Financial industry overview
Over the past few years, the Netherlands has seen a considerable increase in fund sponsors and asset managers establishing Dutch vehicles for holding international investments. The Netherlands has a strong financial sector and is an attractive asset management location, as it does not levy taxes such as stamp duties or other taxes on capital contributions in an investment vehicle, annual subscription or net worth taxes. Moreover, the Dutch withholding tax does not apply to outbound interest payments. According to OECD 2015 findings on pension funds, the Netherlands is, together with the UK, one of the two biggest countries in Europe in terms of pension funds’ assets. With a long-standing savings and investing tradition, the insurance sector is also strong with over €500 billion AUM. There are five categories of funds: Undertakings in Collective Investments in Transferable Securities (UCITS), Alternative Investment Funds (AIFs), Funds managed by managers domiciled in jurisdictions with adequate supervision, Funds managed by exempted fund managers, and Funds managed by fund managers subject to voluntary supervision.
Characteristics of the SRI Market
The SRI market in the Netherlands has become increasingly mainstream. This is clearly reflected by the exponential growth rate for most of the SRI strategies, even taking into account that some large players decided not to collaborate on the questionnaire this year. Although not all players have the same level of maturity, most of the asset managers and asset owners at least have a responsible investment policy in place. Levels of SRI implementation tend to vary according to market sectors – banks, pension funds or insurance companies – but there are also interesting variations within each sector.
This makes the SRI market in the Netherlands rather fragmented. Although not the strongest in size, the two ethical retail banks – ASN and Triodos – are the most developed in terms of their SRI offer – thanks to their long-established experience and specialisation in SRI. Due to their large presence in the market, pension funds and insurance companies remain the most important players. The 30 biggest insurance companies and 50 largest pension funds manage assets for over €1,370 trillion in total and therefore have a big impact on the financial services industry. The Federation of the Dutch Pension Funds (Pensioenfederatie) has recently published a Service Document on Responsible Investment, a framework with guidelines for pension funds’ responsible investment policies. The framework offers guidelines to pension funds on how to develop, implement, monitor, and evaluate sound policies for responsible investing.
The majority of the investments which today make up the Dutch market do not all take into account all of the four key characteristics, leaving us to conclude that ‘just over half of impact investments by Dutch institutional investors can be typified as ‘light impact investments’. In fact, as highlighted in the VBDO Study, the monitoring part still does not follow a formalised approach and therefore remains the most problematic characteristic.
Responsible investing has a long history in the Netherlands, starting back in the 1970s with the first introduction of ethical banks. Over the course of the 2000s, more and more retail banks started practising SRI and since 2007, institutional investors have also turned to responsible investments, due to increasing attention to the topic in the media.
It is common practice for Dutch pension funds to appoint a fiduciary manager to manage their portfolio. These fiduciary managers are often asset managers that manage several pension funds’ assets. This implies an important role of asset managers in the SRI market as they play a central role in the investment decision-making.
Although pension funds and their asset managers have relatively well developed SRI practices, collaboration with other funds and consultation with participants, governmental or civil society organisations about SRI is limited and could restrict development. In the last decade, transparency has changed fundamentally, due to an increase in societal and regulatory requirements. In response to this phenomenon, the quality of reporting has increased and now third parties auditing is increasingly common practice. While pension funds are required to report on their responsible investment strategies, many insurance companies do not yet disclose their strategies on responsible investment.
An obvious trend in the Netherlands is that front runners in the financial industry increasingly implement SRI strategies for their whole portfolio, developing specific targets. Overall, several players in the Asset Owners space, like insurance companies, work through ad-hoc Responsible Investment Departments. On the one hand, this is a way to encourage a further elaboration of SRI strategies, but on the other hand, there is a lower degree of engagement at strategic level with management.
SRI Market and strategy overview
During the last years, SRI strategies have developed both in terms of scale and diversity.
Exclusions continue to feature as the most popular strategy at €1.123 trillion, registering a slight growth, followed by Norms-based screening with €936 billion.
Engagement and Voting, as part of Active ownership, is a well-established practice within pension funds and insurance companies; which has continued to show stable growth this year, with €726 billion in assets. However, it is mostly outsourced and not always solely focused on sustainability topics. Dialogue and debate are part of sector-wide engagement. Pension funds are also increasingly engaging with policy-makers, something which is becoming an established practice for most players now. Tracking and monitoring the outcome of these active ownership practices is not yet a shared common practice.
ESG-integration has kept delivering a positive trend which, culminated this year with a total of € 440 billion. A positive evolution, as ESG information is increasingly considered part of the standard information for financial analysis. Basic ESG-integration is increasingly becoming mainstream with 94% of pension funds applying at least some ESG criteria in the evaluation of equity investments. The same is true for insurance companies, albeit to a lesser degree.
Best-in-Class is the strategy that registers the second highest level of growth of over 272% with €56 billion.
This is mainly due to the fact that some of the main players who were seemingly not applying this strategy in the past or only in a very limited fashion, this year reported a generally high degree of involvement.
Although it is still early days, Impact Investing is becoming a firm fixture on the Dutch SRI market. This year, it was the strategy registering the highest growth rate over the last two years; clearly indicating that the category is getting important buy-ins from a wide variety of players. According to the VBDO’s 2016 report on Impact Investing, the strategy has been defined as one that ‘aims to generate both financial and social or environmental return’. The Study found the Dutch impact investment market rather ‘fragmented, comprising several sub-markets’. Composed of newer (social impact bonds) and more established (microfinance) investment vehicles, impact investing is today very broad and for this reason, it is challenging to have one definition which captures all the different nuances and types of impact investments across all asset classes.
The market is largely dominated by a few of the largest pension funds and insurance companies which alone represent almost 90% of the impact investment market. In their report, VBDO highlighted specific key characteristics of this strategy.
One important step in 2015 was an announcement from the governor of the Dutch Central Bank (DNB), the main supervisor on the Dutch market, that the DNB sees sustainability as a part of its mandate and will step up its efforts in the coming years in this field. Therefore, the DNB is also set to publish several studies in the field of SRI and energy transition in 2016.
The distinction between institutional and retail investors regarding SRI strategies will remain. The retail investors focus mainly on Best-in-Class and thematic/ impact investing strategies. This, however, is a relatively small portion of the SRI market in the Netherlands and will probably not grow significantly in the coming years.
In the institutional market (pension funds, insurance companies and asset managers), a variety of instruments will be used. As a base line, the organisations will have a screening and excluded companies from the investable universe. This will probably not increase in the future, since many institutional investors agree that Exclusion is not an effective method to make the capital markets more sustainable. But when it comes to the integration of ESG-criteria into the investment decision, more institutional investors are of the opinion that it will provide better risk-adjusted returns. It is therefore expected that there will be an increase in not only the number of investors that apply ESG-integration, but also the quality of the integration and the asset classes on which it applies.
The same applies for active ownership practices. The quality of the engagement is expected to improve, since it is regarded as an effective tool for making the market more sustainable. The largest Dutch investors work together at AGMs to ask questions regarding sustainability.
Another interesting topic is the inclusion of sustainability in strategic asset allocation. Megatrends, such as climate change, have a large impact on different assets in the portfolio. Investors are increasingly looking at the effects of these megatrends on the entire portfolio, as opposed to just the single asset. Related to this, some large investors have set targets (KPIs) to reduce the carbon footprint of their portfolio by 25 or 50%. It is expected that others will follow suit, although it is not always clear how this will be measured, as these tools are still being developed.