Wtp forces full transparency on ESG choices

PENSIOEN PRO PARTNER ROUNDTABLE

Dutch pension funds face a difficult balancing act: participants want both sustainability and returns, regulators demand transparency, and global developments have led to changes to the rules of engagement. How can investors navigate this increasingly complex ESG and stewardship landscape, now and after the Wtp transition?

Pressure for transparency around ESG policies is rising, while today’s environment may also warrant a more pragmatic approach beyond simple ESG metrics toward more nuanced, workable strategies. But will this lead to an investment portfolio that is truly sustainable, resilient, and return-generating? And how can institutional investors effectively integrate ESG and engagement into their portfolios?

Questions compelling enough to bring eight investment professionals together at a roundtable organized by Pensioen Pro. The discussion starts not with values or policies, but with something tangible at the core of sustainable investment decisions: ESG data. Most participants report significant improvements in both quantity and quality of data and foresee a critical role for AI. However, a lack of reliable data remains a challenge. Is there real progress?

Louise Dudley, Portfolio Manager Global Equities at Federated Hermes, acknowledges that climate transition plans, in particular, have pushed companies to provide more data. “Many companies have committed to the Science Based Targets Initiative (SBTi) and then put out plans aligned with a common framework. There is also more standardisation through guidelines, but we also need experts to scrutinise data and help improve transparency. On capex spending, for example, companies remain relatively opaque. This also holds true for their lobbying practices.”

She adds that supply-chain disruption, first due to COVID and later because of tariffs, has also helped. “Companies, certainly large caps, have a very good handle on their risks from an ESG perspective. Availability of scope 3 data, increasingly required around the world, is improving steadily.”

Erwin Houbrechts, Manager of Sustainable Investing at PGB Pensioendiensten, agrees that data is much better than it was five years ago, but he cautions against relying too heavily on vendors. “There are still blind spots in the standard data sets. For example, when it came to Israel and Gaza, US-based data vendors reported almost nothing. Then the UN surprises with a report showing dozens more companies involved in the region. If you had relied only on the big data providers, you would have missed half the story. You need broader and reliable sources and people who can interpret them. But even then, you can miss relevant events or pick them up late.”

Headwinds for ESG policies

Anna Czylok, Senior Investment Strategist at Aegon Asset Management, welcomes new reporting initiatives but questions their global reach. “To what extent will they influence investors? In Europe, there is much attention to responsible investing, but less so in other parts of the world, such as the US. So companies that disclose data are not necessarily attracting investor interest outside Europe.”

According to Czylok, this may create a widening gap between Europe and a select group of international companies versus the rest that continue to lag because they can find finance without ESG reporting.

Annette van der Krogt, Head of Responsible Investing at Achmea Investment Management, is more optimistic and argues that European regulation has had a global ripple effect. “The EU has pushed transparency dramatically forward. Against expectations, this may affect US companies as well. Companies active in Europe must meet a minimum level of transparency, and that has helped tremendously in stewardship conversations.”

Bruce Duguid, Head of EOS Stewardship at Federated Hermes, agrees. “US companies recognise the commercial opportunity of megatrends such as the energy transition and AI, which are often reflected through the European mindset of societal impacts.” He believes many companies remain open to ESG considerations because it is in their commercial interests.

Duguid: “A global stewardship team can still address issues across markets and the value chain. One example is methane emissions in the oil and gas sector. We have engaged producers, distributors, utility companies, and even tech companies to establish supply-chain energy standards that raise the overall standard. In the end, limiting methane leak rates yields efficiency savings for companies, and so it’s a commercial opportunity.”

How to make sense of the data?

Once the data is available, the next challenge is the effective use in investment models. Dudley argues that many responsible-investment frameworks still rely too heavily on backward-looking information. “We have definitely achieved better standards in transparency. But the reality is that
most investors still rely on backward-looking data. That’s why many people don’t see the material value of the E and the S. They are looking at what companies have reported, not at where they are going.”

Czylok cites academic literature to explain why this distinction matters. “The G is actually linked to good performance in the long term; E and S are not significant.” If a fund builds an equity portfolio based on backward-looking ESG scores, she argues, “that can also bring a lot of risk without necessarily delivering a better return in the long term.”

Federated Hermes has addressed this by developing forward-looking ESG signals, Dudley reacts. “When we first built out our ESG model in 2012, only governance, the G in ESG, was adding real value in correlation with performance. The E and the S were noise. But by 2020, we could see the S showing value, and by 2022, the E became material too.”

The next step, Dudley continues, is to interpret progress and identify momentum. “We want to understand whether a company is genuinely preparing for future risks like cybersecurity, transition pathways, or supply chain shocks. AI helps us analyse that qualitative data at scale.”

Menno Meekel, Executive Director, XIG, Goldman Sachs Asset Management, adds that even passive strategies can incorporate forward-looking sustainability insights. “We have strategies that tilt toward companies that are more resource-efficient, in water, energy, and circularity. It’s not stock-picking; it’s a broad, systematic approach.”

