René van de Kieft was keynote speaker at the United Nations Environment Programme – Finance Initiative (UNEP FI). UNEP FI is a partnership between United Nations Environment Programme and the global financial sector created in the context of the 1992 Earth Summit with a mission to promote sustainable finance. Over 200 financial institutions, including banks, insurers and investors, work with UNEP to understand today’s environmental challenges, why they matter to finance, and how to actively participate in addressing them.
Text of the speech:
Ladies & gentlemen, dear colleagues,
MN invest 125 bln AUM euro for the pensionindustry. we manage the pensions of one out of every seven people in the Netherlands. Most of our clients are occupied in the industrial and maritime backbone of the Dutch economy. Together with APG en PGGM we are part of the 3 largest pensioninvestors in the Netherlands.
First of all, congratulations! This regional round table marks the 25th anniversary of the UNEP-FI. It is an honor to have been invited to address you today, on this very special occasion.
MN has had a close and productive working relationship with the UNEP-FI, mainly as a member of the Portfolio Decarbonisation Coalition, through which we were able to display how we are starting to systematically align our investment and engagement activities with the requirements of a low-carbon economy. The collaboration has been of concrete value added as it has provided us with access to top specialists in the field of long-term investing, invaluable contextual perspective on policy developments and a platform to share our own ideas and approaches. We have very much enjoyed the privilege of being part of the UNEP-FI community.
Now, let’s cut to the chase. Why am I here? What business does a CEO of a Dutch pensions’ asset manager have addressing such a distinguished international assembly? Shouldn’t he be back home overseeing his return on investment and pension coverage ratio – you might ask? Indeed, MN’s and therefore my, central responsibility is to ensure that the pensions of our beneficiaries are paid out. And that is exactly why I am here.
As investors it is our central role to generate returns for our clients and at MN, we firmly share the insight that returns on investments cannot be sustained in an unhealthy world. At MN we are universal owners in the sense that we own a little bit of nearly everything – especially when it comes to global listed equity. By the nature of our business we have long-term liabilities. This makes us long-term, highly diversified investors.
Now, allow me to indulge in a small thought experiment:
- First: Various experts, such as Lord Stern have estimated that climate change above 2 degrees warming may cause a permanent drag on global GDP of 5-20%, and possibly even higher in more extreme scenario’s.
- Second: Climate change-related risks, either transition or physical, will impact nearly every sector & asset class. There are no ‘safe havens’ especially not big enough to harbor all of our collective AUM;
- Third: Say, speaking generally, highly globally diversified and mostly passive investors generate returns approximately in line with global GDP growth over the long-term.
- That means that organizations such as MN and probably many others of you in the room, cannot hide from the effects of 2 plus degrees climate change. A breach of the two degrees may imply a permanent drag on your returns that may only exacerbate as physical impacts of climate change manifest with increasing relentlessness.
And even if you personally are not swayed by the scientific research, policy makers and financial regulators are. Just last week, the Dutch Central Bank published its second review of climate-related financial risks. Its conclusion: ‘Financial institutions must increasingly factor in the consequences of a changing climate and the transition to a carbon-neutral economy’. Climate change-related risks will become part of the regulatory conversation in the Netherlands and a stress test is being developed. We have seen similar regulatory developments in the UK and France. Also, the High Level Expert Group (HLEG) on Sustainable Finance of the European Commission is making recommendations for European financial & economic policy. On the international level, the Financial Stability Board has launched its voluntary climate risk disclosure framework through the recommendations of the Task Force on Climate-related Financial Disclosure (TCFD).
This WILL spark change. A transition WILL be underway. The bottom line is this: climate change-related risks WILL manifest – no matter what the scenario. Transition risks – so the risks associated with the decarbonization of economic activity – are smaller, especially if we start the transition quickly so we can have a relatively smooth one, and by definition not of a permanent nature. Therefore, as investors, our best bet for minimizing downside risk and maximizing upward earnings potential is to facilitate an orderly transition to an economy aligned with the Paris climate goals. Any other scenario is financially unattractive and not in the interest of creating returns for our clients. Frankly, doing our utmost to help keep the economy stay within a 2 degrees path is what fiduciary duty demands of us. That is why MN has recently signed onto the investor statement of fiduciary duty in the 21st century – a valuable initiative of the UNPRI, Generation Foundation and UNEP-FI. And MN cannot do it alone. We need to act collectively as a global financial sector. And that, dear colleagues, is why I am here speaking to you and not at my desk in The Hague.
