Do you think enough pension funds are moving quickly enough to embed sustainability?

There is always more that can be done, especially with an issue as important as this. There is a lot of traction here in the Netherlands at the moment, but many pension funds are still looking to embed it more meaningfully in their investment decisions, and are becoming increasingly aware of how they can do this.

A lot of progress has been made over the past two years. Before that, it was considered more of a nice idea or a luxury commitment. That has now changed and pension funds are becoming much more aware of the risks and of the importance of sustainability.

There has been a lot of research conducted into one of the most understandably pressing concerns trustees have on this issue. The question that is inevitably asked when presenting the idea of incorporating sustainability is: will it affect returns? The evidence has put this concern to rest as it does not have to have a negative effect on returns. This has certainly made the case for sustainability a lot stronger, but there is still more the industry could be doing on this front.

 

 

What has been driving change over the past two years, particularly in relation to climate risk?

Regulation has definitely helped. The Dutch central bank, De Nederlandsche Bank, has been very explicit on what it expects from the financial sector, especially when it comes to climate-related risk.

Pension funds are also very peer-orientated which has helped. Climate risks have moved from an abstract concept to a tangible risk. This has created a much greater degree of awareness which, in turn, has been driving this change.

At the same time, there has been a big shift in public perception. People are becoming much more vocal on this issue as the risks become more apparent. This is especially true among the younger generation. They really want pension funds to take responsibility and to use their influence to act on these issues. A lot of factors have really come together over the past few years to create this push for change.

What is the biggest challenge for pension funds when it comes to full integration of sustainability into their whole portfolio?

A lot of funds are still struggling with the issue of formulating concrete goals. Understandably, many of them simply just don’t know where to begin.

When it comes to setting baseline goals, or identifying areas of interest, the UN’s Sustainable Development Goals are a good place to start. The 17 SDGs were designed for governments, but can also be used to formulate concrete goals, or at least develop some areas of focus, for pension funds and the companies they invest in.

However, it is obviously  not enough just to take one area, or asset class, into focus. Sustainability really has to be applied across the entire portfolio to maximise impact and affect social responsibility.  It is just a relatively new development that has not been considered necessary in the past. Some older trustees still see it as a cosmetic measure that is a bit of a luxury.

It helps when a party like Ortec Finance comes along to demonstrate how climate, macroeconomic, and financial modelling can be tied together to produce a more complete picture of the impact climate risk, for example, can have on asset liability models (ALM) and ultimately on the funding outcomes of pension funds. That can subsequently be used to inform strategic asset allocation decisions, portfolio manager selection and even how the portfolios are constructed and run.

 

How important is it for pension funds to build climate risks in at the ALM level?

It is very important. In Holland, the investment process is very centred around ALM. It is vital that we take climate risk into account at that stage. The entire purpose is to balance returns and risk so it would be strange not to take the most important risk into account. It is an important risk in terms of stranded assets, and the transition to a low carbon economy.

 

Is there a role for asset managers to get involved in policy design?

There is certainly a role for asset managers in policy design. Some pension funds, especially the larger ones, have more resources and are therefore in a better position to get their sustainability policy off the ground in the first place. The smaller ones will often turn to asset managers to help get this process started. They need an asset manager who can help them with the equity part, for example, and with ESG-proofing portfolio choices. Asset managers can then help them to move on to other asset classes and integrate sustainability across the board. Of course, the pension funds should be in the driving seat themselves. The most important first step in all of this though is for pension funds to have a clearly articulated set of objectives.

 

Is there enough emphasis on sustainability in the passive space?

A lot of the pension funds have, understandably, been very cost-focused and this has generated a lot of interest in lower-cost passive mandates. Passive providers have, at the same time, become more focused on ESG-proof solutions. We believe this trend will continue and we are looking to the asset management industry to come up with innovative strategies to help pension funds manage climate risk, for example, in low-cost structures that can also provide returns close to mainstream benchmarks.

 

about the author.

 

Anne Gram Independent investment expert and internal supervisor Anne Gram has worked for more than 25 years in the financial sector, since 2006 as independent advisor and internal supervisor to a variety of pension funds. Prior to that, Anne had held roles ranging from portfolio manager to director of investments at a number of asset managers including ABN Amro, Fortis MeesPierson and Robeco. Anne is co-founder and past president of the CFA Society of The Netherlands and has also served on the board of VBA and as columnist for more than 10 years for De Financiële Telegraaf.  In her role as expert in investment committees an important goal has been to put sustainability high on the agenda in the board rooms. Anne is convinced pension funds and other financial sector actors can also play an important role in contributing to a liveable world for future generations.  She encourages and helps pension funds to set out ESG policies and translate these into actionable goals.  Anne holds a masters' degree in International Economics from the Copenhagen Business School and is a Chartered Financial Analyst.