PMT, the pension fund for the Dutch metals industry, has adapted its ESG exclusion framework to allow for more granularity. In addition to the general ESG rating of a firm, it will also take into account how companies score on 11 separate ESG topics.
In a 2021 interview with IPE, the chief investment officer of the €79bn pension fund Hartwig Liersch said the scheme’s sustainability policy was in need of a revamp. Since 2018, PMT has been selecting companies in its equity portfolio based on their ESG ratings.
In addition to companies active in certain sectors (such as tobacco and small arms), several hundreds of companies were also excluded based on the ESG scores they received from MSCI.
PMT has now refined the latter aspect, said Liersch. When selecting companies for its developed markets equity portfolio, which has been renamed ‘Portfolio for Tomorrow’ by the fund, the pension fund no longer looks only at the overall ESG rating.
“The disadvantage of using a ready-made ESG rating is that you adopt the methodology of an external provider without having a look-through. In MSCI’s case, this meant that good and bad sub-scores were being averaged out,” said Liersch.
Transparency
To improve transparency, PMT decided to also look at 11 separate ESG indicators: six regarding the environment and climate change, and another five focusing on social aspects. “This allows us to focus on themes that we and our members find important. It also allows us to explain better why we exclude certain companies,” he noted.
Examples of the additional indicators include water management, biodiversity, the labour conditions in companies’ supply chains, the sourcing of their raw materials and waste management. If a company scores below a certain threshold on one of the indicators, it will be excluded.
“A number of mining companies, for instance, have dropped out of the portfolio because they score poorly on water management,” Liersch added. “Before, it was possible for them to compensate poor scores on this with better scores on other ESG topics, but that is no longer possible.”
Nestlé
Another company that has been excluded is Nestlé, which was removed because of an insufficient score on biodiversity.
“In total, we sold 59 companies because they did not meet the requirements on the individual ESG themes,” Liersch said.
At the same time, however, PMT has lowered the minimum overall ESG score that companies must achieve to enter the portfolio as it does not want its equity investments to deviate too much from the MSCI world index.
“As a result, 53 companies have been added to the portfolio,” he said, adding: “An example is Netflix, which was initially not included because of an insufficient ESG rating. But it scored sufficiently on all 11 separate ESG criteria to be re-included.”
Financial screening
In addition, 168 companies were also added because PMT abolished its separate financial screening.
“Here, we mainly looked at whether companies were financially sound and if their operations were focused on the long term. We evaluated this screening last year and found it no longer added value, as applying financial criteria is often backward-looking. Previously, Amazon and Toyota, among others, dropped out because of this financial screening, just because they had made capital-intensive investments,” Liersch explained.
PMT’s new approach contrasts with that of the other Dutch metals scheme PME, which adopted a similar methodology but decided to return to active investing in concentrated portfolios.
“To have fewer names in the portfolio was not an end in itself when creating this new strategy. But if you take this new approach further, you could eventually end up with some kind of active portfolio. But we are far from there yet,” concludes Liersch.
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