• 09 jan 2019
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  • Assetmanagement

RI Agreement signed, implementation starts now

On December 20, 2018, the Dutch Pension Funds Agreement on Responsible Investment was published. What will be the implications for PGGM and its clients? Cedric Scholl explains.

With the RI Agreement for Pension Funds, which was published on December 20, 2018, the Dutch pension sector takes a major next step in the field of responsible investing. Pension funds are now expected to have insights into the social and environmental impact of companies in their investment portfolio.

When these companies cause a serious negative impact on society or the environment, it is up to pension funds to address this with the companies. In addition, pension funds will cooperate with the Dutch government, trade unions and NGOs.

73 pension funds, together representing €1,180 billion in assets under management, have signed the agreement, including clients of PGGM: PFZW, BPF Schilders, SPH, Pensioenfonds Architecten and VOLO.

Over the past year and a half, PGGM has been intensively involved in the development of the agreement, which was led by the Dutch Social Economic Council (SER). Over the next four years, PGGM will work together with the clients who have signed the agreement to implement it and thus take responsible investment to the next level.

What is the RI Agreement about?

The Responsible Investment (RI) Agreement is about the implementation of the OECD Guidelines for Multinationals (OECD Guidelines) and the UN Guiding Principles on Business and Human Rights (UNGPs) by pension funds. The OECD guidance for institutional investors provides guidance for institutional investors, such as pension funds, on how to implement these guidelines. This guidance therefore forms the basis of the RI Agreement.

Pension funds that have signed the agreement, commit to implementing the OECD guidelines and the UNGPs in their investment portfolio. The UNGPs state that every company has the responsibility to respect human rights. Every company must also have a human rights policy. Through the OECD guidelines, pension funds are expected to have an ESG1 policy. In addition, pension funds must set up an ESG due diligence2 process. Finally, pension funds are expected to urge companies that have caused severe negative impact on society and/or the environment to provide remediation to those affected.

The agreement roughly consists of two parts. The first part, the so-called 'broad track', concerns the implementation of the OECD guidelines and the UNGPs in the investment portfolio of pension funds as described above. The second part, the 'deep track', concerns cooperation between the various parties to the agreement (pension funds, the Dutch government, trade unions and NGOs).

In the coming four years, all parties involved will work together on approximately six concrete engagement cases with companies within the listed equity portfolio of pension funds. The focus will be on social issues, such as human rights or labor conditions. The goal of the deep track is to increase the effectiveness of engagement processes and for the parties to learn from each other. The deep track is optional to signatories.

Why an RI Agreement?

The OECD Guidelines are binding for OECD member states, such as the Netherlands. The Dutch government has chosen not to impose the guidelines on businesses unilaterally through legislation, but let sectors themselves develop International Responsible Business Conduct (IRBC) agreements. These agreements are developed by the sectors, in consultation with the Dutch Government, trade unions and NGOs.

In 2014, the government conducted a risk sector analysis to identify sectors in the Netherlands that are most at risk in terms of responsible business conduct. The pension sector is one of the thirteen sectors (in addition to, for example, textiles and clothing, oil and gas, chemicals, banks and insurers) that emerged from this analysis. As the risks in the pension sector are in the investment portfolio and not in the organizations (the pension fund) itself, this agreement is about “Responsible Investment” (RI) instead of “Responsible Business Conduct” (RBC).

What does the RI Agreement mean for our clients?

Pension funds that have signed the agreement must incorporate the OECD guidelines and UNGPs (i) into their policy within two years, (ii) in their outsourcing and monitoring within three years and (iii) in their reporting (transparency) within three and a half years. Many funds already partially meet the criteria of the agreement, but there is often room for further improvement.

There is also often room for improvement in updating relevant existing documents (e.g. the responsible investment policy, investment mandates or the annual report). When pension funds participate in the deep track, they must actively participate in the learning sessions organized around the joint engagement cases. This requires time from pension fund trustees.

What does the RI Agreement mean for PGGM?

As a pension service provider, PGGM ensures that it can meet the expectations of clients that derive from signing the RI Agreement. The agreement can only be signed by pension funds, not by service providers such as PGGM. Nevertheless, as clients of PGGM have signed it, the agreement will have implications for PGGM.

First, PGGM will support clients who have signed the agreement to ensure that they can meet the requirements of the agreement. Second, clients of PGGM will ask of PGGM to set up an ESG due diligence process in accordance with the OECD guidelines and the UNGPs. PGGM already endorses the OECD guidelines and UNGPs and also largely complies with the recommendations of the guidance for institutional investors.

Where this is not yet fully the case, PGGM will bring its practice with regard to responsible investment in line with the OECD guidelines and the UNGPs. PGGM will cooperate with the other agreement parties. PGGM will also contribute on behalf of its clients to the deep track of the agreement.

1)The OECD Guidelines do speak of Environment, Social and Governance (ESG), but Responsible Business Conduct (RBC). Since the concept of ESG is much better known in the pension sector, the agreement has opted to use the term ESG, which refers to RBC as defined in the OECD guidelines. RBC looks at the negative impact of companies on society and the environment. It is not about negative impact of society and environment on companies (and therefore the investment portfolio of pension funds), how pension funds often interpret ESG.
2)The definition of due diligence in the OECD Guidelines differs substantially from what pension funds and other investors usually understand by due diligence. In the OECD Guidelines, due diligence is defined as follows: "the process through which companies can identify, prevent, mitigate and account for their actual and potential adverse impacts as an integral part of business decision-making and risk management systems.".(OECD, 2011)

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