How do you bring sustainability into investment?

investment viewpoints

How do you bring sustainability into investment?

Q&A with Don Gerritsen

In this Q&A, Don Gerritsen, Head of Benelux for the Principles for Responsible Investment (PRI), explains how asset owners are developing their approach to sustainable investing, and what challenges remain.

 

How important is a whole portfolio approach to integrating sustainability?

A holistic approach to sustainability is by far the most effective means of either creating a positive impact, or negating a negative one.

What has helped on this front has been the introduction of the Sustainable Development Goals (SDGs). These are a collection of 17 global goals set by the United Nations that cover social, economic and environmental development issues. Although these were designed as objectives for governments, they are also a useful point of reference for the private sector. There has been demonstrable interest in these objectives and they have been used to align portfolios with sustainability targets.

 

In your experience, how are investors integrating sustainability into passive allocations?

There has definitely been a growing interest in passive investment. In our experience, investors tend to integrate sustainability into their passive investment strategy using one or more of three primary methods.

The first is to simply exclude companies which do not meet standards from the index. This can be an effective method but it does risk overlooking companies which are still in the process of transitioning to a more sustainable model.

Another popular approach is to focus on the best in class stocks. Focusing on those companies which are leading the way in terms of sustainability – and, importantly, can demonstrate as much – is a popular method of creating a more sustainable passive strategy.

Finally, some investors chose to adopt a slightly more advanced technique whereby they will reweight an index to prioritise constituents who have demonstrated a clear adherence to sustainability.  

Investors might adopt any one of these approaches, or a combination thereof, but it is worth noting that all three are complemented by an active approach.

 

What impact will the new benchmarks from the European Commission have?

We played an active role in shaping this new generation of low-carbon benchmarks and we believe there is great potential here.

It is reassuring to see regulators take steps towards achieving the goals of the Paris Agreement. The climate-transition benchmark and the specialised benchmark both have the potential to bring investment portfolios in line with the agreement.

 

Is regulation doing enough?

A key area of development on this front has been to do with fiduciary duty. This has been a difficult area to reconcile with sustainability as it is, by definition, the focus on generating returns. This can be at odds with sustainability principles. However, there have been some important developments from a regulatory perspective recently.  

This is a really key area and there has been a lot of noteworthy developments. In March, the Dutch Central Bank (De Nederlandsche Bank) became the world’s first central bank to sign up to the UN’s Principles for Responsible Investment (PRI). The DNB is encouraging market players to take a more active role when it comes to sustainable investment. This is undoubtedly a positive direction of travel which is starting to have an effect on the investment landscape.

 

about the author.

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Don Gerritsen, Head of Benelux, PRI

Don oversees PRI’s practices in the Netherlands, Belgium and Luxembourg. Previously he was responsible for PRI’s global asset owner programme and its asset owner insight team. Prior to joining the PRI in London, Don worked as a strategy consultant with KPMG and as programme manager with the Dutch Investors Association for Sustainable Development. Before that, he held various roles at the United Nations. Alongside PRI, Don works as guest lecturer active ownership of investments at Erasmus University Rotterdam. His educational background is in investment management, international law and public administration.

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