Risk, Return and Responsibility: Financial and ethical motives in
Dutch pension funds’ involvement in responsible investment
Master thesis Political Science, Political Economy Research Project: Transnational Politics of Sustainability
July 2017
Jordy Willems (10459782) jordy.willems@gmail.com
Supervisor: L. Fransen
Second Reader: J. Fichtner
Table of Contents
List of abbreviations ... 2
1. Introduction ... 3
2. The development of SRI ... 5
2.1 Defining SRI ... 5
2.2 The drivers of SRI ... 6
2.3 SRI strategies ... 8
2.4 Financialisation ... 11
2.5 Financialisation of SRI ... 13
2.6 Intended contribution of the research ... 14
2.7 Research questions and key concepts ... 15
3. Methodology ... 18
3.1 Research design and sample ... 18
3.2 Methods, data gathering and data analysis ... 19
3.3 Strengths and limitations of the research ... 21
4. The Dutch pension sector: an overview ... 23
4.1 The Dutch pension system... 23
4.2 Dutch pension funds’ investment behaviour and financial situation ... 25
4.3 Dutch pension funds’ involvement in responsible investment ... 27
5. Multi-level dependency and scale effects ... 30
5.1 The practice of investing for pension funds ... 30
5.2 Multi-level dependency for different SRI strategies ... 32
5.2.1 Multi-level dependency in SRI screening ... 34
5.2.2 Multi-level dependency in engagement ... 35
5.3 Scale effects ... 38
6. Different understandings of SRI: balancing risk, return and responsibility ... 40
6.1 Beliefs on the relation between social and financial performance ... 40
6.2 Two different understandings of SRI ... 42
6.3 Mistranslation within the chain of subcontracting ... 46
7. Conclusion and discussion ... 49
8. Acknowledgements ... 51
9. Bibliography... 52
List of abbreviations
ABP - Algemeen Burgerlijk Pensioenfonds (Pension Fund for Civil Servants)
AFM - Autoriteit Financiële Markten (Dutch Authority for Financial Markets)
AGM - Annual General Meeting
AOW - Algemene Ouderdomswet (Old-age Pension)
BMO - Bank of Montreal, Asset Management
CSO - Civil Society Organisation
CSR - Corporate Social Responsibility
DNB - De Nederlansche Bank (the Dutch Central Bank)
EPO - Executive Pension Organisation
ESG - Environmental, Social and Governance
MN - MN Services, Asset Management
MSCI - Morgan Stanley Capital International, Data Provision
NGO - Non-Governmental Organisation
PFZW - Pensioenfonds Zorg & Welzijn (Pension Fund for the Health Care
Sector)
PME - Pensioenfonds Metalelektro (Pension Fund for Metal and Electronics)
SRI - Socially Responsible Investment
SPMS - Stichting Pensioenfonds Medisch Specialisten (Pension Fund for
Medical Specialists)
UN PRIs - United Nations Principles for Responsible Investment
VBDO - Vereniging van Beleggers voor Duurzame Ontwikkeling (Dutch
1. Introduction
Managing around €1.4 trillion worth of assets, Dutch pension funds are a considerable actor on the (inter)national capital market1. Recently, these funds have started to make important changes to their investment strategies, aimed at the improvement of the social and environmental impacts of their investments. Herewith, they follow a broader trend of socially responsible investment (SRI) in the financial sector. Pension funds, however, do not directly manage their investments themselves, but have largely subcontracted the practicalities of investing with financial intermediaries.
This study examines how financial intermediaries influence Dutch pension fund’s involvement in responsible investment. As gatekeepers of the funds’ access to the capital market and as the main provider of knowledge on investment opportunities and possibilities, financial intermediaries play a crucial role in shaping and implementing their client’s investment policy. Despite considerable scholarly attention for the rise of power of the financial sector in today’s society on the one hand, and the increasing popularity of SRI among institutional investors on the other, specific research on the influence of financial intermediaries on SRI is quite scarce (Van Duuren et al., 2016: 525-6). This scarcity is surprising, as these two phenomena appear to be at loggerheads. Literature on financialisation argues that the increasing power of financial institutions on diverse sectors of the real economy has strengthened ‘financial imperatives’ (Van Der Zwan, 2014:100) within society. Instead, literature on SRI indicates that the dogmatic focus on financial performance has been left behind, as investors throughout the financial sector now also acknowledge the importance of social and environmental performance of assets (Sparkes & Cowton, 2004; Urwin et al., 2009; Galaz et al., 2015). This research aims to contribute to clarifying this apparent paradox. This exploratory study is based on qualitative data, collected through twelve semi-structured interviews with key decision makers, consultants and external experts working in or linked to the Dutch pension sector. The study first and foremost has a descriptive purpose. As the influence of financial intermediaries on the SRI process of pension funds has not yet received specific scholarly attention, the study aims to clarify the structure of the decision-making processes around SRI. In this way, it uncovers a complex chain of subcontracting that
opens up new fields of research. Second, the study aims to identify which differences exist inside this chain with regards to the understanding of SRI.
The study finds that financial intermediaries have substantial practical influence on the SRI involvement of pension funds. This influence is scattered across different actors, operating in a complex interdependent chain of subcontracting that connects pension funds to the capital market. Additionally, the study finds that a different understanding of SRI is dominant in higher levels of the subcontracting chain than in lower levels. Two distinct understandings are identified: conventional SRI, in which ESG is seen as improving the risk-return balance of investments; and ethical SRI, in which an ethical responsibility exists beyond the financial responsibility. The dominance of conventional SRI among financial intermediaries poses challenges for pension funds to achieve the SRI goals they desire.
The thesis is structured as follows. In Chapter 2, a comprehensive literature review is provided, which illustrates the current academic debate on SRI and financialisation in relation to the pension sector. In addition, the study’s stance towards and contribution to the current literature will be specified. Chapter 3 contains the study’s methodology and reflects on the gathering of data, used methods and the reliability and validity of the research. Chapter 4 provides a brief introduction to the Dutch pension sector, and highlights important characteristics of the relationship between large pension funds and asset managers that have changed over the past ten years. The findings of the research are presented in the fifth and sixth chapter. In Chapter 5 the practical influence of financial intermediaries on the SRI process is discussed, in which the themes of multi-level dependency and scale effects are central. Chapter 6 elaborates on the different understandings of SRI among stakeholders and the implications of the difference on the SRI involvement of pension funds. The final chapter briefly summarizes the study’s findings, and thoroughly reflects on its contribution to the academic debate.
