In a bid to direct capital to finance the green transition, in recent years pension funds – along with other types of investment funds and portfolios – have integrated ESG (environmental, social, governance) valuation into their strategies. Take the Netherlands – a number of Dutch pension funds have spent a lot of time and effort formulating their sustainability strategies, initiatives that will make a considerable impact on society and the environment.
SFDR
Back in 2021, the Sustainable Finance Disclosure Regulations (SFDR) came into effect. With SFDR, the EU aims to shine a light on the extent to which financial products consider ESG factors, asking financial market participants to disclose ESG risks and impacts associated with their financial products. It also enables investors to report on the risks and impacts of their investment portfolios. With evolving sustainability targets and growing societal demand for sustainability, SFDR compliance helps pension funds to mitigate risks while driving positive change.
Difficulties in accountability and comparing performance
The SFDR makes it possible to compare the outcomes of investment strategies. But there are still significant differences in how Dutch pension funds choose to measure and report the impact of their sustainable investment strategies, which makes it difficult to compare them and hold them to account for their sustainability performance.
Sustainability benchmark
Valcon reached this conclusion after creating a benchmark in which we compared the sustainable investment metrics of five Dutch pension funds. These pension funds have assets between €20 billion and €475 billion. During our work, we discovered notable differences in the scope of metrics used by these pension funds to measure three areas within their sustainable investment strategies. We think our benchmark can inspire pension funds to act on sustainability matters that are currently underrepresented in their reporting, which will allow them to set the next steps in making sustainable impact.
Differences in the scope of sustainability metrics used by pension funds
In our benchmark, we compared the metrics that five Dutch pension funds use to measure different areas within their sustainable investment strategies. We focused on three areas: scope 3 GHG emissions (climate), nature and biodiversity (environment) and plastic waste reduction (pollution). Our benchmark shows that despite pension funds trying to measure very similar themes, there are key differences in the metrics these pension funds use to measure whether they meet their sustainability commitments. The three key differences are:
Scope 3 emissions data not always used to calculate carbon footprint
An organisation’s carbon footprint consists of Scope 1, 2 and 3 emissions. Scope 1 emissions are greenhouse gasses an organisation makes directly. Scope 2 emissions are indirect, like greenhouse gasses deriving from purchasing electricity. Most organisations have the data needed to report on Scope 1 and 2 emissions. In contrast, Scope 3 emissions are much harder to report. Scope 3 emissions are greenhouse gasses that an organisation is indirectly responsible for across its entire value chain, both upstream and downstream. Scope 3 emissions should include 15 different categories according to the Greenhouse Gas Protocol. For most organisations, Scope 3 emissions account for the largest portion of their carbon footprint.
The difficulty in reporting scope 3 emissions is reflected in the scope of metrics used by pension funds to measure the carbon footprint of their investments. Three of five pension funds in our benchmark didn’t yet include Scope 3 data when calculating their portfolios’ carbon footprint. Only two pension funds are currently able to include Scope 3 data in their calculations, but include different scope 3 categories to those mentioned in the Greenhouse Gas protocol. Collecting Scope 3 data poses a significant challenge for pension funds, as a big component to committing to a net-zero portfolio by 2050 involves mapping and reducing Scope 3 emissions.
Concrete metrics and targets for nature and biodiversity action are missing
The hypothesis that investing in nature can generate financial gains while also improving outcomes for ecosystems, biodiversity and human well-being is borne out in the Kunming-Montreal Global Biodiversity Framework (GBF), which outlines a pathway to the global goal of ‘living in harmony with nature’ by 2050, by setting 23 targets for preserving and restoring biodiversity. The GBF can guide organisations when they formulate related strategies. Four of the five pension funds in our benchmark integrated the Kunming-Montreal GBF in their sustainable investment strategies, albeit to different extents. Where some pension funds merely referred to the GBF as a global framework, frontrunners aligned their nature and biodiversity targets with the GBF.
Although all the pension funds involved in this exercise mention they promote nature and biodiversity action through engagement with portfolio companies, we observed that most of these pension funds lack concrete targets and metrics. Its indisputable importance aside, we argue that engagement is most valuable when pension funds can support their efforts with quantitative targets and appropriate metrics.
Plastic is not a sub-topic of waste reduction for all pension funds
Plastic waste constitutes a significant portion of global waste. Human activity generates large amounts of waste globally, of which plastic constitutes a significant and continuously growing portion. Each person living in the EU generated 36.1 kilos of plastic packaging waste in 2021, an increase of 29% between 2010 and 2021.
Reducing plastic waste is considered a key objective by many organisations. The Kunming-Montreal GBF sets a specific target for ‘preventing, reducing and working towards eliminating plastic pollution’. Although most of the pension funds in our benchmark integrated the Kunming-Montreal GBF in their sustainable investment strategies, not all of them have ambitions for reducing plastic waste. One pension fund is a frontrunner in excluding companies that produce ‘single use’ plastic from their portfolio and two other pension funds conduct engagement with portfolio companies with the aim of reducing plastic waste.
For plastic waste reduction, engagement is most valuable when pension funds can support their efforts with quantitative targets and appropriate metrics. The final two pension funds did not integrate plastic waste reduction into their sustainable investment strategies at all, which is not in line with their commitments to the Kunming-Montreal GBF.
To sum up
Our benchmark shows that pension funds are dedicating considerable resource and effort to formulating sustainable investment strategies, creating a clear path for using their formidable assets to drive positive change. At the same time, there are still notable differences in the scope of the metrics they use to make sustainable investment strategies tangible.
The benchmark shows there is plenty of opportunity for collaborative learning by pension funds. By learning with and from their peers, pension funds can further develop their sustainable investment strategies and select metrics that are aligned across the industry. This benefits both the ability to compare sustainable investment strategies and the positive impact that pension funds can make through their investments.
In our view, alignment is needed to compare efforts and results in the areas the benchmark explored, to provide meaningful information to stakeholders. We believe that engagement should be supported by measurable goals to accelerate the sustainability strategy of pension funds. We would advocate that companies should encourage their pension funds to take these next steps, so they can step up their efforts in making a positive impact.
At Valcon, we can help pension fund executives drive positive, sustainable change with the results of our benchmark and our expertise in sustainable finance. If you would like to speak to someone at Valcon about sustainable finance, please contact: Jeffrey Colin at [email protected] or Thomas Borgers at [email protected]. If you would like to speak to someone at Valcon about the pension industry, please contact: Niels van Maurik at [email protected].
