Dutch social security provider UWV’s pension fund is the first Dutch scheme to introduce a Paris Aligned Benchmark (PAB), having set a CO rate of 50%2 reduction target for 2022.
The PAB aims to align investments with the Paris Agreement to limit global temperature rise to less than 2 ° C and includes a commitment to climate neutrality by 2050. The benchmark introduced by UWV , which pays unemployment and disability benefits on behalf of the state, encompasses all categories of investment, said Marcel Snijders, director of the fund.
In this, UWV goes further than AP2 – the Swedish pension fund announced the adoption of a PAB last year, but only for its portfolios of foreign stocks and corporate bonds.
The PAB prohibits investments in companies where more than 1% of their turnover is made in thermal coal, 10% in oil and / or 50% in natural gas, effectively excluding all of the fossil fuel industry from its investment universe. Utilities that depend on fossil fuels for more than 50% of their income are also excluded.
In March of last year, UWV, which is in principle a passive investor, had already switched to an MSCI ESG Leaders index for its mandate in developed markets equities. This index only invests in the 50% of companies with the highest ESG ratings by sector.
The pension fund also already uses ESG benchmarks for its corporate bond portfolio. As a result, the CO2 emissions have already been reduced by 31%.
High yield bonds
This year, the pension fund will proceed with the sale of its investments in oil and gas companies, utilities with coal-fired power plants and miners with coal mining activities. UWV’s investments in high yield bonds already emit 70% less CO2 than the benchmark, according to Snijders.
He said: “Our high yield bond manager has an active investing style and allocates virtually nothing to fossil fuels, even though the high yield bond index has relatively high exposure to the industry.
This is particularly the case for the American high yield, a UWV category divested since last year. This is not directly related to the fund’s climate policy, but stems from a “desire to reduce complexity,” according to Snijders.
UWV invested the proceeds of the sale in its European High Yield Portfolio, which is managed by Danish asset manager Capital Four.
These additional measures ensure that the UWV achieves its 50% CO target.2 reduction by the end of 2022, said Snijders. The pension fund is also reducing the carbon footprint of its unlisted assets “by allocating sustainable real estate funds and wind and solar farms into our infrastructure portfolio,” he added.
UWV is not the first Dutch pension fund to announce climate neutrality by 2050. The country’s two largest funds, ABP and PFZW, have already committed to this goal, with the latter aiming to reduce to zero the net emissions of its investment portfolio by 2040.
None of these funds, however, detail how they will achieve their goals. Both remain for the moment invested in fossil fuels, for example.
The PAB includes a requirement to reduce carbon emissions by an additional 7% each year, in order to achieve the zero emission target by 2050. UWV plans to achieve this target by introducing additional filters based on the targets of sustainable development (SDG) in its passively managed portfolios.
In this regard, Snijders specifically raised the possibility of introducing a CO2 filter, contributing to SDG 13 (Climate Action). “In this way, companies with high carbon emissions get a lower weight in the benchmark and, therefore, in the portfolio as well,” he said, adding: “A consequence of this is that sector weights could change within the benchmark. “
A final choice regarding the addition of ODD factors to the benchmark will be made at a later time.
Goodbye linkers, Brazil and India
The UWV pension fund sold its investments in inflation-linked bonds and reinvested the proceeds in its mortgage portfolio. According to the director of the scheme, Marcel Snijders, ALM studies in 2017 and 2020 had shown that the investment category had no added value for the pension fund.
He said: “In order to reduce complexity, we have therefore decided to remove this small allocation (5.6% of the bond portfolio).
The fund also decided to exclude government bonds and bonds of public companies of 10 emerging countries as of September of this year. The 10 countries are the biggest violators of labor rights, according to the International Trade Union Confederation (ITUC) global rights index, said Snijders.
The pension fund invests in government bonds from seven of the ten countries, including Brazil, Colombia, India and Turkey.