2. The development of SRI
This chapter will present the current state of academic literature in several theoretical fields that are relevant for this study. First, attention is given to different definitions of responsible investment. The second section reflects on the main drivers of responsible investment, followed by an overview of the different strategies in which socially responsible investment can be executed. The following sections will focus on the rise of financialisation in general, and more specifically in the pension sector. At the end of the chapter, the theoretical direction and contribution of the study will be discussed and the main research question and sub-research questions will be presented and elaborated.
2.1 Defining SRI
Throughout the financial sector, SRI has experienced a phenomenal growth over the past two decades (Renneboog et al., 2008; US SIF, 2016; Eurosif, 2016). However, as the definition of SRI often lacks precision and functions as an ‘umbrella concept’ (Sethi, 2005:101) there is some disagreement on its exact share of and its effect on the capital market (Sandberg et al., 2009). As Van Duuren et al. (2016:525) point out, ‘[m]any academic studies focus on the impact of SRI on financial performance, rather than the exact meaning of SRI [...], whereas more research seems required on a conceptual and theoretical ground’.
Sandberg et al. (2009) note four levels on which differences exist concerning the concept of SRI. First, a terminological heterogeneity exists. Different concepts such as ‘ethical investment’, ‘sustainable investing’, and ‘responsible investment’ are popular throughout the literature (Louche, 2004; Urwin & Woods, 2009; Sievänen et al., 2013). On a definitional level, subtle differences exist. SRI has been defined as investments that address ‘social and environmental concerns not for any financial reward, but for the moral desire and responsibility to improve the world’ (Richardson, 2009:555). Others argue instead that financial characteristics do signify an important part of an investment’s degree of ‘responsibleness’ and define SRI as the combination of financial obligations with social and environmental commitments (Haigh & Hazelton, 2004). Urwin and Woods (2009:1) broadly follow up on this approach and argue SRI includes two main elements. First, it embraces a long-term investment strategy in which current benefits do not compromise future returns.
Second, it requires investors to ‘act fairly by considering the externalities created by their investments [which] includes the integration of ESG factors and ownership responsibilities’ (Urwin & Woods, 2009:1). Thus, a definitional heterogeneity exists on the extent to which financial criteria are part of SRI, or that SRI means looking beyond financial criteria.
A third level of heterogeneity is the strategical level. This relates to how investors integrate ESG criteria into the investment process. Assets with low ESG-scores can be sold, or instead an investor can focus more on buying assets of front runners in sustainability. Section 2.3 further elaborates on the different investment strategies investors may use to engage with SRI. Fourth and finally, a practical heterogeneity of SRI exists, which points to which ESG criteria are actually used. For example, investors may want to exclude tobacco companies from their portfolio, which appears to be quite a simple task. However, some investors consider a company a tobacco company when 25 per cent of its revenues come from tobacco, while others use a 10 per cent cut-off.
The differences in the understanding of SRI exist both in the academic as the professional field. As the definition of SRI of a decision-maker in the investment process determines its choices and behaviour, this study gives specific attention to the way in which respondents define SRI themselves. Following Sandberg et al. (2009:520-1), this thesis will use a broad definition of SRI, and consider it as ‘the integration of ESG criteria into the investment process’.
2.2 The drivers of SRI
Many scholars have examined the drivers behind SRI for institutional investors, and pension funds in particular. As Wagemans et al. (2013:238) point out, a main initial motivation for institutional investors to engage in SRI has been the development of more stringent legislation on reporting on investor’s motivations for investment decisions. Also, the implementation of special tax regulation has encouraged SRI involvement (Scholtens, 2005). Second, institutional investors such as pension funds may experience societal pressure from stakeholders to improve the social and environmental impact of their investments (Sparkes & Cowton, 2004; Sievänen et al., 2013).
Third, ethical motives may cause investors to invest responsibly. These motives generally apply to individual investors specifically, as their personal values are argued to play a bigger role in their investment decisions (Michelson et al., 2004). Nevertheless, ethical motives can also be of importance for decision makers of institutional investors.
A fourth and heavily debated driver for SRI is the financial motive. Since the 1990’s, the relationship between financial and social performance has been the subject of an impressive body of literature (Waddock & Graves, 1997; Margolis & Walsh, 2003; Barnett & Salomon, 2006; Renneboog et al, 2008), which so far has failed to reach consensus. Some scholars find empirical evidence that SRI funds have higher financial returns than regular ones (Statman, 2000; DiBartolomeo & Kurtz, 1999), while others argue the opposite (Geczy et al., 2005; Mueller, 1991), point out difficulties in finding a statistically relevant relation (Sauer, 1997; Renneboog et al., 2008) or question the direction of causality (Vogel, 2007). Proponents of the positive relation hold that companies engaging in CSR generally work with a longer time horizon in their management process, which strengthens their financial stability and durability (Barnett & Salomon, 2006). Environmentally well-performing companies also tend to be more efficient (Schaltegger & Figge, 2000), while companies with advanced corporate governance and good labour conditions tend to be more productive (Hübler & Jirjahn, 2001; ILO, 1998). And last, reputational benefits of socially and environmentally good conduct by a company are likely to contribute to economic gains as well (Bengtsson, 2008).
Advocates of the negative relation between social and financial performance generally argue that any divergence of the central objective of profit ultimately weakens a company’s financial performance (Friedman, 1970). Also, negative screening of investments, which excludes companies or sectors with negative social and/or environmental impact, limits the diversification of the investment portfolio and may thus increase financial risk (Renneboog et al., 2008:1739). Thus, as Aguilera et al. (2006) find, financial motives are used by both advocates and critics of SRI.
The abundance of research on this topic in itself, however, shows that among academics there is a strong belief that an alleged trade-off exists between responsible investment and financial return. Although many aim to refute this trade-off, the fact they do so shows that they feel a need to do so. Despite the popular statement that SRI has become
mainstream (Sparkes & Cowton, 2004), the conviction that SRI should not compromise financial return still appears to be somewhat precarious. Correspondingly, Juravle and Lewis (2008) show that the fiduciary duty, the legal obligation of fund managers to act in the best (financial) interest of their client, can be an impediment to SRI. Fund managers feel they first and foremost have a financial responsibility to deliver maximum return and any deviance of this financial responsibility is inappropriate.
