The Pensionsfonds of the German state of North Rhine-Westphalia (NRW) has fallen under criticism for adopting contradicting policies for its sustainable investments.
The Ministry of Finance for the state said the extraction of fossil fuels had never been used as exclusion criteria for environmental, social, and corporate governance (ESG) policies in view of the economy in North Rhine-Westphalia.
In the reply to an inquiry by a Green MP in local parliament, the Ministry added that coal is necessary as a “bridging technology” to generate electricity.
In the inquiry, Green MP Monika Düker also raised the question on whether the pension fund’s investments in coal-based power generation were compatible with exclusion criteria used for allocations in businesses that were “particularly problematic” from a sustainability standpoint, and with the best-in-class approach part of the investment guidelines.
The ministry did not reply to a request for comment on the matter.
According to the guidelines, the Pensionsfonds excludes securities from issuers with “ethically or ecologically particularly problematic business practices”.
Moreover, it excludes buying securities from issuers violating the principles of responsible corporate governance which are part of the United Nations Global Compact relating to human rights, labour, environment and fight against corruption, and producers of controversial weapons such cluster bombs, land mines, or weapons of mass destruction.
The fund, which must divest from securities that are not in line with the exclusion criteria mentioned in the investment guidelines, integrates ESG criteria in its investment strategy, overweighting companies that operate within a certain sector with best-in-class rating for corporate bonds and equities.
Green (or non green) stocks
Another point of criticism relates to two equity indices, one for the eurozone and the other for world, developed to track the performance of companies leading in ESG policies.
NRW had commissioned Stoxx, a subsidiary of Deutsche Börse, to develop the two sustainable equity indices – STOXX ESG countries Eurozone Index and the STOXX ESG countries World ex Eurozone Index – in partnership with other states, namely Baden-Württemberg, Brandenburg and Hessen.
Deutsche Bundesbank passively manages the pension assets of the four states.
Stoxx has designed the indices, NRW said, “with and without the exclusion of fossil energy generation” to give the states the option to adjust energy policies according to the characteristics of regional economies.
One special version of the indices includes the exclusion of fossil fuels as well as CO2-intensive companies, according to a financial statement on the Pensionsfonds’ managed assets.
NRW eventually picked the version without the exclusion criteria on fossil fuel extraction because, it added, coal-fired power generation in Germany is necessary to maintain security in energy supply until the coal phase out is completed by 2038.
As of 31 December 2019, the pension fund held assets totalling €12.74bn, of which 56.8% were invested in generic bonds, 6.6% in corporate bonds, 18.7% in equities, with the remainder in other asset classes.
It plans to gradually increase its equity allocation to 30% over the next few years, using both sustainable equity indices.