Responsible Investment

Pension funds’ search for sustainable returns

March 20, 2013

© Robeco

What motivated you to write a book on the search for sustainable returns?
It was a combination of an advanced interest in the subject, policymaking that has led to limited progress in this area in recent years and the conviction that sustainable investing will be a sine qua non within a decade. What struck me most was the interviewees’ desire to continue to develop sustainability policies and practices.

After completing the interviews, how do you view the current state of sustainability investing in the Netherlands?
Dutch pension funds are ahead of the average pension fund around the world. The main issue that many pension funds currently face is low coverage ratios, which have resulted from the low level of interest rates. Combined with the short-term focus of policymakers and regulators, this issue is preventing many pension funds from embracing a sustainable, long-term view. It is not only crucial that sustainable investing is perceived as important, but also that our industry makes urgent progress in implementing it more comprehensively.

Many interviewees state that the 2007 investigation by the Dutch TV program Zembla of pension funds’ investments in cluster ammunitions triggered their sustainability investing activities. Do passive investors need a similar wake-up call?
I doubt whether there will be a similar wake-up call for passive investors, who simply want to “buy the market” at low cost. That said, it is possible that the exercise of voting rights will grow. And maybe passive investors will start using benchmarks that —while remaining mainstream— are more sustainable.

How do you see the relationship between fiduciary duty and sustainability investing?
It involves both an attractive risk/return profile on investments and a long-term view—and by “long-term”, I mean across multiple generations.

The interviewees stress that conviction and leadership from pension-fund board members are required to give a boost to sustainability investing. Do you agree?
Yes, that is important. It requires conviction and leadership for pension fund trustees to take steps to incorporate sustainability more deeply in their investment processes, especially in the current environment. Low interest rates and the resulting low coverage ratios are serious headwinds.

In my view, short-term issues such as coverage ratios are receiving too much attention. This is understandable, given the financial impact they have on pension funds’ participants. However, it is also important that policymaking doesn’t ignore longer-term interests. What is really required to give sustainability investing a shot in the arm is an increase in interest rates, which would help coverage ratios to improve and should thus refocus attention, allowing pension board members to give more time to sustainability investing. However, this will probably take some time.

When do you expect sustainability investing to become a mainstream activity? What will this mean for returns?
From a global perspective, it will take many years to move from lip service to true application. This will provide ample opportunity to improve the long-term risk/return profile of investment portfolios. This is also an opportunity for Dutch pension funds to regain the trust of their participants.

Sustainability investing isn’t just a hype then?
No. Sustainability investing is here to stay. Robeco will remain dedicated to the cause.

References

This article may be reproduced according to our terms of use with attribution (and link, if online) to www.tias.edu. To be cited as: “Pension funds’ search for sustainable returns”, fsinsight.otg, March 20, 2013.

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Author(s)

Roderick Munsters
Roderick Munsters is chief executive officer of Robeco Group.


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