2.3 SRI strategies
SRI can be conducted through different strategies. A main distinction can be made between screening and shareholder engagement. Screening entails incorporating sustainability criteria in the composition of the investment portfolio, which can be done in different ways (Wagemans et al., 2013). With negative screening, investors exclude companies or sectors that perform below certain sustainability standards, or are involved in unwanted practices (such as tobacco, weapons and gambling). Positive screening involves focusing investments on ‘best-in-class’ companies that are frontrunners in their sector, which helps the investor to actively contribute to a better world and simultaneously allows the investment portfolio to be diversified enough (Derwall et al., 2004; Vandekerckhove et al., 2007). The latter is an important reason why investors may be somewhat reluctant to negative screening. When sectors are excluded, the investment portfolio becomes less diversified, which in theory will increase the overall financial risk. In practice, exclusion is an SRI strategy that is used by most pension funds, but not on a particularly large scale. Mainly, companies are excluded either when this is demanded by law – such as the Dutch prohibition of investing in the production of cluster ammunition2 – or when a company’s core activity truly collides with a fund’s ethical beliefs. For example, the biggest medical pension fund in the Netherlands PFWZ does not invest in tobacco companies because of its harm to public health3.
Screening of investment opportunities requires the establishment of ESG-criteria and the access to ESG-information in order to compare companies. Investors are thus highly dependent on the providers of this information, who may be selective in what knowledge they
2
See website AFM: https://www.afm.nl/nl-nl/professionals/onderwerpen/marktmisbruik/clustermunitie-mm-int 3 See website PFWZ: http://www.jaarverslagpfzw.nl/jaarverslag-2016/mvo/a1172_Verantwoord-beleggen
report on (Wagemans et al., 2013:241). As some screening methodologies focus more on environmental, and others on social or governance issues, getting the complete picture of companies’ sustainability impact may prove to be difficult.
In recent years, a second SRI strategy has received much attention from institutional investors, including pension funds. Instead of using the power to ‘exit’, investors can choose to use their ‘voice’ (Hirschman, 1970). Engagement has now become an important way for pension funds to conduct SRI, for different reasons (Hebb, 2008; Wen, 2009). Especially large pension funds lack ‘flexibility’ on the capital market. As they usually have substantial amounts of assets of a company, suddenly starting to sell these is likely to negatively influence the share price, which harms the fund itself. As already mentioned, exclusion of companies from the portfolio decreases the ability to diversify, so pension funds generally avoid this. Moreover, moving out ends any ability to influence the company, while engagement may provide the ability to make a change and actively contribute to a better ESG performance. Wen (2009) notes that because of increasing attention for SRI ‘[t]he traditional passive shareholder role has been abandoned by institutional activists’ (p.309).
It is important to clearly distinguish passive investment strategies and passive shareholder behaviour. The former relates to the way in which assets are managed, while the latter relates to the role played as owner of the assets. As Fichtner et al. (2016) find, a massive shift from active to passive investment strategies has taken place since 2008, in which both private and institutional investors are involved. Passive ‘buy-and-hold’ investment strategies seek to minimize asset management costs by simply replicating stock indices. Assets in principle are hold ‘forever’, unless the composition of the index changes (Fichtner et al., 2016:3). Active investment strategies, in contrast, seek to outperform the benchmark by actively selecting, buying and selling assets, which inevitably increases costs. While active investors usually prefer to exit, passive investors are more likely to try to influence the corporate behaviour of the companies of which they are shareholder. Thus, a passive investment strategy usually goes along with active shareholder behaviour.
Two types of engagement can be distinguished: shareholder activism and shareholder dialogue. Shareholder activism involves making use of shareholder rights, such as voting and filing resolutions at the annual general meeting (AGM). Shareholder dialogue involves
encouraging a company to improve ESG performance in an informal way. Instead of filing a resolution and making a public statement, investors can choose to directly discuss ethical matters with the company’s management behind closed doors (Wagemans et al., 2013). Because dialogue can take place informally, it has no effect on the share price. Investors can hereby also avoid taking a public stance concerning sensitive subjects. The investor’s preference for one strategy of engagement over the other can depend on culture and tradition within economies. Sparkes & Cowton (2004) demonstrate that investors in the US make more use of shareholder activism, while European investors generally prefer the softer and informal dialogue. Nevertheless, both strategies are widely used on both continents.
In the academic literature, some ambiguity exists regarding the terminology of shareholder engagement. Some authors strictly use the term to denote the informal way of shareholder influence, and separately define making use of formal shareholder rights (Wagemans et al., 2013). Others, instead, use the term ‘shareholder activism’ to describe both the formal and informal use of shareholder influence (O’Rourke, 2003b). Many other terms are used interchangeably, which complicates a thorough understanding. Following Vandekerckhove et al. (2007), this thesis defines ‘engagement’ as the general strategy of using shareholder influence to encourage ESG performance. ‘Activism’ denotes indirect, formal influence through voting or filing resolutions, while ‘dialogue’ refers to the direct, informal engagement with corporate executives.
A third and rapidly growing SRI strategy is impact investing. Impact investing entails investing in private equity, which has a positive and measurable sustainable contribution (Wood et al., 2013). In this sense, it is somewhat similar to positive screening, but impact investing requires an investor to take up a far bigger role in the development of a project. This inherently means that the financial risks of impact investing are far bigger than just buying bonds or assets. On the other hand, the potential financial (and social or environmental) returns may also be higher. For pension funds, investing in private equity is only possible when the fund has substantial resources, because a single private equity project would easily disrupt the risk-return balance of the fund’s portfolio. So, large pension funds are more likely to participate in impact investing than smaller funds. Impact investing, however, still remains challenging for pension funds, as the high costs of due diligence require the project to be substantial in growth so these costs can be regained. Also, the supply of such projects is still fairly limited, but increasing (Höchstädter & Scheck, 2015; Ormiston et al., 2015).
2.4 Financialisation
The increased popularity of SRI appears to be at odds with the rise of financialisation. While responsible investment is argued to leave behind the dogmatic focus on financial returns, a growing body of literature paradoxically signals ‘the increasing importance of financial markets, financial motives, financial institutions, and financial elites in the operation of the economy and its governing institutions’ (Epstein, 2001:1).
From a macro-perspective, financialisation can be considered as the development of a finance-led growth regime of accumulation that has outstripped the productivity of the industrial sector (Van Der Zwan (2014:101-2). Neoclassical theorists assume that the financial industry has the capacity to efficiently allocate financial resources, which leads to higher returns and thus benefits the real economy as a whole. Instead, Corpataux et al. (2009) argue that ‘the financial economy, far from being a simple instrument for the allocation of capital, has its own autonomy, its own logic of development and expansion’ (p.2). The authors signal that the financial sector’s capacity to integrate specific innovations and to standardize and complexify financial products increases their autonomy and the extent to which the real economy is dependent on their knowledge and skills (Corpataux et al., 2009:3-4). By complexifying products and thereby the market itself, investors have increasing difficulty to maintain their knowledge and increasingly outsource asset management. When the practical act of investing is outsourced, however, crucial knowledge about the market may be lost, further strengthening the investor’s dependence on the asset manager. Financial intermediaries have been thus been argued to play an indispensable role in financial markets, as they possess valuable knowledge that is unavailable to outsiders (Allen & Santomero, 1997).
