Dutch pension funds still have “many steps” to take to manage ESG risks, according to De Nederlandsche Bank (DNB).

The central bank and regulator asked 39 pension funds about their management of ESG risks, as well as carrying out three on-site investigations. In the survey, DNB asked pension funds about their progress of integrating ESG risks into their core processes. This concerns their business model and strategy, governance, risk management, information provision and the investment cycle.

With this information, DNB said it has been able to form a sector-wide picture. The Guide for the Management of Climate and Environmental Risks was used as a reference framework for the request. In addition to climate and environmental risks, social risks were also taken into account, in line with the legal requirements (Article 18, FTK decision).

DNB found that several pension funds have come a long way, but numerous funds still have many steps to take to understand, provide insight into and manage ESG risks. The survey found that pension funds give “serious weight” to ESG within governance and they are also taking steps to integrate ESG risks into their strategy.

“An overwhelming majority of pension funds have policies for the various ESG risks that are integrated into the investment cycle. However, this policy is often not made sufficiently concrete with goals and key performance indicators (KPIs). As a result, there is little or no effective management of ESG objectives,” DNB added.
In addition, the bank noted that a few pension funds are switching to a concentrated share portfolio with active management from a Socially Responsible Investment (SRI) perspective.

“This allows ESG risks to be managed and the fund's ESG objectives to be achieved. The downside of this strategy is that concentration risks and asset management costs increase. The substantiation, framework, monitoring and management of this active portfolio is an important point of attention,” DNB explained.
Finally, DNB said the integration of ESG risks into the risk management cycle “requires attention” for a large number of pension funds.

“A majority of institutions have carried out a materiality analysis to analyse ESG risks, but more than half of the funds consider the quality of this analysis to be insufficient. In those cases, the materiality analysis provides limited insight into the impact and/or dependence on ESG risks. In addition, concrete risk indicators and tolerances are often lacking to arrive at a risk assessment.”

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