The Dutch pension fund for retailers Detailhandel has transferred its euro credit portfolio to a custom-made benchmark modelled on four of the UN’s Sustainable Development Goals (SDGs).
The step follows similar action for the fund’s equity portfolio in 2019.
Across its equity and bond portfolios, Detailhandel has now invested €14bn in line with the SDGs Decent Work & Economic Growth (SDG 8), Responsible Production and Consumption (SDG12), Climate Action (SDG 13) and Peace, Justice and Strong Institutions (SDG 16).
This is more than 50% of the fund’s liquid portfolio. Assets under management for Detailhandel, which also invests in private real estate and mortgages, total €32bn.
Compared to the original portfolio, based on an iBoxx corporate credit index, the stakes in 131 out of 785 companies have been sold.
The companies in question score badly on one or more of the four focus SDGs, or have been eliminated a consequence of an additional climate filter used by FTSE Russell, the firm that created the new bespoke SDG index for Detailhandel.
The fund’s head of investments, Henk Groot, declined to provide examples of companies that have been eliminated from the portfolio.
“It all concerns passive exclusions here that follow from the methodology used by FTSE Russell. In the new index, allocations to some companies had been reduced to less than half a basis point. We deem it not efficient anymore to have such a negligible allocation to a company, so we decided to sell these stakes,” Groot explained.
Carbon emissions of the new credit portfolio have come down by 69%. Most of this reduction follows from applying the FTSE Russell climate filter.
The focus on SDG 13 is expressed in an increased allocation to green bonds (+3 percentage points). Exposure to fossil fuel reserves is also 62% lower than in the original index.
“With this index, we want to reduce the climate risk of our investments and that’s why we invest less in companies with high fossil fuel reserves. After all, there is a chance that most of these reserves cannot be exploited,” said Groot.
Detailhandel also wants to increase investments in green companies. This goal has proved difficult to accomplish in the credit portfolio because of a lack of available bonds. Most renewable energy firms predominantly turn to the equity market for financing.
“In our SDG equity indices the exposure to green energy has increased more strongly,” noted Groot.
All four of the focus SDGs receive equal attention in the portfolio, he added.
“With regards to SDG 8, or decent work, we look at labour conditions and the social aspects of the supply chain, while under SDG 16 [Peace, Justice and Strong Institutions] we focus on human rights, such as child labour, and corruption.”
SDG 12 (Responsible Production and Consumption) covers the environmental aspects of the supply chain, biodiversity, pollution and use of natural resources.
Detailhandel president Henk van der Kolk hailed the new index a statement as “a great step”. But, he added: “We aren’t there yet.”
The pension fund also wants to align its investments in high-yield bonds and emerging market debt (EMD), all of which are passively managed by BlackRock, with a SDG index.
“Especially the high-yield portfolio is interesting from a climate perspective,” Groot said. “With regards to EMD, there’s a challenge that we will have to evaluate separate countries [on their ESG credentials]. We are currently in the middle of this process and are weighing our options.”
In 2019, metals industry PMT was the first Dutch pension fund to launch a bespoke EMD index. At the time, the fund eliminated 27 countries from the standard index because they did not meet certain financial or sustainability criteria.