Asset owner platform: Market cap strategies need re-think

A senior executive at the world’s largest investor-led sustainable investment platform has said that market cap investment indices are no longer fit for purpose.
Asset owner platform: Market cap strategies need re-think

The chair of the markets and members committee of the Sustainable Development Investment Asset Owner Platform (SDI AOP), the world’s largest investor-led sustainable investment platform, has told AsianInvestor that investment strategies based purely on market cap indices are inadequate.  

“A simple market cap approach is insufficient. Asset owners understand they must go beyond just accepting the market cap as being the reality of things,” said Hans Op’t Veld, who is also principal director for responsible investments at the €162bn ($183bn) Dutch pension fund, PGGM.

“The current [market cap] universe is not the same as what we need: investors are re-thinking their approach,” he added. Members of the SDI AOP collectively comprise $13 trillion of AUM.

The SDI AOP was founded in 2020 by Australian Super, Canada’s British Columbia Investment Management Corporation, APG and PGGM. It represents total AUM of $1.468 trillion, with investment manager members, which include BlackRock, UBS Investment Management and Bridgewater, collectively comprising an additional $11.5 trillion.


Op’t Veld said that one European institutional investor member of the AOP, whom he declined to name, will allocate several billion dollars’ worth of Asian equity mandates based on the SDI taxonomy formulated by the AOP within the next few months.

“I know of other investors currently writing mandates specifically for emerging markets. Within 3 to 6 months, meaningful volumes will flow into these products,” he said. PGGM was not currently among them, and would instead to retain the market cap index for now, according to Op’t Velt.

Op’t Velt said that the shift towards SDI-tilted indexes placed greater control, and responsibility in the hands of investors. “It is exciting but risky since [investors] must pass judgment on the index,” he said.

The SDI AOP eschews self-reporting in favour of independent analysis of company accounts, using AI and human analysis, to provide data on how far products and services contribute to the UN’s Sustainable Development Goals (SDGs). It has selected 9,258 companies worldwide that make such a contribution. More than half of their products or services of 1,275 of those companies contribute to the UN SDGs.

Op’t Veld said that the prevailing approach at PGGM was still to start with a market cap index, then tilt it towards stocks where the funds saw SDI opportunities, often adding additional screens to companies selected by SDI measures.


“Typically, these relate to add-on issues such as [companies experiencing] controversies,” he said. He added that, in addition to shaping funds around Paris-aligned benchmarks, PGGM has measuring schemes that monitor emissions over the entire portfolio. The AOP adds value by evaluating the impact of investments over time, as well as helping PGGM select from a universe of companies that had performed well in the past.

The new mandates would follow a shift by one of Asia’s largest superannuation funds from market cap to ESG indexes.

Between July and September 2022, the New Zealand Superannuation Fund (NZ Super) shifted the universe from which it selects $25 billion of passive investments in global equities to two MSCI market indices aligned to the 2015 Paris climate targets. The move was an effort to improve the environmental, social and governance (ESG) profile of its portfolio.

In October, NZ Super’s CIO Stephen Gilmore told AsianInvestor that the move would significantly reduce the amount of time that staff would have to spend on researching stocks for their ESG impact, and would increase the fund’s ability to scrutinise and engage with individual companies.

READ MORE: Cost savings push NZ Super to new climate indexes

The story has been updated to add the pension fund's name in para 2.

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