1. Pension funds and sustainable investment
2nd DNB Seminar on Financial Inclusion
Strategy for and challenges in financial inclusion
Patrick Corveleijn DNB Pensions Supervision, 22 September 2017

2. Agenda Introduction: background and set-up First impressions
General picture
Policy
Risk management
Accountability
Challenges
Wrap-up

3. Introduction Dutch pension system
Pillar III Individual private pensions
Pillar II Private employee pensions
Pillar I State pensions (Dutch citizens included via General Old Age Pensions Act up to 70% of minimum wage)
Employers are obliged to build up pension for its employees 
(if, statutory requirement for sector, and/or part of the collective labour agreement)
Approx. 90% of Dutch employees are included in a fund scheme.
268 Pensionfunds manage approx. € billion of assets.
DNB Supervision
DNB supervises sufficient funding, appropriate risk management and sound governance (under Pensions Act).

4. Background pensionfunds
Introduction
Background pensionfunds
Legal perspective
The Pension Fund Governance Act, Section 135(4) of the Pensions Act
Code for Pension Funds
Capital perspective
Size (€1,300 billion) and international
Overview of risks
Social perspective
Pension assets are invested with sufficient public backing, although trust in pension funds is low
There is a growing tendency in society towards a more sustainable economy
Since 2014 Pension funds have been obliged to state in their annual reports how their investment policies take account of;
environmental and
climate aspects,
human rights and
social relations.

5. Introduction
Set-up
Objectives:
Take stock of the current status and considerations about pension funds' sustainable investment policies, and encourage laggards to meet their transparency obligations
Gain a better understanding of sustainable investment
Baseline measurement – Status
Call laggards to account
Embedment in policy and implementation
Analysis of good practices
Focus: motivations and challenges
Final report
Continuously:
Discussions with external parties
Basic assumptions:
Sound and
ethical operational management
2. Prudent person principle

6. Major progress Where can this be seen?
General picture
Major progress
Where can this be seen?
Nine out of ten pension funds have sustainable investment on their agenda, and the decisions they made show up in their balance sheets.
Several pension funds, including the largest, are characterised by applying sustainability criteria to the entire investment cycle of policy, risk management, and accountability.
A sample survey revealed a substantial increase in activities focused on sustainable investment.

7. Status of sustainable investment
General picture
Status of sustainable investment
Five categories according to intensity
Number of Funds
(in percentage)
No clear data
12%
Limited
31%
Active
26%
Intensive
20%
Integrated
11%

8. General picture
Size a key determinant
Large funds lead the field in shaping a sustainable investment policy

9. Developments Notable developments between 2013 – 2015:
General picture
Developments
Notable developments between 2013 – 2015:
Incorporation sustainability in Investment Beliefs has risen from 40% in 2013 to 74% in 2015.
Of the group comprising funds with “no” or “limited” sustainable policy 40% developed a more active sustainable investment policy.
Funds that implemented an active sustainability policy showed the most amount of development.
The group comprising funds with a more intensive and integrated sustainable investment policy gradually developed their policies.

10. Cycle as support for investment policy
Insight into policy
Dilemmas: principles vs pragmatism
Increasingly more specific sustainable policy per asset class
Cycle as support for investment policy
Ensures that all necessary steps are taken
Prevents ad-hoc policy
Increases time efficiency of management boards

11. Risk
management
Reputation
Large pension funds are held to account over investment policy at an earlier stage
Increased vulnerability due to greater transparency
Reputation management a key driver for sustainable investment
Strengthened connections with members
Restoration of trust
Observable shift from ex-post driven reputation management to ex-ante integration in financial analysis

12. Risk
management
Financial risks
ESG risks can be immediately manifested in financial risks
Investment in sectors which take insufficient account of negative effects
Financial risk management is key for pension funds
The use of non-financial information can lead to more insight in risks and refine valuation
The use of relevant non-financial information can stregthen risk management
Embedding in investment policy is still only very recent

13. Accountability is increasing
Accountability is focused both internally and externally
Quantitative accountability
88% of pension funds implement Section 135(4) of the Pensions Act
There is increasing disparity in accountability
Qualitative accountability
Involving members is a challenge
Availability of generic sustainable investment data limited
Consistency between implemented policy and accountability can be strengthened
Shift towards ex-ante integration of ESG factors has had an impact on accountability

14. Challenges
Next steps
Sustainable investment does not develop independently, but interrelatedly.
For pension funds (and their asset managers)
Encourage cooperation within the sector
Focus on making sustainable investment more transparent
Further integrate sustainability further into the investment portfolio’s risk management
For the entire sustainable investment chain
Improve the availability, quality and standardisation of ESG information and aim for unambiguous sustainability reports
Conduct further scientific research and studies into the effects of ESG factors on investment policies

15. In conclusion: balance

16. For further information please contact: p.corveleijn@dnb.nl
Questions?
For further information please contact: 16