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Aligning Pension Fund Equity Investments with the UN Sustainable Development Goals

FTSE Russell

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It’s a challenge faced by a growing number of pension funds: matching the values and concerns of their members with a rigorous, financially robust investment strategy. In this Q&A, Pensioenfunds Detailhandel’s, one of Netherlands largest pension funds with €28 billion in AUM, head of investments Henk Groot explains how the Dutch pension fund married the SDGs to its return objectives.

Why did you decide to focus your equity investments on the SDGs, and how does it work?

We began this process a few years ago with a review of what our pension fund stands for in relation to ESG. We decided to focus on four themes: labor rights, human rights, company ethics and climate and environment.

Around the same time, the international community was defining the SDGs, and it was our assessment that they would become the new benchmark within the industry with regard to ESG. We therefore set out to match our four meta themes with the 17 SDGs—initially to SDG 8 (decent work and economic growth), SDG 13 (climate action) and SDG 16 (peace, justice and strong institutions).

We also worked with the University of Maastricht on a large survey of our participants—workers in the Dutch retail sector—to find out what their ESG preferences were. They were in complete agreement with our themes, but they wanted us to go further, so we also committed ourselves to SDG 12 (responsible consumption and production).

How did you set out to align your investments with those four SDGs? 

We have a policy of strict independence between policymaking, carried out by our board and investment committee, management of the pension fund by specialized firms such as BlackRock, our asset manager, and independent control and oversight.

As a result of this policy, we decided to work with an index provider with a custom methodology for assessing companies against the SDGs. We approached FTSE Russell, who has such an SDG methodology. They map the 17 SDGs to their various ESG themes, such as climate change, pollution and resource use and labour standards, which they use to score individual companies against.  

In addition, FTSE Russell is able to build a custom SDG benchmark that shares a lot of the features of the previous conventional benchmark we were using. So, in 2019, we instructed BlackRock to manage our then €5.8 billion developed markets portfolio against the new benchmark.

How has that portfolio performed, and what lessons did you learn? 

Before we shifted benchmarks, we back-tested the new index and found that it performed in line with the FTSE Russell developed markets equity benchmark both in terms of returns and risk. A year after we made the shift, we found the custom benchmark performed a bit better—which was a big relief—and the risk was also still aligned with that of the original benchmark.

We decided this year to ask FTSE Russell to also create a custom benchmark for our €1.5 billion emerging markets equity portfolio. 

It’s also worth noting that alignment with the climate action SDG has also resulted in a reduction of both portfolios’ carbon footprint of around 50% and a significant increase in our exposure to green revenues. We increased our climate fund score significantly alongside that of our SDGs.

What are the next steps for Pensioenfunds Detailhandel to integrate sustainability into your investments? 

This spring, we reassessed our ESG policy and made it more ambitious. The first objective was to integrate SDGs across our listed equity portfolios, which we’ve done, and we’re now looking at extending into other asset classes.

Originally Posted on September 29, 2020 – Aligning Pension Fund Equity Investments with the UN Sustainable Development Goals

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