This dependency may explain how the financial sector has managed to maintain the highest rates of return compared to sectors in the real economy. Malkiel (2013) finds that asset management fees in the US have risen substantially as part of the total assets under management, despite economies of scale-effects that should be realizable in the growing asset market. Neither did these higher fees lead to higher financial returns. Malkiel (2013) suggests
that ‘perhaps the greatest inefficiency in the stock market is in “the market” for investment advice’ (p.98).
In practice, financialisation entails the changed behaviour of dominant financial actors such as banks, pension funds and investment funds. Hardie & Howarth (2009) define financialisation as ‘increasing exposure to, and trading of, risk’ (p.1018). In this sense, financialisation is understood as the increasing dominance of ‘impatient’ finance (Gabor, 2010:251). More and more financial actors joined the trade in securities and derivatives, as the returns on conventional credit portfolio activities dropped. Even traditionally very ‘patient’ financial institutions, such as pension funds, got involved in building up more diversified and complex portfolios, which entailed their exposure to higher financial risk. The financial sector as a whole has increasingly accepted financial risk, thereby providing ‘[t]he legitimacy of modern financial instruments and increasingly complex risk management techniques’ (De Goede, 2004:213).
A second face of financialisation concerns a more discursive influence of the financial sector. Through a variety of financial products such as pensions and mortgages, low- and middle income households have been incorporated in financial markets. This has been identified by scholars as the financialisation of the everyday (Van Der Zwan, 2014:102). Social security, previously provided by the welfare state, has now been replaced by financial products that are dependent on market returns, such as private pensions and insurances (Waine, 2006; Langley, 2006) Financial motives and associated risk-taking are hereby internalized throughout society, changing language and ideas about economic behaviour (Clark et al., 2004; Cutler & Waine, 2001).
This dominance of the financial sector hereby changed what one may call the ‘economic discourse’. Avsar (2014) signals a ‘financialisation of public discourse’, as the financial industry has considerable control over economic ideas and language that in turn are inherently favourable to their interests. ‘Controlling language means controlling the definition of reality […] which in turn contributes to the social (re)construction of this produced reality’ (Avsar, 2014:239). Financial intermediaries, who play an increasingly crucial role in the provision of information on and access to the capital market, can thus heavily influence trends in investor behaviour (Toporowski, 2002; Adrian & Shin, 2010).
Hirsto (2005) notes that ‘[t]he prevalence of instrumental and technocratic discourses of investing may […] restrain the rise of social awareness in the market of financial consumption and contribute to the persistence of investment practices that lead to socially undesirable outcomes’ (p.58). Financial intermediaries tend to perceive stock-listed companies primarily as tools to create value and thereby leave aside their broader connection and impact on society. In other words, within the financial discourse the primary goal of financial return remains determinant.
2.5 Financialisation of SRI
It is highly interesting how the financial sector has come to embrace SRI. Louche (2004) describes the development and growth of SRI from ‘a social movement led by marginal groups [which] has become a mainstream activity dominated by financial institutions’ (p.3). As SRI has become adopted by the financial sector, its meaning, characteristics and boundaries are now defined by the financial actors that provide the products and services that comprise responsible investment. With the development of SRI into a mainstream activity, the financial sector has increased investors’ dependency on providers of the infrastructure and knowledge base for SRI. The dependency of pension funds on financial actors is not necessarily a negative development. The development of SRI as a commercial product has increased its potential for widespread influence on companies’ behaviour for two reasons. First, the growth of SRI involvement has raised awareness among investors, who now increasingly demand transparency from companies. Second, because the total volume of investments that somehow integrate ESG criteria in the selection of assets has grown to a substantial part of the capital market, ESG performance actually may influence the cost of capital for companies (Heinkel et al., 2001).
On the other hand, SRI itself is also costly. Regardless of which strategy is used, SRI requires availability of information on companies’ ESG performance, which costs come on top of the usual asset management fees. SRI requires an active investment strategy, opposed to the passive index investing method which is still popular among pension funds around the globe (Fichtner et al, 2016). Active investor behaviour, and thus SRI, necessarily raises costs for pension funds and can be a lucrative market for financial intermediaries.
Both Juravle & Lewis (2008) and Sievänen (2014) point out that the fiduciary duty of a pension fund can be an impediment to SRI. Both pension funds and asset managers have the legal obligation to act in the best interest of their clients. Usually, this duty is explained solely in a financial way, which means investments can only be selected based on financial motivations. Pension fund decision makers may therefore be reluctant to incorporate non-financial criteria in their investment decisions, as these may compromise non-financial return and thus impede their primary duty. Similarly, Renneboog et al. (2008) find that, in pursuit of ethical goals, institutional investors in general seem not ready to accept suboptimal financial return. Therefore, pension fund decision makers’ definition of SRI is crucial, as is their belief on the relation between ESG-performance and financial performance (Sievänen, 2014).
As pension funds are dependent on financial intermediaries for the implementation of SRI, the way in which external asset managers define SRI is equally important. A recent study by Van Duuren et al. (2016) finds SRI to be highly similar to fundamental investing among conventional asset managers. As information on corporations is essential in the allocation of capital, ESG information is mainly seen as additional knowledge on which the selection of assets can be based. In this way, ESG criteria can be used solely to achieve better financial returns on the long run and to beat the market through an active investment strategy. The authors conclude that ‘[a]pparently, ESG investors perceive their trade more like a sound business practice than as an activist approach on how to change the world’ (Van Duuren et al., 2016:532). Despite the valuable contribution of these findings, the extent to and way in which this perception of SRI affects actual SRI involvement remains an open question.
2.6 Intended contribution of the research
Current literature describes a strong influence of financial intermediaries on the investment practices of pension funds. It is to be expected that this influence also affects the development of SRI for pension funds, but no specific research has yet focused on this matter. This study therefore explores how asset managers influence the boundaries and meaning of responsible investment, and likewise the extent to which pension fund managers have sufficient control over the implementation of the mandate they provide the asset manager with.
