6.2 Sustainability and responsible investment reporting

In this book I address the topic of sustainability reporting. However, when we look at the investors, and in this chapter, particularly to the pension funds, we can see that they communicate their sustainability initiatives and ESG investments differently. For example, the Dutch pension fund ABP chooses to publish a Sustainable and Responsible Investment report, the Dutch pension fund manager PGGM publishes an annual responsible investment report, the Swedish pension fund AP4 publishes a Sustainability and Corporate Governance report, the US pension fund CalPERS publishes a report called “Towards Sustainable Investment & Operations” and PREVI, the largest Brazilian pension fund publishes an annual report with both financial and sustainability information in the same report. Other investors, also choose to publish an annual responsible investment report, such as, Nordea Asset Management and Aegon.1

As you may read further, similarly to sustainability reporting, there is no globally harmonized responsible investment regulation. As explained in the previous chapters, the lack of harmonized regulation on sustainability reporting and sustainability ratings has led to a variety of lexicon and approaches to communicate and rate ESG risks. Investors in general, including pension funds, deal with sustainability reporting and responsible investment reporting differently.

It is important for this book to look at the potential impact of investors, in particular the impact of pension funds promoting sustainability reporting and therefore, look at how pension funds are communicating their ESG investment commitments. Often, the ESG investment commitments of pension funds are part of a responsible investment strategy. The disclosure of ESG risks of pension funds’ investments are made in a responsible investment context. Consequently, this chapter looks at the sustainability reporting approach of pension funds through a responsible investment lenses.

Differences start with the definition of responsible investment. For example, the UN-supported PRI, defines it as “(…) an approach to investing that aims to incorporate environmental, social and governance (ESG) factors into investment decisions, to better manage risk and generate sustainable, long-term returns.”2 The European Social Investment Forum (Eurosif) defines Socially Responsible Investment (SRI) as “combining (…) investors’ financial objectives with their concerns about social, environmental, ethical (SEE) and corporate governance issues.” Eurosif believes both are relevant to SRI. SRI is based on a growing awareness among investors, companies and governments about the impact that these risks may have on long-term issues ranging from sustainable development to long-term corporate performance.3

Generally, investors can practice responsible investment by including it in their strategy. As explained by the UN-supported PRI “it simply involves including ESG information in investment decision-making, to ensure that all relevant factors are accounted for when assessing risk and return.”4 How can this be done? Investors can practice responsible investment by using a variety of instruments. Organizations such as the UN-supported PRI and the VBDO have identified and usefully complied some of the responsible investment instruments used by investors.56 A few examples are: exclusions, having an exclusion list with e.g. the activities, sectors and/or products, by companies or countries, that are excluded from the investors’ portfolio; ESG integration in quantitative and qualitative analysis; engagement with investee companies to influence and improve their ESG impacts, and align their activities with the investor’s interests;7best-in-class, where investors choose the best ESG performing organization out of a group of organizations ranked either by sector, industry or class and, voting, through their shareholder voting rights to influence the company’s ESG impact and also aligning their activities with investor’s interests.89

Through e.g. engagement and voting, investors can also drive sustainability reporting in their investee companies. As explained by Jeroen Bos, head of Global Equity Research at ING Investment Management, it is similar to the “chicken-and- egg problem”, as companies disclose more ESG information when they see the investors’ interest in ESG. On the other hand, investors’ interest in ESG is often triggered when they have the companies’ ESG information.10 Engagement with investee companies can drive corporate sustainability reporting and investors’ responsible investment reporting.

Responsible investment practices allow investors to identify more sustainable companies for potential investment and to improve the ESG integration and performance of investee companies.11 Listed companies also have an increasing interest in SRI funds to promote their ESG best practices. The responsible investment arena is growing rapidly. The UN-supported PRI have as of 31st of March of 2016, a total number of asset owner signatories of 304, representing US$16.6 trillion in assets under management.12

The Global Sustainable Investment Review (2014) published by the Global Sustainable Investment Alliance, has concluded that assets under management incorporating sustainability investment strategies reached $21.4 trillion globally in 2014. It grew 61% from 2012.13 In this review the largest responsible investment strategy in Europe was the negative screening, while in the US it was ESG integration.1415 Finally, the review explained that most of the SRI assets referred in the report were located in Europe (63.7 percent) but the relative contribution of the US has increased to 30.8 percent from 28.2 percent in 2012.16

Below, this chapter looks at the regulatory setting in which pension funds in Brazil, in the EU, in particular in Sweden and in the Netherlands, and in the US, are developing their sustainability and responsible investment reporting. For each of the countries, I briefly introduce the basic regulatory framework, including the prudent person rule and the fiduciary duty, which combined are responsible for requiring pension funds to act diligently and within the stipulated investment limits. In each of the countries I finalize with an example of a large national pension fund and point out a few organizations active in the promotion of, among others, sustainability and responsible investment reporting.