It's the risk, stupid! About risk and green pastures
The Dutch pension market is a beautiful landscape full of green pastures for asset managers, in which they earn a packet. If they want to continue to do so, they must be aware of the interests and sensitivities that play a role here, nationwide. Because the market is changing. Asset managers better be aware.
Outcry
When the Dutch TV series Zembla broadcast a documentary named ‘Het Clusterbom gevoel’ (‘That Cluster Bomb Feeling’ on the evening of Sunday, 18 March 2007), representatives of Dutch pension funds sat trembling in front of their sets. The programme presented a somewhat sensationalised picture of pension fund investments in controversial businesses: companies that produce cluster bombs and landmines, that cause serious environmental damage or that use child labour to make their products. Furthermore, the programme showed that Dutch pension funds provide little transparency on the details of their investment operations. And although the tone of the programme may have left something to be desired, the representatives of the major funds who were interviewed were unable to turn the tide. The programme had major consequences. The newspapers were full of the story for days afterwards, and the government Ministers responsible faced questions in Parliament. Dutch pension funds, including some that were not mentioned in the programme, received thousands of letters, e-mails and phone calls from angry and concerned investors. ‘I don’t want any blood on my pension’, was the general tenor of the reactions.
Fast response
The evening after the broadcast, a number of large pension funds, including ABP, PGGM and PME, announced on TV that in future they will provide full information on their investments. All stock positions will be published online. The umbrella organisation for the Dutch pension funds sector also promised an investigation and recommendations in the near future. Those promises tempered Parliamentary calls for measures and further regulations, at least in the immediate future. The sector proved able to address the public signal quickly and to turn it into concrete measures. Then it was up to the pension funds to formulate an answer to the outcry.
Risk
The uproar caused by the broadcast brought to light an aspect of socially responsible investment (SRI) that has so far had too little attention among pension funds: risk management. While other private sector companies, particularly large multinationals, have long seen responsible investment as part of risk management, until recently, the debate on this issue among pension funds was driven mainly by the desire for a better world.
There was already awareness that in the long term, corporate social responsibility (CSR) creates conditions that can improve shareholder value. After all, companies that practice CSR limit all types of risk: consumer boycotts, claims, damage to reputations, legal action or legislative measures that restrict the company’s operations. So there was already something to be said for SRI from the point of view of yields. However, until now, there has been too little recognition of a direct risk for pension funds.
Wake-up call
Zembla’s producers can be thanked for this wake-up call. The broadcast made painfully clear that pension funds run a high risk of reputational damage if they do not take public sensitivities and preferences into account in their investment policies. In the Dutch situation, with mandatory sectoral pension funds, this applies more than anywhere. People who are required to contribute large amounts of their salaries to pension funds they do not choose for themselves make extra high demands of those funds. This not only involves demands of a moral nature, but above all, a call for openness. Noblesse oblige, precisely for institutions to which citizens are tied for life, without any free choice. In that case, confidence in good representation must be beyond any question.
However, this obligation does not mean that from now on, pension funds can invest only in solar power, organic tomatoes and micro-credit. But it does mean that they have to make conscious choices, to be ‘glass houses’ and to be able to justify everything they do. It also means that those who would prefer something to be kept secret had better avoid doing it. For today, with Google at hand, little remains a secret for long.
If pension funds fail to meet demands for aware policies and transparency, their risk is not confined to reputational damage alone. Ultimately, this could threaten mandatory pension schemes as such and consequently, the Dutch sectoral pension funds’ license to operate. The consequences for the collective pension system in the Netherlands are obvious. Ultimately, it might be the end of the Dutch collective system built on solidarity, which stands for lower costs and better pensions for all.
What next?
Together with the umbrella organisation, the Dutch Association of Industry-Wide Pension Funds (VB), the large Dutch pension funds have taken the first steps. The SRI policy, which has existed for many years, will be tightened up. And at least as important, major steps have been taken in the field of transparency. Public opinion plays a role in these measures. With the aid of opinion polls, the pension funds are investigating the issues and information requirements of their various contributor groups. But full integration of SRI criteria in the investment policies of the pension funds will require more, including external assistance – to start with, from the asset managers acting globally on behalf of the Dutch pension funds.
