Companies in the Netherlands, as elsewhere, are under public pressure to clean up their act on environmental and social issues. Many pension funds, too, are making moves towards implementing policies on socially responsible investment. But how are the funds approaching socially responsible investing (SRI), and are there any real changes going on?
Some in the industry doubt it. Though there is a lot of talk about SRI in the Netherlands, pension funds are not following it up with much action, they say.
“The pension funds are really underexposed to SRI compared to what they say,” says Hendrik-Jan Boer, senior investment manager, Sustainable Equities, at ING Investment Management.
While sponsoring companies may be scrutinised publicly for their social and environmental records, pension funds tend to stay out of the spotlight. “Some companies are treated rather toughly by the community from an SRI perspective,” says Boer.
“They tend then to listen to the NGOs and adjust their activity. But then you look at the pension fund, which is a legally separate entity, and in many cases, the pension fund is not invested according to SRI principles.
“Pension funds are still lagging in the way they give transparency to the outside world,” he says. Though they do disclose the information they are legally bound to disclose, talking openly about their SRI stance is voluntary. The reality is, says Boer, that while pension funds may make some mention of SRI in their annual reports, if you look for any detail you are unlikely to find it.
But the pressure on pension funds to be transparent is increasing, he says.
Jan Lodewijk Roebroek, director of Fortis Investments Netherlands, points out that while SRI has generally been seen as an important and rising trend, it is competing with many other priorities in the Dutch pension fund industry.
“As a result, there is a wide differentiation in the degree that SRI is on the agenda of pension fund boards: we feel this is more explicit with sector funds rather than with company pension funds,” he says.
The subject of SRI has been on the agenda of Dutch pensions giant ABP for five years, says Rob Bauer, head of research at ABP Investments, and the fund is still in the process of setting up its SRI strategy.
“Five years ago we had a strategy discussion on this, and it wasn’t really clear whether SRI was compatible with our fiduciary duty,” says Bauer. There still is no indisputable evidence to show whether it enhances returns or does the opposite. “So you have to make a decision yourself,” he says.
The pension fund set up two experimental SRI portfolios which were merged into one in 2001. The stock selection is based on rating agency information, and the portfolios are evaluated in the same way as other portfolios. ABP Investments uses rating agencies Innovest and GMI, and it has a stake in both of them.
Engaging with the companies they invest in is becoming an increasingly popular way for investors to improve their social, environmental and ethical performance. In many ways it is seen as a better way forward in SRI than simply screening out those companies which fall foul of accepted principles.

As far as engagement is concerned, ABP has just entered the Enhanced Analytics initiative. The EAI describes itself as an international collaboration between asset owners and asset managers aimed at encouraging better investment research.
And ABP does have a lot of joint ventures and networks where it is able to cooperate with other large investors in leaning on corporations that stray. “The Ahold case is a good example,” says Bauer. “ABP and PGGM got together and acted publicly.”
“More and more pension funds will actually implement social responsibility in their investment policy and more by means of an engagement overlay rather than by the means of exclusions or best in class,” says Erik Breen, head of corporate governance and sustainability at Robeco.
This trend is, he says, the logical continuation of the current focus on corporate governance, and it can be compared with similar movements that took place in the UK a couple of years ago.
The approach to SRI taken by Dutch industry-wide pension fund PME is engagement rather than negative screening. “I’m a strong believer that a positive approach adds more value than a negative approach,” says Roland van den Brink, managing director investments at PME.
The fund has arranged voting and engagement on all its equity holdings via F&C - formerly ISIS - and publishes the results of this each quarter on its website.
Fons Lute, chief investment officer at pension fund Blue Sky Group argues against negative screening because of the effect it could potentially have on returns. Imposing a selection rule on a well-defined universe of securities acts like a constraint, and constraints hamper the scope for alpha, he says.
So sustainability criteria may restrict the alpha-generating ability of managers, he says. But this can, perhaps, be overcome by applying adequate econometric pre-selection tools, he adds.
“The question is,” says Boer, “why should (pension funds) invest in SRI?” As long as there are no concrete reasons for doing so, pension funds will find it hard to justify.
“You can’t just shrink your universe,” he says. “From an American perspective, you would be breaching your fiduciary duties. So first of all, pension funds should sort this out with their participants: Do they want to invest in SRI, yes or no?”
People are arguing that if a pension fund gives itself a smaller universe to select from, and has fewer stocks in its portfolio, they volatility and tracking error will go up. This means that the return would have to be higher in order to get the same information ratio.
“On the other hand, you are concentrating on companies which probably, in the long-term will get less negative media attention, less input costs, higher employee loyalty” which in turn should lead to better returns and reputation, says Boer.
Boer points out one notable incompatibility between SRI and pension fund investment: at the moment, there are few SRI investment products in fixed income, but fixed income in general makes up a large proportion of pension fund investment.
Is a company which behaves well ethically and socially a better investment from a returns point of view? That is the key question. “There are some factors in the field of SRI which have a positive influence,” says Bauer. Studies have shown that there seems to be a positive relationship between returns and environmental information.
“The question is just the causality,” he says. “Maybe management is good quality so the environmental performance is also good. It’s not clear; the jury is still out.”

But good management does add value to a business, says Breen. “Good corporate social responsibility is an indication of good management,” he says. “Robeco also believes that improvement creates the extra returns investors are looking for. This pleads for investing in good and bad companies, and for trying to bring about improvement rather than staying as a passive investor.”
SRI does add value, says van den Brink. This is based on the theory that if someone asks questions, processes tend to approve. “But it is very difficult to measure and therefore not our main driving force,” he says. “SRI is seen as a part of good governance due to ownership and our fiduciary role.”
PME will shortly review its SRI process, turning to the expertise of Jan van der Kolk, former CEO of KPMG Sustainability.
But just how does a pension fund - a body consisting of many participants not to mention investment and administration professionals and trustees - decide on the ethical stance it will take? ABP’s Bauer says the fund’s current code is based on standard principles which are related to OECD principles.
Roland van den Brink says the fund has decided it is too early to develop its own standards with regard to how corporations should behave ethically and socially, and so it follows the general trends as indicated by F&C and the public discussion in The Netherlands. “Maybe the review mentioned will lead to our own standards,” he adds.

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