Driven by social pressure and regulatory requirements, pension funds across Europe are becoming more sustainable. Stubborn resistance against this movement increasingly feels like an echo from the past.
The pension fund sector in the Netherlands is a good example of the move towards sustainability. Many Dutch pension funds find themselves in the midst of a historic shift with sustainability changing from being a side issue to becoming the new foundation of their investment policy.
One of the most striking examples of this is the recent decision by Pensioenfonds Zorg en Welzijn (PFZW) to sell its shares in some 2,700 companies. Dutch newspaper NRC called this “with some exaggeration, the biggest divestment of all time”, but it hardly is. PFZW has consciously opted for a smaller, actively managed portfolio of around 800 companies, so that it can better embed sustainability in its investment policy. Earlier this year, the largest Dutch pension fund ABP also opted to enhance sustainability through a more concentrated, partly active portfolio.
As usual, such progress is met with stubborn resistance from conservatives. In an attempt to leave things as they are, this group clings to one-dimensional financial models and dismisses the proponents of sustainability as sustainability evangelists. But their criticism is increasingly out of touch with the reality in which pension funds operate today.
Sustainability is a core task
Conservatives continue to hammer home the legal obligation for pension funds to provide an adequate pension through an optimal risk-return ratio. They see this as incompatible with a smaller portfolio focused on positive impact, but this is an outdated perspective. After all, a good pension is of little value in a depleted world. Moreover, sustainability is not optional, but is legally mandatory as well.
The idea that thousands of investments are needed to achieve sufficient diversification and returns is also untenable. Various studies show that a smaller number of companies is more than sufficient. In addition, a compact portfolio makes it easier for shareholders to play an active role: understanding companies, engaging with them and steering them in the right direction.
Exclusion sets the standard
Another hobbyhorse of the critics is that exclusion of certain companies is pointless because other investors will pick up the shares anyway. According to this reasoning, exclusion does not affect the share price or company profits, while excluded companies do lose the incentive to become more sustainable due to a lack of opposition at shareholder meetings. This is a misunderstanding of what exclusion is really about.
Exclusion is not about dealing a direct financial blow, but about drawing a moral line. It gradually deprives companies of their “social licence to operate”. This does not happen overnight, but the effect is real: companies notice it through critical media, conscious consumers and employees, and ultimately through stricter legislation. Anyone who takes sustainability seriously knows that setting standards is indispensable.
Political neutrality does not exist
The alleged lack of support among participants of pension funds is also misused as an argument. Participant surveys by PFZW and ABP consistently show that a large majority want their contribution invested sustainably. But critics argue that participants do not understand the questions properly or give socially desirable answers. Their solution to these “measurement errors”? A so-called politically neutral approach in which nothing is excluded.
But such an approach does not exist: a continuation of our polluting and unequal economic system is a political choice that maintains the status quo.
Echoes from the past
Seen in this light, the resistance is not about pension fund returns, but about the inability to let go of an old worldview in which social responsibility is of secondary importance. The Sustainable Pension Investment Lab (SPIL) has rightfully stated that nothing stands in the way of pension funds moving towards more concentrated, sustainable portfolios. It merelyrequires a “slightly different way of thinking”.
An increasing number of pension fund directors are showing precisely that kind of courage by thinking a bit outside the box. They are listening to their participants and are making their investment policies future-proof. Conservative criticism stands in stark contrast to this development. It no longer sounds like relevant counterarguments, but more and more like an echo from an outdated past.
This column was previously published in Dutch in Financial Investigator.