Green pastures
The Dutch pension market is a beautiful landscape full of green pastures for asset managers, in which they earn a packet. If they want to continue to do so, they must be aware of the interests and sensitivities that play a role here, nationwide.
Many asset managers regard SRI simply as a nuisance: a complex subject on which they prefer not to burn their fingers. Who decides what is right anyway? Is it the legislators, and if so, which ones? The legislators of the country in which a company is established? Or the legislators of the capital provider’s country of origin? Or is it the United Nations? And if an action group manages to mobilise enough protest about a particular issue, does it then automatically have moral right on its side? These are difficult questions, and I do not expect the average asset manager to be able to give me an immediate answer. But they do claim to know everything about risk. And that is precisely what I am concerned about. I think it can be solved quite simply. Not only financial risks and corporate risks relating to CSR, but precisely also the resulting risks to reputation and the political risks for institutional investors: asset managers must include these factors as an integral part of the extensive and exceptionally advanced research, know-how and innovation that their generous fees should warrant. This applies not only for specific SRI mandates, but always and everywhere. Those who address this effectively will later be among the leaders. We shall see whether the sector picks up the gauntlet. My telephone is switched on.
What does PME do?
UN principles
PME was one of the first Dutch pension funds to sign the Principles for Responsible Investment (PRI). This is a code in which institutional investors worldwide accept that environmental, social and governance factors affect investment results and that it is therefore important to integrate these factors in investment policy. PME includes the PRI principles in new contracts and requires its external asset managers to apply them.
Active shareholdership
PME believes that companies that treat their environment and labour in a sustainable manner have the best chances of survival in the long term. CSR limits all sorts of corporate risks, such as customer boycotts, claims for compensation, damage to reputation and legal measures. In the long term, limiting those risks will have a beneficial impact on corporate results and, therefore, on the company’s shareholder value.
In order to promote CSR in the companies in which it invests, PME has outsourced voting at the general meetings of shareholders of the companies in which it invests to the British organisation F&C since the start of 2004. When casting the votes, this organisation assesses the proposals of the company management in terms of the principles of good governance, which includes the social policy, labour standards, the environmental policy and treatment of human rights. In addition to voting at general meetings of shareholders, F&C also performs engagement activities on behalf of PME, in which it actively raises issues with the companies concerned, in order to exert an influence on the policy.
PME sometimes addresses engagement activities itself, for example in its latest investment in forestry projects in the US (2.2% of the assets). PME has reached agreements here with the project managers on achieving more sustainable forest management. In concrete terms, this means that, within three years, the management of the areas consisting of natural forest must comply with the requirements of the FSC, the widely recognised international certificate of sustainable timber production. The FSC criteria cover both social and ecological aspects. The project sections involving planted forests are subject to a contractual effort requirement to achieve the same goal in due course.
Transparency
Via its website at www.metalektropension.nl, PME regularly reports on voting behaviour. Each month, a list is published of the ‘votes against management’, in which F&C voted against the proposals of the company concerned on PME’s behalf. A brief explanation is provided of the reasons for each vote against or abstention. Every quarter, PME also publishes a review of companies actively contacted. A clear chart with symbols shows which companies were contacted on which issue. When contacts have a positive effect on the relevant company’s policy, this is shown on the chart.
From mid-2007, PME will also publish all companies in which share positions are held on the fund’s website. This information will be extended in due course to a search system, in which visitors can conduct searches by company name. If PME has an interest in a company, information of PME’s voting behaviour and any engagement activities performed at the company will be shown alongside the company name.
Positive selection
PME has invested 1% of its assets in a mandate that uses ‘positive screening’. This mandate is invested through the French asset manager IDEAM. This asset manager explicitly assesses both social and financial criteria in its choice of investments, selecting the ‘best in class’ companies in each sector.
Negative selection
The fund rules out investments in activities that are rejected in the Netherlands on the basis of Dutch law or international treaties signed by the Netherlands. In concrete terms, in 2007 this includes investments in certain types of cluster bombs and landmines.