APG Asset Management (APG) is a fiduciary manager for Dutch pension funds. We invest globally with the aim to enable our clients, on whose behalf we invest, to achieve the highest net return for their beneficiaries while ensuring the pension funds remain strong and future-proof. As a leading long term responsible investor we want to enable pension fund beneficiaries to rely on a good income upon retirement and enjoy that income in a sustainable world. All investment policies are geared towards achieving this dual objective.

One of APG’s investment beliefs is that good governance and responsible investment are key.

We have used scenario analysis to explore plausible future developments up to 2040 in the economic sectors and countries that we invest in. We have used both a 'business-as-usual' scenario and a '2-degrees' scenario.

From these scenarios, we identified 44 climate factors. These are the key drivers of climate-related risk and opportunity that may impact the economic sectors that we invest in, e.g. carbon pricing, extreme heat, decreasing oil demand, flooding, rise of renewable technologies.

We have categorized these climate factors in three buckets: Policy & Regulation, Technology, Market & Reputation and Physical Impact. For each sector and country, we assessed the most significant climate factors, and how these may impact on growth and cost levels in the sector. We have done this for 26 economic sectors and the majority of countries in the investable universe covering, in total, approximately 70% of the portfolio, using the time horizons 2022 - 2030 - 2040.

The scenario analysis undertaken used time horizons 2022, 2030 and 2040.

APG has established a Climate Risk Policy which describes the climate risk approach. The APG AM Climate Risk Policy covers the entire investment process as performed on behalf of our clients: From investment beliefs towards evaluation. Climate related considerations are included in the Strategic Asset Allocation, mandating process, portfolio management and in the Annual Mandate Review cycle. This policy is dependent on the availability of tooling and measurements, which is a field still very much in development. Tooling that is already available within APG includes the traffic light model and a climate dashboard.

The traffic light model captures the results of the climate scenario analysis, which offers insight into the most pressing risks and opportunities in 2022, 2030 and 2040.This analysis will be conducted every two years to capture the latest developments into the scenarios. Next to that, we developed a climate dashboard with 20 indicators that together give insight into the speed of which the transition to a low-carbon economy is going. This dashboard will be updated every year and will be available broadly within APG Asset Management. The two tools enable a high-level organization-wide view on the key climate related risks and opportunities in the portfolio, and the speed at which these may be manifested.

The portfolio managers and sector specialists of the various investment strategies are primarily responsible for managing of climate related risks and capturing opportunities, since at that level the specific knowledge is available on how climate change can impact investments. The organization-wide insights from the climate scenario analysis can raise points of attention and priorities for follow-up by the portfolio managers. Therefore, the portfolio managers are the so-called first line of defense within the risk management framework.

With the climate scenario analysis, APG has made steps to further integrate climate change also into the so-called second line of defense. The traffic light model and the dashboard are available for management teams and the risk management department of APG, as well as for our clients. In the coming years, work will be done to further integrate climate change into the second line of defense function.

Current mitigation measures include:

• Actively monitoring developments in policy, markets and technology through research, company meetings, trade fairs, conferences, in-situ visits, etc. For example, in 2019 a portfolio manager covering the Utilities sector went on a field trip to Germany to, amongst others, speak with politicians about the developments German policy towards phasing out coal-fired power generation.
• Accounting for carbon pricing, reduced volumes of fossil fuels and other financial impacts in investment cases and CIP memos, e.g. a 15% annual reduction in coal transport for investments in US rail transport companies.
• In illiquid asset classes, an investment rationale focused on next-generation assets. Long-term risks are included in due diligence and subject to GRIG sign-off.
• Analysis of companies' transition strategies and capex plans, particularly in transition sectors such as oil& gas and automobiles.

APG AM has adopted an internal Code of Conduct to detect and manage potential conflicts of interest, which is being monitored continuously and reviewed annually. Where a potential Conflict of Interest is apparent, APG AM can decide to refrain from engaging in a particular activity.

APG AM also has specific existing policies on Insider dealing, gifts, invitations and entertainment, and additional functions.

If for any reason pre-emptive measures have not been successful in mitigating a potential Conflict of Interest, APG AM will endeavour to make any information pertaining to such conflict available to all relevant stakeholders.