6.4.3 Pension funds as responsible investors in the Netherlands

Dutch pension funds are subject to the European requirements of the IORP Directive (2003/41/EC), transposed to Dutch national legislation on the 8th of February of 2006, and more recently of the IORP II Directive (2016/2341) which was transposed into Dutch law in early 2019.2324 In addition, as part of the EU, the Netherlands will be part of any upcoming regulatory framework to support and promote responsible investment in the EU, in line with the EU Action Plan 0f 2018 to achieve climate change commitments.25

Besides the EU requirements, voluntary codes of ethic and socially responsible investment principles, the Dutch pension system is regulated by the Pensions Act (PW),26 the Industry-Wide Pension Fund Act (mandatory participation) (Wet Bpf 2000), Mandatory pension Act for professional Groups (WVB) and the Equalization of Pension Rights in the Event of a Divorce Act (WVPS).27

Nationally, under section 150 of the Pension Act Dutch pension funds are part of the political responsibilities of the Ministry of Social Affairs and Employment and supervised by the Dutch Central Bank (DNB),28 responsible for the prudential and material supervision, and the Dutch Authority for the Financial Market (AFM), responsible for conduct of business supervision.29 As explained in chapter 3 (section 1.3.1), the AFM has supervisory role, under the Financial Reporting Supervision Act (Wtfv). The AFM regulates the behavior within the Dutch financial markets. The supervision of the Dutch financial sector is based on the “Twin Peaks” model. This is a bipartite model in which the macroeconomic stability of the financial system falls under the competence of the Dutch Central Bank. The DNB has a prudential supervisory role regarding pension funds (in Dutch, “prudentieel toezicht”) and it is the supervisor of the pensions’ fiduciary duty. The DNB analyzes the financial position of pension funds, this is if they are financially sound, if they are able to fulfill their financial obligations in the future and the relationship between employees, employer and the pension fund (material supervision).30 The microeconomic stability of the Dutch financial system falls under the competences of the AFM.3132 The AFM monitors the conduct of pension funds (article 151 PW).33

Since 2014, under article 135 (paragraph 4) of the Pensions Act (PW), and in accordance to the prudent person rule, pension funds are required to disclose in their annual reports how their investment policies manage environmental (including climate change), human rights and social risks. Please see the text, in Dutch of article 135, paragraph 4, below:34

The DNB’s 2016 report has found that 88% of the pension funds comply with the new legal requirement. However, there are differences in how and what the pension funds report and different levels of transparency.35 The DNB has justified the addition of section 135 with the increasing public demand, and growing ESG awareness of society and Governmental. Pension funds significant asset size has changed their role in society, it has moved it beyond their basic function of securing a retirement pension in the long-term. Pension funds are now expected to disclose how they integrate ESG risks in their investment strategies and policies. However, pension funds have the freedom to choose what to report and how to report.36

Additionally, the Dutch Code for Pension Funds (Code Pensioenfondsen) has since 2014 set forth sustainability management standards, including three covering responsible investment.3738 According to standards 27, 28 and 29, on a “comply or explain” approach, all pension fund boards must publicly disclose their ESG considerations.39 Please see a translation of standards 27, 28 and 29 as written in the Code for Pension Funds (pp. 29) below:40

The code also leaves pension funds with freedom to decide what and how to disclose this information to stakeholders. The monitoring committee believes the code is followed by a “large number” of pension funds on an “implicit compliance”.41

The General Pension Fund for Public Employees (ABP) is the industry-wide pension fund for employees working in the government and in educational sectors in the Netherlands.42 It is the largest pension fund in the Netherlands; ABP has 2.8 million participants and 356 billion euros in available assets, as of June 2016.43 According to DBN’s report (2016), the ABP is one of the few Dutch pension funds able to quantify their sustainable investments, estimating it to be around 10%, as of June 2016.44

The ABP found out arduously how client demand is a crucial driver for responsible investment practices. In 2010 in a public television program, it was announced that ABP had been investing the Government and educational sectors’ employers and employees’ money in land mines. It triggered immediate attention from different fronts, including participants, beneficiaries, and asset managers, besides the Dutch society at large and political attention. The ABP has since then consistently changed their approach to ESG risk integration into their investment processes and along the chain. ABP is considered among the most progressive pension funds in terms of responsible investment practices globally, not only in the Netherlands.

