Dutch regulator: Pension funds manage climate risk better than banks, insurers

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Dutch pension funds have a better overview of sustainability risks than banks and insurance firms, according to a survey by financial regulator DNB. Pension funds still have work to do though.

For its report ‘On the way to a sustainable balance’ DNB interviewed 61 pension funds, 37 insurance firms and 29 banks in the Netherlands about their sustainability policies, and especially about their management of climate risks.

As far as the banks were concerned, the focus was on their credit portfolios while the questions asked to insurers and pension funds were linked to their investments in equities and corporate bonds.

DNB concluded: “Pension funds have anchored their sustainability risks more strongly in their governance than insurers and banks.” To illustrate its point, DNB said half of pension funds had a specific person in charge of monitoring climate risk. With insurers (41%) and banks (21%) this was less the case.

Moreover, more than a third of pension funds used a number of key risk indicators in their sustainability policy. Banks (14%) and insurers (17%) have only just started developing this practice.

Almost all the pension funds surveyed used ESG data from the likes of Sustainalytics or MSCI to map the ESG risks of their investments though funds are aware of the shortcomings of the data these firms provide, according to DNB. Sometimes these data are incomplete or contradictory.

Not satisfied

Though pension funds are doing better than banks and insurers, DNB is not yet satisfied. The regulator noted funds could do a better job at analysing climate risks. This point is illustrated by the fact that only 30% of pension funds said they saw a relation between sustainability risk and their overall risk preference.

DNB’s questionnaire showed only a minority of pension funds (44%) and insurers (21%) distinguished between physical and transition risks of climate change. Six in 10 funds and insurers merely looked at these risks in a quantitative way.

“The translation of sustainability risks to financial impact and defining relevant risk metrics is still a work in progress,” DNB concluded.