persuasion rather than being too prescriptive in our approach.”