Sustainable investing, responsible investing or ESG investing has become an important theme in asset management over the past decade, especially among pension funds in Northern Europe. These pension funds’ investment policies typically describe how sustainable investing is put into practice. Yet, these ESG policies can vary significantly from one fund to the next.
To assess the differences, we analyzed the individual policies of the ten largest pension funds in each of the four Nordic countries – Denmark, Finland, Norway and Sweden – as well as the Netherlands. A prerequisite was that each fund had to manage at least EUR 1 billion in assets. Within these countries, we found strong network effects that were due either to the funds being part of a sustainability initiative or to excluding certain products or company behaviors.
Among the stocks typically considered for exclusion in academic studies – namely alcohol, tobacco, and gambling stocks – only tobacco stocks were shunned on a large scale by the pension funds in our sample. Stocks of alcohol producers and gambling firms were only rarely excluded.
Controversial weapons were by far the most heavily excluded category, sometimes through forced national regulation. The academic literature occasionally mentions adult entertainment and conventional weapons as meeting the criteria for product-based exclusions, but these were rarely excluded by pension funds in our sample.
There seems to be a great deal of disagreement about which companies should be excluded.
Focus on climate in Denmark and Sweden
From an environmental protection perspective, most Nordic countries have excluded investments in (thermal) coal companies, while Dutch pension funds are still not doing this on a large scale. Meanwhile, excluding oil and tar sands has become commonplace in Denmark and Sweden. These two countries’ largest pension funds were actually the first to start excluding oil companies from their portfolios.
An interesting finding from our study is that while pension funds concur on broad topics such as environmental damage, human rights and labor rights, there seems to be a great deal of disagreement about which companies should actually be excluded.
These variations between the exclusion policies reflect a healthy degree of diversity in the different approaches to sustainable investing. Sustainability means many things to many people. But these differences can also create challenges for asset managers. In particular, they ensure managers cannot follow a one-size-fits-all approach when developing sustainable investment solutions for institutional investors.