The €4.2bn pension fund SNS Reaal, which manages pensions of (former) employees of the Dutch state-owned bank De Volksbank (formerly SNS) and insurance firm Athora Netherlands (formerly Reaal), has implemented a major overhaul of its €418m emerging markets (EM) equity portfolio.

The fund, which invested predominantly passively in the asset class, has sold its three existing managers – Robeco, Vanguard and Schroders – replacing them with two ESG-branded strategies managed by JP Morgan Asset Management and Goldman Sachs Asset Management (GSAM).

“If you find ESG important in emerging market equities, you can only invest actively there with an active ESG overlay,” said Sybrand Nauta, director of the pension fund.

The JP Morgan Emerging Markets Sustainable strategy as well as the Goldman Sachs Emerging Markets Equity ESG Portfolio both exclude fossil fuel producers, resulting in a 70% CO2 reduction of the EM equity portfolio.

SNS Reaal invests almost half of its €900m equity portfolio in EM, much more than the typical pension fund.

SNS Reaal building

The move is part of the €4.2bn pension fund switch from mostly passive to fully active management in EM equities

Fruitless engagement

For now, SNS Reaal is sticking to its fossil fuel holdings in developed markets, where it continues to invest passively.

“We do believe in engagement with energy firms in developed countries, but we do not see realistic opportunities to accomplish anything with engagement in emerging markets. Hence, we decided to exclude fossil fuels from our emerging markets universe entirely,” said Nauta.

The switch to active ESG management also led to a reduction in ESG controversies, according to Sustainalytics methodology, in the total equity portfolio from 104 to 32, with environmental controversies down from 17 to zero, Nauta said.

The choice for GSAM as one of the new EM managers is striking, as the firm is also the new owner of SNS Reaal’s fiduciary manager, NN Investment Partners (NNIP). According to Nauta, the GSAM fund had already been on NNIP’s shortlist “before the takeover became public”.

Interestingly, the pension fund’s supervisory board was sceptical about the acquisition of its fiduciary manager by the US-based firm. “Whereas our choice for NNIP [back in 2020] was partly based on the firm’s ESG track record, this aspect is expected to be less prominent under Goldman Sachs Asset Management,” the board said in the pension fund’s annual report for 2021.

More risk

Separately, SNS Reaal upped risk last year by increasing the share of its return portfolio by five percentage points to 38% as its funding ratio had improved. Specifically, the fund increased its exposure to developed market equities from 9% to 11%, its allocation to non-listed real estate from 4% to 5% and its exposure to alternative fixed income from 10% to 12%.

The scheme also commissioned an asset liability management (ALM) study with its strategic adviser Ortec Finance.

The study concluded that the fund’s return portfolio would be increased by a further 10 percentage points once its funding ratio exceeded 113.5% “by a sufficient margin”. SNS Reaal’s funding ratio reached 115% in July, its highest level since 2015.

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