In this way, the study aims to provide a better insight in the relation between pension funds and asset managers in regard to SRI. Furthermore, it attempts to uncover which ideas lay behind the current dominant concepts and practices in responsible investment, and by whom these are shaped. The study hereby contributes theoretically to the academic debate on financialisation and financial discourse, and more practically to our knowledge on decision-making power in responsible investment in the pension sector. The latter may prove to be important for both regulators and civil society, and may signal opportunities for future research. Civil society organisations (CSOs) are increasingly attempting to influence investors such as pension funds, as they are seen as the engines of change – both in positive and negative sense (Greven, 2003; Schiffrin, 2015). Thus, a thorough understanding of which actors are most influential in the investment process is crucial. Similarly, such an understanding is important for regulators, when increasing monitoring and regulation of ESG issues is aspired.
2.7 Research questions and key concepts
This study aims to answer the following main research question:
How do financial intermediaries influence Dutch pension funds’ SRI involvement? In order to answer this broad question, the following sub-research questions have been formulated:
1. How do financial intermediaries influence the practical implementation of Dutch pension funds’ SRI strategies?
2. How does the pooling of invested capital, facilitated by financial intermediaries, affect SRI involvement of Dutch pension funds?
3. To what extent do financial intermediaries’ understandings of SRI differ from pension fund managers’ understandings, and does this difference affect SRI involvement? The first sub-research question focuses on the influence of financial intermediaries in the practical implementation of pension funds’ SRI involvement. As the study recognises the different strategies in which SRI can be conducted, the first sub-research question will examine positive and negative screening activities in portfolios, engagement activities and
impact investment. Engagement is usually also an activity outsourced by pension funds, either with the asset manager or with a separate financial intermediary (e.g. proxy voters). Specific attention is given to the way in which the complexity of different relations of subcontracting, combined with the dependency on multiple financial intermediaries, affects pension funds’ SRI involvement.
The second sub-research question examines the effects of the pooling of invested capital on SRI involvement. Because asset managers have control over the capital of multiple investors, they potentially have more leverage to persuade companies to become more sustainable. On the other hand, the pooling of different SRI ambitions may result in disagreement among investors over which trajectory to follow.
Lastly, the third sub-research question focuses on the differences in understanding of the concepts of SRI between financial intermediaries and pension fund managers. As Van Duuren et al. (2016) point out, SRI is highly similar to fundamental investing among conventional asset managers. In other words, financial motives are dominant for their SRI involvement. Pension fund managers may instead have a more holistic approach towards SRI, based on ethical motives. If a significant difference exists between the understandings of SRI, this may produce difficulties in the practical implementation of SRI strategies set out by pension funds.
In order to accurately answer the research questions stated above, some key concepts require a precise definition. First, a distinction is made in two types of pension funds. The five biggest pension funds in the Netherlands are structurally very different from other pension funds in the way in which they subcontract their asset management. These five funds have subcontracted their asset management with a fiduciary manager, of which they are (one of) the main shareholder(s). ABP, the largest Dutch pension fund, for instance has subcontracted both their asset management and administrative tasks with APG, of which it owns 92% of the shares (APG Groep, 2015:11). As the two organisations are highly interconnected, it is unlikely that ABP will switch to another provider when unsatisfied with APG’s activities. Pension funds that are structured in this way are therefore defined as dependent pension funds, as they are dependent of the executive pension organisation (EPO) they (partly) own. Pension funds that do not fit this structure are defined as independent pension funds, as they are free to
choose a different fiduciary manager whenever desired. A more detailed picture of this structural difference and its origins is provided in Chapter 4. Note that the definitional distinction between dependent and independent funds does not imply a judgement on their influence on the SRI process, and is made on a purely descriptive basis.
Financial intermediaries are broadly defined as companies that facilitate participation in the financial sector. Following Allen & Santomero (1997), financial intermediaries are regarded as institutions that ‘are facilitators of risk transfer and deal with the increasingly complex maze of financial instruments’ (p.1462). Within this broad category, a distinction can be made between fiduciary managers, external managers and supporting financial actors. Fiduciary managers are asset managers that are directly mandated by pension funds to invest their capital in specific sectors. For dependent pension funds, EPOs are the fiduciary manager. Independent pension funds sometimes have subcontracted their asset management with different fiduciary managers, each responsible for a different sector. Fiduciary managers form the first level of subcontracting. On a second level, the fiduciary managers subcontract particular mandates with other asset managers, which are labelled external managers. All asset managers indirectly mandated by pension funds are thus considered as external managers, which can also refer to passive index funds or hedge funds in which pension funds invest. Finally, supporting financial actors comprise the suppliers of data, which is purchased by pension funds, fiduciary managers or external managers.
An important additional aspect is that these institutions are generally privately owned, and aim to make profits by offering financial products that enable ‘outsiders’ to participate on the capital market without the possession of the required knowledge. EPOs, however, are owned by the funds and cannot be considered as private companies. Nevertheless, they are considered as financial intermediaries, as they perform the asset management for pension funds and facilitate their participation on the capital market. Similar to the distinction made for pension funds, EPOs and private fiduciary managers are conceptually separated in the analysis.
3. Methodology
As specific research on the influence of the financial sector in pension funds’ involvement in SRI is lacking, this study makes use of an inductive qualitative approach. Inductive qualitative research can be understood as ‘approaches that primarily use detailed readings of raw data to derive concepts, themes or a model through interpretations made from the raw data’ (Thomas, 2006:238). In this sense, the inductive approach is an intermediate evaluation of the findings, which than can indicate the direction of further research (Fransen, 2011:170). The use of qualitative analysis in combination with interviewing as research method allows an examination of the respondents’ ideas and beliefs on aspects of responsible investment. Furthermore, it enables achieving a mixed and detailed picture of the relation between financial intermediaries and pension funds as experienced by those directly involved.
3.1 Research design and sample
The study has been conducted with the use of an exploratory research design. As Stebbins (2001) suggests, exploratory designs are especially suited for fields of which specific knowledge is missing, and new insights and openings are needed before further research can be conducted. This design was perfectly suited for the research, as no meaningful hypotheses could be formulated beforehand on the ways in which financial intermediaries have influence on pension funds’ involvement in SRI.
Following a general inductive method (Thomas, 2006), the research was set up in order to identify the most important categories within which financial intermediaries have influence on the SRI process. In advance, it was clear that financial intermediaries have influence on this process, as pension funds subcontract their asset management with them. However, knowledge on which actors are particularly influential and the specific areas in which this influence materialises was lacking. Hence, the choice was made to study the raw data material and build up a theoretical framework from dominant or significant themes that emerged from it. This approach is consistent with Strauss and Corbin’s (1998) understanding of inductive analysis, in which ‘[t]he researcher begins with an area of study and allows the theory to emerge from the data’ (p.12).
