Dutch pension funds in the firing line over ESG performance link

Dutch pension funds have often been seen as innovators in the European institutional market. They were among the first to adopt index investing and more recently, some of the country’s largest pension funds committed to selling off their fossil fuel holdings.

ABP, Europe’s largest pension fund with more than €500bn in assets, announced in 2021 that it would sell off most of its €15bn in fossil fuel holdings. It revealed last month that it had completed the sale of these assets. Meanwhile, PGGM, the second largest pension fund in the Netherlands, followed suit last year.

However, with the far-right party emerging as the winner of the 2023 elections, a decision once heralded as a bold climate commitment is now facing political challenges. After months of coalition talks, the far-right Freedom Party (PVV), the centre-right liberal (VVD), the centrist New Social Contract party, and the populist right-wing farmers' party BBB have agreed to form a government. This government will be led by former secret service chief Dick Schoof, who is due to take on his role in two weeks’ time.

Political backlash

The new administration has already made it clear that it takes a dim view of climate commitments. Earlier this month, Thierry Aartsen, a Dutch MP for the VVD, put forward a motion against “activist investment strategies,” specifically calling out ABP’s divestments from fossil fuels, which received the backing of his coalition partners.

“It is all well and good if green investments offer a positive return, but if activism becomes a target in itself, it becomes time for the regulator to step in,” he warned in an interview with Dutch conservative newspaper De Telegraaf. “Return must come in the first, second, and third place, not activism,” he stressed.

Harmen van Wijnen, a member of the board for ABP, has publicly fought back against these allegations. In an interview with the centre-left Volkskrant, he described the allegations of climate activism as “lariekoek” (nonsense). He stressed that the fund’s commitment to offshore wind through initiatives such as the Noordzeker wind initiative would benefit members in the long run.

APG, the asset manager for ABP, has recently joined forces with energy cooperatives in a bid to build a large-scale offshore wind park in the North Sea. The initiative, which will see the construction of a 2GW Alpha offshore wind tender site in the IJmuiden Ver Wind Farm Zone, received the backing of Dutch authorities earlier this month, just weeks ahead of the new government taking power.

In their battle with politicians, pension funds have found an unlikely ally in their Central Bank, which also acts as the country’s financial markets watchdog. In response to Aartsen’s motion, DNB stated that pension funds do not have to prioritise returns above everything and that there was scope to consider other targets, as long as these were aligned with the interests of scheme members.

A sore issue

The debate around returns touches upon a sore issue for Dutch pension funds, acknowledges Anton Kramer, co-founder of independent adviser OverRendement. Kramer, who has previously worked as a portfolio manager for Aegon Asset Management, acknowledges that a strong ESG profile can improve fund returns.

However, he also stresses that greater transparency on fund performance is sorely needed. Many Dutch pension funds have had extremely volatile returns over the past two years, a trend influenced by their adoption of liability-driven investing rather than climate ambitions. For example, ABP booked -17% in 2022; fortunately, this has now shifted to 9.3% in 2023, according to its latest annual report. Moreover, the volatility in investment performance was to some degree covered by a stark drop in actuarial estimates of their liabilities, which means that most Dutch funds still remain in surplus.

Nevertheless, with pension ambitions being based on future returns, transparency remains crucial for a credible ESG strategy, Kramer stresses. “A pension fund should make a return that is sufficient to match the increase in liabilities, i.e. risk-free return plus inflation. Most funds do not report performance in relation to the goal of real (inflation-compensating) pensions. They benchmark themselves against customised benchmarks that are composed of all kinds of sub-indices that closely match the actual portfolio. A lot of the important decisions, including their strategic asset allocation, are hidden in the benchmark,” he stresses.

This also applies to ESG investing: “Once a fund starts to invest in an ESG strategy, they typically benchmark it against an ESG index. So you will never know whether the decision to invest in the ESG strategy pays off, and you certainly would not know whether the return is sufficient to meet the fund’s goal.”

Kramer warns that many of the funds that claim to focus on good returns have over the past 17 years lost much of the purchasing power of their pensions, with some funds realising average annual returns below 4%, though that may not be for ESG-specific reasons.

Kramer believes that ESG integration should not only apply to the investment portfolio but also to the behaviour of the pension fund itself, meeting expectations and providing transparency on investment decisions.