In October 2015, the ABP announced a new responsible investment policy.45 This new policy once again had its root in the wishes of ABP’s members. After conducting a series of surveys on their future socially responsible investment’ policy ambitions, ABP found that almost all of its 3 million participants supported the proposed changes.46 It is more ambitious with the objective of raising the standards for responsible investment.47 Among others, ABP expects to be able to have a maximum influence as a shareholder and in this way have a direct influence on the ESG risk approach of their investee companies. ABP clarifies that, with this new responsible investment policy, the members’ best returns are at the core of their investment processes and choices. In addition, other concrete objectives are, by 2020, ABP will cut 25% of CO2-related investments from the overall share portfolio, will double responsible investments including clean technology from €29 billion to €58 billion euro;48 investments in renewable energy will increase five times to more than €5bn;49 engagement under the new policy will continue but it will be extended worldwide in the areas of human rights, security and education.5051Under the new policy, ABP expects to divest more than 1,500 holdings,52 which is expected to result in a €30bn shift to more sustainable companies.5354 ABP announced that during the implementation of the new policy it will continue to consult with their members, society and the corporate sector. Finally, has committed to be accountable for the implementation of the policy and for the results achieved.

Among others, VBDO (in Dutch, Vereniging van Beleggers voor Duurzame Ontwikkeling) is the Dutch Association of Investors for Sustainable Development. Established in 1995, it represents both institutional and individual sustainable investors. It aims to create a sustainable capital market and increase sustainability awareness among investors but also companies.55 The VBDO has been publishing a yearly responsible investment pension fund benchmark study since 2007. It has published the 10th edition of this study in 2016.56 Every year the study gives an overview of the state and trends of responsible investment by pension funds in the Netherlands. The study ranks the top 50 pension funds in the Netherlands, assessing them on governance, policy, implementation and accountability. This year, in 2016, Pensioenfonds Zorg en Welzijn (PWFZ) is in the top position, followed by ABP.57

The VDBO’s report found that 98% of all pension funds boards actively discussed responsible investment at least twice per year, a significant growth from 2015, as it was only 46%. This finding shows how responsible investment’ best practices among Dutch pension funds is rapidly increasing and signals the trend towards continuing growth; 100% of the pension funds have a responsible investment policy; 94% of the largest 50 pension funds have a responsible investment policy applicable to the majority of their portfolio; 48% have key performance indicators to measure the effectiveness of their policy.58 As a recommendation for further improvement VBDO believes transparency could be improved.59 The VBDO benchmark is a landmark study in the Dutch responsible investment arena, it increases transparency among Dutch pension funds, encourages further ESG risk integration improvements and fosters dialogue between peers and other relevant responsible investment’ stakeholders.

Another relevant and recent initiative with potential for promoting dialogue and responsible investment’ best practices is the Sustainable Pension Investment Lab (SPIL).60 The SPIL is an initiative from the Dutch Sustainable Business and the Sustainable Finance Lab, together with pension funds’ directors and other pension experts, aimed at supporting the pension sector in the Netherlands.61 At the request of the Ministries of Foreign and Economic Affairs in 2016, the Dutch Sustainable Business and the Sustainable Finance Lab conducted research on responsible investment by pension funds. Among others, they found that the barriers for further improvement include, lack of guidance in the implementation of responsible investment’ policies, lack of knowledge about the existing standards, available responsible investment’ products, costs, lower returns and also lack of a supportive regulatory environment.62

The Pensioenfederatie, the Federation of Dutch Pension Funds, has recognized the need of responsible sustainable investment, and has included it in the agenda.63 The Federation has announced to examine the development of generally accepted standards and definitions to contribute to fostering responsible investment, and to promote dialogue with investee companies to encourage sustainable business practices.64 In June 2016 the Federation published a “Service Document on Responsible Investment”, with guidelines for pension funds’ responsible investment policies to help pension funds to develop, implement, monitor, and evaluate responsible investment’ policies.6566 Previously, the Federation wrote a code for good governance among pension funds, on a “comply or explain” approach, the code advises and guides pension funds to develop a responsible investment policy. This code, written by the Federation and compiled together with the Labour Federation, was the Code of the Dutch Pension Funds in effect from January 2014 until September 2018, when the new code came into effect in the Netherlands.676869 This is an example how a soft law agreement such as the code for good governance of pension funds was widely accepted by the pension market participants and eventually became part of the Dutch pension legislation. Policy makers in the Netherlands, after the code was widely accepted by the market, created a supportive regulatory environment.