The research is limited to a population of Dutch pension funds, of which pension funds are the units of analysis. Although the internal dynamics within pension funds concerning pressures for more or less CSR are definitely important, this study will focus on the external dynamics and thus considers pension funds as a ‘black box’. Given the explorative nature of this study, the objective has been to gain a profound picture of the Dutch pension system as a whole. This proved to be a challenging objective, as the Dutch pension fund landscape is highly diverse, and pension funds heavily differ from each other both on the ways in which they subcontract their asset management, as on the extent to which they are actively involved in SRI. The pension funds were initially selected with the aim to achieve a good mix of pension funds, differing in structure (dependent/independent), size and sector. As the access to respondents proved to be difficult, in addition to the limited time frame, the sample was narrowed to two pension funds and the asset managers that conducted their SRI strategy. Instead of a structural sampling technique, the study has thus used a convenience sampling technique, which is common in qualitative research (Eriksson & Kovalainen, 2008; Sievänen, 2014).
The sample includes both a dependent (PME) and an independent pension fund (SPMS), and both funds highly differ in size, sector and SRI involvement. PME, the pension fund for the metal and electronics sector manages €45.6 billion (DNB, 2017). Its asset
management is executed by the EPO MN Services, of which it mutually owns 95%4. PME is
among the ten best performing Dutch pension funds on SRI (VBDO, 2016). SPMS is an occupational pension fund for medical specialists and manages €9.9 billion (DNB, 2017). SPMS is an independent fund and has an average SRI performance (VBDO, 2016).
3.2 Methods, data gathering and data analysis
The research was conducted through twelve semi-structured interviews. Key decision makers of the two pension funds were interviewed, as were representatives of their main asset manager. As the ambitions of the research go beyond the two selected pension funds, the data collection was extended. A diverse group of respondents was selected and approached for an
4
PME and PMT (pension fund for Metal and Technical industries) are both represented in a foundation, which owns 95% of MN Services’ shares (MN, 2017:75).
interview, comprised of regulators (DNB), NGO-representatives, interest organisations and an academic. Hereby, the results from the interviews with those directly involved can be verified and compared with the views of others related to the sector, as a form of triangulation (Meijer et al., 2002). An overview of the respondents can be found in Appendix I. Except for one, all interviews were conducted face-to-face and lasted for one hour on average. Respondents were notified of the ambitions of the research in advance and were offered the possibility to remain anonymous. All respondents agreed to be mentioned in the research, but some preferred to be only quoted anonymously. In order to guarantee their anonymity, most quotes in this thesis are kept anonymous. All interviews were conducted in Dutch; all quotes in this thesis are translated by the author.
The interviews were semi-structured, and primarily open ended questions were used (Leech, 2002). A couple of general questions were formulated beforehand, which were used as a guideline. Often, the respondents easily switched from one topic to the other without being guided through specific questions. Some questions were structured in the shape of a grand tour question (Spradley, 1979). This type of question lets the respondent speak freely though in a focused way, giving ‘a verbal tour of something they know well’ (Leech, 2002:667). This also makes very technical elements easier to understand and prevents the respondent’s answer to be influenced by the question posed. Grand tour questions were primarily used with the representatives of pension funds and asset managers, and requested the respondents to describe the process of taking up an SRI strategy and instructing the asset manager to carry it out. Hereby, a good picture of the respondent’s view on the relation between fund and asset manager was obtained.
After a brief introduction, each interview was opened with the very broad question ‘What does responsible investment mean for you?’. This was done so the respondents could define SRI the way they preferred, which allowed them to direct the interview towards the topics they believed to be most important, thereby obtaining a genuine insight into their understanding of and stance towards SRI (Eriksson & Kovalainen, 2008). Because definitions of SRI are very heterogeneous, as mentioned in Chapter 2, knowledge of the respondent’s understanding of SRI was crucial to evaluate their following statements.
All interviews were recorded and subsequently transcribed by the author. These transcripts were read and interpreted multiple times, in order to carefully identify the most
important themes, and subsequently to develop these ‘into a model or framework that summarizes the raw data and conveys key themes and processes’ (Thomas, 2006:240). During the initial coding of the data, relevant statements from the interviews were subdivided in a wide range of categories. Then, a second analysis was conducted in which these categories were critically reconsidered and recoded, in order to group them into broader themes.
For the coding of the data, the researcher has made use of Atlas T.I. This software supports efficient labelling of categories and helps to identify similar and divergent perceptions among respondents.
3.3 Strengths and limitations of the research
This study has sought to achieve both reliable and valid results. However, as with every study, specific choices were made by the researcher that resulted in both strengths and limitations. Qualitative studies are often criticised for leaving open too much room for the researcher’s own interpretations (Diefenbach, 2009). This may weaken the study’s reliability – referring to the extent to which repeating the research would lead to similar results – and validity – referring to the extent to which the study’s description corresponds to reality (Sievänen, 2014:316).
The study has sought to achieve reliable and valid results in different ways. The small amount of pension funds included in the sample initially limited the ability to generalize the findings beyond the two pension funds. However, by incorporating stakeholder checks (Thomas, 2006:244) through the wide range of selected respondents, all differently connected to the sector, this limitation was partly compensated. Furthermore, the broad selection of respondents increased the reliability of the study’s results.
The choice of semi-structured interviews as method for data gathering has increased the internal validity of the study. Respondents were free to define the concept of SRI themselves, and therefore able to direct the interview towards the topics they found to be relevant. The downside of this interviewing technique is that it limits the replicability of the research. As the topic list used in the interviews was adapted for each interview, in order to tailor it to the respondent, repetition of the study would be likely to result in different
interviews. Nevertheless, the broad selection of respondents and the length of the interviews assure that the most important topics are identified in the research.
Pension funds in the Netherlands share some basic characteristics, but in practice they can be very distinct in their organisational features and the way in which they are linked to the capital market they invest in. Therefore, it is difficult to generalize very specific findings of the study beyond pension funds comparable to the ones included in the sample. Despite this acknowledgement, the researcher is convinced that important characteristics of the structure in which most Dutch pension funds operate are identified, which are typical for the sector as a whole. Therefore, the findings may prove to be a fruitful contribution to our knowledge on this little examined topic, thereby obtaining the goal of the exploratory nature of the study.
4. The Dutch pension sector: an overview
Despite the interconnectedness of Dutch pension funds with the global market through their investments, pension funds in the Netherlands are in some ways distinct from those in other countries. This chapter therefore provides a concise background of characteristics of and developments in the Dutch pension system and pension funds. The first section explains the way in which pensions are funded in the Netherlands, and provides a brief history of recent developments in the organizational structure of the five biggest pension funds. The second section sets out the way in which the investment behaviour of Dutch pension funds has changed over time, and reflects on their current financial situation. The third section provides a general picture of the developments in the involvement of Dutch pension funds in SRI.
