Dutch pension funds have yet to embrace SDGs

That was the verdict of a report by the Dutch Association of Investors for Sustainable Development (VBDO), which analyzed the extent to which SDGs from part of investing culture in the Netherlands. It surveyed 42 institutions, representing about 95% of the Dutch pension savings market with about EUR 1.36 billion in assets, making it the most comprehensive survey of its kind in this arena.

The results showed that while all funds had heard of the SDGs, and most saw them as an investment opportunity, only a small proportion had directly allocated capital to them, or used them in their routine business dealings. Dutch funds are still ahead of the pack generally, but there is much work yet to be done to have SDGs enter the mainstream.

Launched in 2015 by the United Nations, the 17 goals range from eradicating world hunger and reducing global warming, to improving health care, technological access and educational standards in emerging markets. The SDGs have now been adopted by 198 countries, with a target of achieving all of them by 2030.

“Not achieving the SDGs could have dire consequences for pension funds,” warns the report, which was sponsored by Robeco as part of its commitment to promoting sustainability. “For example, according to the recent report by the UN Intergovernmental Panel on Climate Change, not tackling climate change will result in significant impacts on ecosystems, human health and well-being.”

A major outcome of the research was that most pension funds focus on SDGs as an investment opportunity rather than a business responsibility. This is a vital distinction, since a core message of all sustainability investing is that it can be used to make better-informed investment decisions, having long moved beyond simply being an ‘ethical’ issue.

The SDGs provide a range of investment opportunities in different sectors and across all asset classes, such as in the equities of companies in low-carbon infrastructure, or in green bonds. Pension funds identified SDG 13 (climate action) as the one offering the biggest investment opportunity, particularly as it has quantifiable targets in terms of things like CO2 emissions. However, not all SDGs are perceived to be investible, such as SDG 10 (reduced inequalities) and SDG 16 (peace, justice and strong institutions).

Viewing them as a business responsibility doesn’t necessarily rule them out of the investment process though, as the positive or negative impacts can be used for negative screening, or as part of ESG integration. For example, when investing in infrastructure under the sea, a fund may consider the effect on SDG 14 (life below water). The goal that investors were most likely to view as being a business responsibility was SDG 3 (good health and well-being), while SDG 1 (no poverty) was not seen as a business responsibility by any pension fund.

Setting out the report’s call-to-arms to “be smarter, speak louder, push harder” in achieving more widespread adoption of the goals, Herman Mulder, chairman of the SDG Charter in the Netherlands, believes the issue is a moral compass for investors.

“Clients of pension funds have a dual interest: enjoying a decent pension, while living in a prosperous, just and peaceful society,” he says. “The fiduciary duty of pension funds should not only relate to the direct best interests of their primary beneficiaries, but also to contributing, within their roles and resources, to society-at-large and, hence, more indirectly benefitting such clients.”

“The pension sector has a duty and an opportunity to be a trusted steward and facilitator of sustainable, shared value creation, by analysis and funding, for the world we all want and deserve!”

The report found that an effective responsible investment policy relies heavily on the involvement of the board. When the board shows a serious interest, the discussion may lead to incorporation of the SDGs, though this would require the discussion to be extended to include the asset manager.

Some of the other key takeaways were:

• Most pension funds consider their fiduciary duty as the most important motivation for adopting the SDGs. Other important drivers are reputation and ethical considerations. The relatively low score for financial performance as a driver indicates that it is unclear to pension funds if SDG investments also contribute to better financial performance.
• SDGs are high on the agenda of pension fund boards, with 48% discussing them more than once a year, 35% once a year, and only 17% not at all. However, only half of the funds went on to discuss SDGs with their asset managers and fewer than one third took them into account when appointing asset managers.
• Two-thirds of the funds surveyed do not have a formal policy that adopts the SDGs. Some 18% of funds do address the goals in investment opportunities, while 8% touch upon them in a more general sense.
• Only 19% of pension funds set targets to align investment activities with the SDGs; for example, one fund formulated a clear target of allocating 10% to sustainable development. Another 19% are currently developing such targets, but 62% do not have any targets in place. This is partly due to the non-investible nature of some of the SDGs, and the fact that some of the 169 targets are qualitative rather than quantitative in nature.

Several obstacles remain that prevent pension funds from fully embracing the SDGs, the report said. Reasons given were a lack of capacity at the fund, particularly given the research needed, and a lack of visibility on what would be the final impact on investment returns. Pension funds also complained about a lack of know-how internally on the concept of SDGs, and a lack of added value for the more subjective ones.

More encouraging was the fact that 13 (out of 42) pension funds mentioned that they are currently working on adopting the SDGs. Overall, implementing the SDGs was considered to be complex, and further research was viewed as being needed. Subsequently, some pension funds first wanted to explore the possibilities of measuring the SDGs before adopting them into their policies.