Of course a lot of action is already underway. Many of you have carbon reduction targets, publish the carbon footprint of your equity portfolios, engage companies and external managers, speak with civil-society and attend international gatherings such as these in order to share ideas. MN is proud to do these things, on behalf of its clients, as well.
However, it is my impression that mainstream investors, including MN, are just getting started. We have 25 – 30 years to complete the transition and that is, especially for CAPEX intensive sectors such as transport, energy & chemicals, a very short period of time indeed. The investments made now will be around for decades so the coming years will be decisive. We need to step up our game as a financial community. In view of our financial interests at stake it is my opinion that we have been punching below our weight when it comes to working on, facilitating and calling for change.
To be effective going forward I would urge investors to consider the following:
- Ensure that climate-related financial risks are a matter of board level priority, that internal governance is conducive to addressing the issue and that the ‘tone at the top’ is right;
- This means also that in your own company sustainability is internalized and not only part of a few happy staff members
- Start mapping all financial climate-related risks and opportunities in their portfolios in a way that is forward looking & decision relevant. Scope one and two carbon foot printing is just the start and tends to focus attention on the usual suspects. Innovation on measuring scope three and avoided emissions are necessary in order to truly understand which companies are best positioned to navigate the transition. Scenario and supply chain analysis strategies need to be further developed and applied;
- Be transparent about risks and opportunities. MN welcomes the TCFD disclosure framework in this regard; and we welcome the leadership demonstrated by now 16 UNEPFI banks towards piloting the recommendations in their industry which is critical;
- Embrace engagement with investee companies as a powerful tool and allocate sufficient resources to do it effectively as investor and therefore partial owner of companies we consider it to be our fiduciary duty to enter into this dialogue. We want companies to enable us in understanding their transition path. At the same time, acknowledge that engagement does have its limitations. If a company is not open to engagement at Board level and/or is simply not acting with urgency on investors’ concerns then divestment should be a credible option;
- Accelerate and intensify the efforts in the space of impact investing to speed & scale up new technologies;
- Be vocal in asserting our client’s and beneficiaries interests at stake.
- Work collectively on all these challenges.
However, no matter how seriously we go about our work as investors – we cannot do it alone. An effective orderly transition requires the real economy to change. All actors along the investment value chain must play their role.
From MN’s point of view we ask the following:
- Of our investee companies we ask them to disclose along the TCFD guidelines. We require this information to be able to appraise risk & return effectively;
- Of the banks we ask them to green their portfolios and increase efforts to securitize such green solutions into the capital markets so that investors like MN and increasingly others can invest in these offerings;
- Of our external managers we request that they develop sophisticated methodologies to adequately manage climate-related risks and opportunities and to disclose results;
- Of our governments and regulators we request a clearly signposted orderly transition path including robust carbon prices and the end of direct or indirect fossil fuel subsidies. Without clear policies the transition will not be smooth and may cause unnecessary economic losses. In this respect we welcome the announcements made recently by the new Dutch government to introduce new measures, in addition to European targets, and to anchor these in a ‘climate law’. Also, we request that governments facilitate simple access to open source, forward looking, decision relevant, climate-related risk data for companies as well as for sovereign debt;
- Of our service providers we ask them to order and interpret this data in a way that investors can easily integrate them into current daily investment practices. It is time to go beyond scope one and two foot printing. We would welcome methodologies that map risks and opportunities within supply chains, not just at the company or sector levels, in a forward looking way.
Together we can harness this transition agenda and make it into the engine for growth and employment that it actually is. Some industries may indeed no longer fit under a 2 degrees scenario. It is important to find socially equitable solutions to this. However, many new companies and skills will be required. In the Netherlands we expect large amounts of job opportunities in developing, manufacturing and the installation of new, clean, infrastructure for transport, real estate and the power sector in the coming years.
I have spoken a lot about climate change. However, the Sustainable Development Agenda is of course broader. That is why we are so proud that one of our clients, the fund PME, has committed to bringing 10% of their total AUM of 45 bln. in line with the SDG’s. And this is not an easy job, because definitely in this part of the economy there is also a lot of resistance putting pressure on boards and committees like pensionfunds. It much more easier to make this step in public pension environment.
Relatively investors are perhaps a little further ahead when it comes to addressing climate change. It is my hope and ambition that valuable lessons learned in this space will soon be translated to the broader SDG agenda.
A recent survey, also conducted by the Dutch Central Bank, showed that 68% of respondents find it important that their pension endowments and savings are invested in a manner that contributes to a sustainable society, especially when it comes to preventing climate change and diminishing social inequality. By acting on these issues we will both honor our ultimate beneficiaries’ wishes as well as protecting their financial interests. So do I need to say more?
Let’s get to work, together!