4.1 The Dutch pension system
Along with the Danish, the Dutch pension system is internationally regarded as the most stable pension system in the world (Australian Center for Financial Studies, 2016:7). No other country in the world has as much saved pension capital per capita. Contrary to countries like France, Germany and Italy, in which almost the entire pension provision is paid for by the current working population, the Netherlands has a fully funded pension system (CBS, 2015:13). This means that during ones career, part of an employee’s wage is set aside and saved for its pension. These savings are invested by pension funds, in order to grow with inflation. Pension disbursements are thus generally way higher than the contributions paid (Pensioenfederatie, 2011:14).
Pension provision in the Netherlands is comprised of three pillars. The first pillar consists of the primary old-age pension (AOW) which is provided to every citizen after a certain age. For a long time, this age was 65, but since the population is ageing, it has been gradually raised over the past years to 67. The AOW is funded by a pay-as-you-go system, is paid for by the current working population and provided by the government. The second pillar, the collective pension provision via the employer, is by far the biggest. This pension is fully funded, and is thus comprised of invested savings. Currently, the total saved capital of the second pillar is worth €1390 billion (DNB, 2017). The third pillar consists of individual pension insurance or savings.
Collective pensions cover by far the biggest portion of the Dutch saved pension capital. As collective pension contribution is mandatory for employees in most sectors, around 80% of Dutch employees are members of a collective pension scheme (CBS, 2015:5). For most sectors, the choice of a pension fund is mandatory and provided for in collective labour agreements. Companies may, however, choose to offer the services of their own company pension scheme, as long as this is equivalent to the industry’s scheme. The pension schemes can thus be mandatory for a specific sector, a specific occupation, or a specific company. This means there is no individual choice in the selection of a pension fund, and for that matter pension funds are not competitive with each other. Collective pension provision is scattered over more than 300 individual pension funds. Due to increasing cooperation in the sector, in order to lower costs, the number of pension funds in the Netherlands has been decreasing for years (CBS, 2015:5).
The biggest pension fund of the Netherlands ABP, which manages the pension savings of teachers, civil servants and the military, was privatised in 1996. Before that, the fund was the only Dutch pension fund owned by the government. After the privatisation, ABP became similar to other pension funds: a non-profit foundation that has the fiduciary duty of managing its participants’ savings in their best interest. The main reason for the privatisation was that ABP had a large funding deficit, which was envisioned to be solved by transforming the fund into a professional asset manager that could offer a range of financial products next to pensions (De Winter, 2001).
The tailpiece of the privatisation came in 2008, when ABP was separated in sparsely staffed fund, keeping the original name, and a large asset manager and executive organisation (EPO), which was named APG. ABP remained the responsible treasurer for the pension savings, but they now subcontracted both their asset management and the pension administration with the EPO. APG became a fully privatised company which could enter the market for asset management. ABP became the majority owner of APG, with 93 per cent of its shares. The remaining 7 per cent came in the hands of the pension fund for the construction sector BpfBouw, which from then on also subcontracted their main tasks with APG (APG Groep, 2015). PFWZ, the second biggest Dutch pension fund, quickly followed their example
(Hollanders, 2017). In a similar way, the pension funds PME and PMT mutually own MN Services, with which they subcontract pension administration and asset management.
In 2010, an independent commission established by the Dutch Minister of Social Affairs to examine the developments in investment policy and risk management of Dutch pension funds, came to interesting conclusions. The commission stated that ‘subcontracting asset and risk management activities decreases the direct control of pension funds on day-to-day operations and introduces a “principal-agent problem”’ (Frijns et al., 2010:44 – translation by the author). Furthermore, the authors signalled insufficient attention for the implementation of the investment strategy by pension fund managers, especially when this implementation is subcontracted. This poses a risk for management control, as ‘asymmetric information and distinct interests between the outsourcing and executive party are present’ (Ibid., 2010:3 – translation by the author).
4.2 Dutch pension funds’ investment behaviour and financial situation
In the past few decades, the practicalities of the investment process of Dutch pension funds have transformed drastically. A structural transformation in their investment behaviour has been visible over the past decades. Additionally, the financial crisis of 2008 has severely changed pension funds financial situation and reputation.
First, the allocation of pension funds’ investments has changed substantially. Traditionally, pension funds almost exclusively invested in government bonds and other similar long-term and low-risk investments. Since the 1990s and especially during the last decade, investments in assets, corporate bonds and securities have increased rapidly (DNB 2016a; Hollanders, 2017). Where in 1980, corporate assets comprised only 4 per cent of total investments, Dutch pension funds nowadays invest nearly half of their capital in assets (CBS, 2015:10). This had partly to do with a decreasing rate of return on government bonds. Despite the better rate of return on assets, risks are also higher. The investment practice has thus become more volatile.
A second and related development is the increased importance of financial intermediaries in the investment process. As pension funds were investing more and more in assets, instead of long-term loans and government bonds, the management of investments
became much more complex. Therefore, asset management has now largely been subcontracted with professional asset managers, which has placed pension fund managers at a bigger distance from the capital market. De Deken (2011:3) sees this ‘increase of the reliance on financial markets to secure the resources necessary’ as a way in which financialisation replaced the traditional collective retirement provision with more individual financial risk.
The financial crisis of 2008 has had a big influence on pension funds in the Netherlands. Obviously, the collapse of stock markets led to big financial losses, pressuring the funds’ financial situation. However, an even bigger consequence has been the extreme drop in interest rates that followed in the years after the crisis. Pension funds’ solvability, the extent to which they are financially capable of paying their expected future expenses, is based on the current market interest rate (CBS, 2015:12). The current capital, multiplied by the expected rate of return (the market interest rate, or account rate) for each year the capital can be invested, needs to cover the fund’s future pension disbursements. This figure forms a fund’s coverage ratio. When the current capital, including expected return, exactly corresponds to the future expenses, the coverage ratio is 100 per cent. In order to be able to disburse pensions which are indexed for inflation, their coverage ratio must be way higher. If the coverage ratio comes below 105, the fund is required by DNB to implement a recovery plan (CBS, 2015:12). Despite high obtained returns on investments since 2009, the low interest rate has drastically lowered coverage ratios.
