If there is one area in which pension funds are under the magnifying glass, it's their socially responsible investment policy. The (European) legislator, the supervisory authority and public opinion are demanding more and more regulations in this field. Legal Counsel Marijke Biewinga and Risk & Investment Officer Arnold Gast talk about the steps SSPF has taken in 2021. A path full of exchanges, dilemmas and external pressure.
Arnold Gast: "Quite the opposite. The social pressure to adopt socially responsible investment practices only increased further in 2021. Think about legal proceedings such as those against Shell, and the actions of NGOs such as Friends of the Earth Netherlands, which are getting a lot of media attention. As a pension investor, you can no longer avoid this topic."
Marijke Biewinga: "On top of that, legislation has clearly become tighter and more stringent. ESG investing is increasingly becoming rule-based1 rather than principle-based."
Marijke: "On 10 March 2021, the SFDR level 1 legislation came into force, legislation that is part of the EU's Action Plan for Financing Sustainable Growth. One of its goals is to counteract any possible greenwashing. The SFDR sets out in considerable detail the requirements for ESG reporting that both pension funds and providers of financial products must comply with. SFDR, which stands for Sustainable Finance Disclosure Regulation, therefore takes things a step further than the IMVB (International Socially Responsible Investment) covenant that SSPF voluntarily signed in 2018. By signing that covenant, the fund at that time made a commitment to further develop its Socially Responsible Investing (SRI) policy, to choose certain topics and to be more transparent. In fact, SFDR ensures that much of what was laid down in the IMVB covenant is now legally established. It is very detailed, especially regarding implementation, and is of a more compulsory nature."
Arnold: "In March, we drew up an SFDR statement, with which we are, in effect, showing our true colours. That statement can be viewed on our website. The challenge for us was that we had to wait until 2021 for the final SFDR level 2 legislation, which specifies in detail which aspects we actually have to report on; it involves, for example, indicators for the emission and concentration of CO2. But the implementation of that specific legislation has been postponed until the beginning of 2023. Although the framework of that legislation is for 80% clear, it is now causing a lot of unclarity in the pension sector."
Arnold Gast: "It's not only about money and returns, but also about the world in which you may be receiving that pension now or at a later date.”
Arnold: "Indeed, we cannot manage that all by ourselves. We therefore cooperate with EOS at Federated Hermes, which is specialised in this field. This engagement service provider works on behalf of a large group of investors and therefore has much more clout than we would have operating alone. Hermes EOS employs thirty engagement specialists solely for dialogues with companies. Their approach, ways of communicating and views perfectly match with our own. Finally, as an extension of their dialogues, they provide voting advice and proposals for shareholders' meetings. In order to use this influence and strengthen the dialogue, these are adopted by SSPF."
Marijke: "The four SDGs that were identified through the survey, with 'Affordable and Clean energy' at the top, have been included by EOS in the engagement plan, which means that they actively encourage this topic among the companies we invest in. Among other things, the SFDR legislation is going to encourage both EOS and us to measurably report how we, with our investments and our influence, specifically score on those SDGs."
Arnold: "The deeper you explore this issue, the more complex your discussions are bound to become. For example natural gas. To what extent is that green or not? Obviously gas is not free of CO2 emissions, but it is better than coal. And how green is nuclear energy?.”
Marijke: "What we always try to remember during these discussions is our ultimate goal: to offer our participants a good pension in the long term, in the most sustainable way possible. And to communicate clearly about this.”
Arnold: "It's not only about money and returns, but also about the world in which you may be receiving that pension now or at a later date. We first and foremost want to better manage our investment risks with a view to ESG factors.”
Arnold: "The board is convinced that a high return from companies with a weak ESG profile will not last in the long term and does not outweigh the possible risks involved. This is another reason why it is important to, by means of engagement, improve the ESG practice and performance of companies in which SSPF invests. On the other hand, we will not invest in companies solely because they have a good ESG profile; we always consider risk and return at the same time. Good ESG performance and a good risk/return ratio work very well together."
Marijke: "In addition to that, I think it's a positive development that this topic is increasingly being discussed within our board. By 2021, all board members will have completed an extensive ESG training course."
Marijke Biewinga: "On top of that, legislation has clearly become tighter and more stringent. ESG investing is increasingly becoming regulation-based rather than principle-based."
Arnold: 'Three. For these companies, through EOS, there was no prospect to engage in a meaningful dialogue. At some point, we had to sell those shares. Of course we would rather not do that, because you then lose all influence on such a company. Every quarter, we screen all our investments for possible controversies, both on the part of EOS and SAMCo. This way, we can operate from two angles, partly because they work with different datasets. If we detect controversies, we investigate with EOS to what extent there is still room for a constructive dialogue. That determines whether a particular investment is placed (or not) on our exclusion list. We then consider what the impact of such an exclusion might be: if it's about poor working conditions within a particular company, for example, then you're really not supporting employee interests if our shares end up in the hands of an investor who doesn't give a fig about those issues."
Marijke: "The simple fact that we have excluded 'only' three companies in 2021 illustrates our approach of focusing on engagement and voting for as long as possible. Because once we are out, we lose all influence."
Marijke: "In everyday life, this turns out to be quite difficult to quantify and often involves the introduction or adjustment of policy. A company will not readily admit that they have changed their practices because the shareholders wished them to. Having said that, EOS does provide us with figures if pressure from shareholders has had a positive effect on, for example, diversity within a Board of Directors or equal pay for men and women. Incidentally, neither the fund nor EOS can establish a dialogue on all topics. The fund has set priorities based on a risk analysis and the topics that have been chosen. EOS pursues these priorities through its engagement policy. Reporting developments on sustainability features under SFDR will hopefully give a good impression of the impact of our engagement."
Arnold: "In the coming years, we would like to focus more on the ESG outcomes of our investments, in other words on the inclusion rather than exclusion of companies that are doing well, best-in-class in a particular sector, etc. This way, you can indeed contribute to the energy transition or better social conditions."
Marijke: "That in itself is not an SSPF objective, we are not competitors. However, we do participate in the ranking of VBDO, the Dutch Association of Investors for Sustainable Development. This offers a solid basis for comparison and for making improvements. In VBDO's annual ESG ranking of fifty pension funds, we have moved up from the rear to 25th place in two years' time. This is a major achievement considering that VBDO has been raising the bar on sustainability and the other pension funds have not been sitting on their hands either. To what do we owe this advancement? Mainly through pursuing our engagement and voting.”
Arnold: "Also, last year we further expanded the implementation of tailor-made ESG benchmarks for shares, credits and high yield investments."
Arnold: "We intend to very distinctly formulate our own story, in which we will clarify what we as SSPF really stand for in terms of ESG investments. In the years ahead we plan to focus more on the ESG results of our investments, so on inclusion rather than exclusion, when companies are doing well, best-in-class in a sector, etc. That way you can indeed contribute to, for example, the energy transition or better social conditions. See it as a more in-depth process. And following on from that, we want to make our policy more tangible by formulating KPIs, starting with climate, so that in the future we can steer on that even better."
1 Rule-based assumes as many rules as possible to influence behavior and principle-based assumes few rules and especially focus on the relevant principles.