Table 1. Coverage ratios of the five biggest Dutch pension funds
Rank Pension Fund Invested Capital (bn.) Coverage ratio,%*
1 ABP 387,8 94,0
2 PFZW 186,7 92,3
3 PMT 69,0 94,7
4 BpfBouw 54,6 107,8
5 PME 45,6 93,3
Currently, most pension funds in the Netherlands have a too small coverage ratio. Table 1 shows the latest coverage ratios for the five biggest pension funds.5 Almost all of the five biggest pension funds currently have less capital than they need to comply with their future financial responsibilities. This has forced pension funds to refrain from indexing pension disbursements and to increase pension contributions. If coverage ratios will not improve in the coming years, it is even possible that pensions need to be cut back. The latter has heavily contributed to an increasingly negative reputation of pension funds in the public opinion (Pikaart, 2015).
4.3 Dutch pension funds’ involvement in responsible investment
Ten years ago, societal attention for the investment behaviour of Dutch pension funds suddenly exploded. Following an episode of the Dutch television programme Zembla that revealed pension funds to be heavily invested in the production of cluster ammunition, responsible investing of pension savings appeared on the public radar (Hachigian, 2015). Pension fund managers slowly learned that investing in assets and government bonds involves a responsibility, and may attract scrutinizing activity of CSOs. In recent years, activist groups such as ABP Fossielvrij (ABP Fossil Free)6 have gathered public pressure to enforce pension funds to implement more stringent policies on sustainability issues, specifically on fossil fuels.
On top of these societal pressures, the Dutch government has begun to move pension funds towards SRI involvement. Today for instance, investing in the production of cluster ammunition is prohibited by law. Furthermore, a modification of the law on pensions, made in 2015, forces pension funds to explicitly state the extent to which they are involved in SRI activities. According to the law, ‘[a] pension fund mentions in its management report the way in which investment policy takes into account the environment and climate, human rights and social relations’7
. Next to these national governmental pressures to improve SRI involvement, international pressures have increased. From an intergovernmental level, the introduction of
5 Coverage ratios are from the first quarter of 2017 6
http://www.abpfossielvrij.nl/
the UN Principles on Responsible Investment (UN PRIs) have been an important driving force behind the adoption of SRI guidelines among investors, including pension funds. The UN PRIs are comprised of three core principles: integrating ESG in investment decisions; conducting active ownership of assets; and encouraging transparency on ESG (PRI, 2016). Being strongly encouraged by the Dutch government, a vast majority of Dutch pension funds has proclaimed its support for the UN PRIs.
In addition, the Dutch central bank DNB has picked up the issue of SRI and has begun to advise pension fund managers on the way in which they should report on their SRI activities. In a recent report, DNB (2016b) set out the current state of and important developments in the Dutch pension sector regarding SRI. An important finding of the report is that the countervailing power of fund managers over executive companies has increased (DNB, 2016a). In general, pension funds managers seem to play a more active role in the investment process and demand more specific services from the asset manager in regard to responsible investment. Still, it is found that some small and medium sized pension funds are heavily dependent on the standard supply of responsible investment possibilities of the asset managers, and lack the resources to pursue a customized responsible investment strategy (DNB, 2016b:16).
Increased public attention for pension funds’ investment behaviour is demonstrated by intensified in-depth research by CSOs and journalists. Interest organisation VBDO, representing investors, asset managers and NGOs that strive for more sustainable investment, annually publishes a benchmark on which it scores pension funds on their SRI behaviour. The benchmark has increased awareness of the successfulness of SRI involvement, both for pension funds as for the public. Table 2 shows the ten best performing pension funds in 2016, as assessed by VBDO.
A few observations can be made on the basis of the table. First, it appears that the biggest pension funds have a relatively successful SRI involvement. Four out of five biggest pension funds are represented in the top ten. Second, it appears that among the best scoring pension funds, coverage ratios are very different. PFZW, the best performing fund on SRI, has the lowest coverage ratio of the funds in the list.
Table 2. Ten best performing Dutch pension funds on SRI in 2016*
Rank Pension Fund SRI score Inv.Capital (bn.) Coverage ratio8
1 Pensioenfonds Zorg en Welzijn (PFWZ) 4.61 185.4 90.1
2 Algemeen Burgerlijk Pensioenfonds (ABP) 4.44 381.0 91.7
3 Bedrijfstakpensioenfonds voor de Landbouw (BPL) 4.40 15.9 92.3
4 Pensioenfonds SNS Reaal 4.12 3.3 108.5
5 Bedr. Pensioenfonds vd Bouwnijverheid (BpfBouw) 4.11 53.9 105.4 6 St. Pensioenfonds voor de Woningcorporaties (SPW) 3.97 12.1 104.1
7 Spoorwegpensioenfonds 3.93 15.7 102.7
8 St. Pensioenfonds Openbaar Vervoer (SPOV) 3.86 3.8 102.0
9 Pensioenfonds van de Metalelektro (PME) 3.77 44.7 91.8
10 Ahold Pensioenfonds 3.62 4.3 104.0
*Data retrieved from VBDO (2016) and DNB (2017)
Similar to other financial institutions, the reputation of pension funds was severely damaged after the financial crisis. The current low coverage ratios continue to generate negative publicity. Therefore, pension funds may turn to SRI as a means to generate positive publicity.
5. Multi-level dependency and scale effects
In the coming two chapters, the findings of the research are presented. By analyzing the interviews, three interconnected themes were found to be dominant in the respondents’ views on the influence of financial intermediaries in the process of SRI: first, the dependency on subcontractors on multiple levels; second, the scale effects of combining power over capital; and third, different discourses behind SRI. The former two themes are of a more practical nature, the latter is of a discursive nature. Although three distinctive themes were identified, these are highly connected. The two practical themes – multi-level dependency and scale effects – form the structure in which pension funds are situated. These themes are discussed in this chapter. Both themes, however, will reappear in Chapter 6, in which the third theme – different discourses behind SRI – will be discussed.
This chapter is structured as follows. The first section explains the way in which pension funds subcontract tasks with financial intermediaries. Hereby, a necessary insight in the different actors that are connected to the investment process is provided. The second section elaborates on the theme of multi-level dependency. The final section sets out the research’ findings related to scale effects. Consequently, the following two sub-research questions are answered in this chapter:
- How do financial intermediaries influence the practical implementation of Dutch pension funds’ SRI strategies?
- How does the pooling of invested capital, facilitated by financial intermediaries, affect SRI involvement of Dutch pension funds?
5.1 The practice of investing for pension funds
Dutch pension funds were found to be operating in a fairly complex structure of different organizations through which they are connected to the capital market. Figure 1 gives a schematic representation of this structure, constructed on the basis of combined findings from the interviews. Note that this model illustrates the general structure of pension funds’ investments; specific implications of the structure for SRI involvement will be provided in the upcoming sections.