Houbrechts warns against overreliance on tools: “AI is not a magic solution. You still need context and to understand what’s noise and what’s meaningful. Stewardship is not just data. Data is the starting point, but it also requires analysis and judgment to arrive at a well-informed conclusion.”

Van der Krogt echoes this: “I have hopes that AI will bring improvements, but it all starts with the quality of data. If the quality is not there, it’s still garbage-in, garbage-out. Before you know it, the model starts hallucinating, and you get very strange outcomes. You still need human judgment, especially when dealing with sensitive or politically fraught topics.”

ESG as a risk factor or ethical choice

At the roundtable, a distinction is drawn between a material approach to ESG, aimed at identifying and mitigating long-term risks, and a more ethical approach, which often leads to exclusion policies that may impact performance. Over time, this raises a fundamental question: to what extent are participants willing to accept potentially lower returns of a more ethical approach?

Van der Krogt draws on Dutch experience: “In 2008, I thought pension funds would drop their ethical exclusions because of performance pressure. They didn’t. They kept them, because participants expect ethical norms to be upheld. So there is clearly a place for values-based exclusions.”

Mark van Schagen, Portfolio Manager CZ and Trustee at SBZ Pensioen, agrees. “In SBZ’s recent participant survey, we noted broad support for sustainable investing. People want a good pension in a liveable world.”

Regardless of the ESG approach, participants must be fully informed about the consequences, the experts at the roundtable agree. Under Wtp pressure, such transparency will only increase.

Communication with participants is key

Matthew Ross, Head of Manager Selection at Univest for Unilever’s pension funds, would welcome more standardised stewardship policies to mitigate performance risk, particularly now that risk shifts from sponsors to participants. He sees the popularity of exclusion lists in the Netherlands as a challenge. “It’s not the best path if you really want to make a difference. So, to get that nuanced level across to participants is the challenge we face in the system.”

Van Schagen responds: “I genuinely trust that sustainability can contribute to long-term outperformance, provided that the implementation choices are well considered. The challenge is that, in the short term, performance can deviate from expectations.”

He also emphasises that such a long-term perspective requires transparency: “Clear communication with participants will become increasingly important. If you can explain why certain decisions around selection, exclusion, and engagement are made, and why they support better long-term outcomes, I believe participants will understand and support those choices.”

Van Schagen argues that transparency will change perceptions. “Stewardship will play a more visible role under the new system. When people receive their own pension statement, they will become more involved and start asking questions: why do we invest in these companies, why do we use this strategy, and what results are we achieving? Stewardship is therefore not only part of the investment process, but also a strategic element of communication and accountability towards participants.”

Ross is not convinced: “Participants are not really showing involvement until something goes wrong. And when it does, they may ask why you didn’t invest in a company that performed well. That makes exclusion lists risky.”

Exclusions, Dudley agrees, can be a blunt tool, whereas integrated ESG factors can be embedded without removing large parts of the investable universe. “Exclusion lists can be backward-looking and inflexible. And you have to consider their impact on tracking error. We are willing to take some limitations, but typically only up to a third of our total tracking error within an active equity portfolio. You need a risk budget to generate returns.”

A balancing act: returns and impact

With participants becoming more involved after the transition, stewardship outcomes and performance will need to be communicated even more carefully, Ross argues. “You must be honest about the impact of exclusions or ESG targets on returns. If exclusions hurt returns, someone will eventually say, ‘I didn’t choose this.’” Explaining trade-offs becomes even more important as the industry moves toward more forward-looking approaches, Dudley adds. “But we shouldn’t worry too much about what perfect looks like. Perfect companies don’t exist. However, we do know which ocompany characteristics we don’t like. If we put more focus on avoiding those, that might be a common language we can agree on. The more we use data to understand momentum, where companies are heading, not where they have been, the easier it is to explain why you stay invested.”

Houbrechts believes participants understand these trade-offs. “I strongly question the idea that participants only care about short-term returns. Surveys at the European level and within pension funds show that a large majority of the population, more than 80%, is aware of the importance of biodiversity loss and climate change for our society and economy. The world is changing fast, with hundreds of billions in climate damages each year, and growing healthcare issues linked to pollution and highly processed foods. People understand that this will hit their pension capital and the people they care about. So you need to explain the rationale behind your sustainable investment approach.”

Van der Krogt highlights a governance dilemma: “Participants are being given a greater role under the Wtp, but how do we effectively identify their wishes without allowing an outspoken minority to determine the fund’s ambitions? And to what extent is there still room for moral or normative considerations, and does that vary between cohorts? These questions will only become
more important.”

Stewardship and engagement

Engagement is a crucial element of stewardship. Duguid notices that clients increasingly want proof of engagement outcomes rather than evidence of activity alone. “We have been able to show real progress. For instance, in 2019, we covered seven Paris-aligned companies. Today we are at fifty. But yes, the sentiment in the US has changed. We focus our discussions around the commercial opportunities associated with big societal issues.”

Van der Krogt raises “the elephant in the room” regarding engagement: the undermining of shareholder power. She refers to the oil company ExxonMobil limiting shareholder rights. “The fact that they threatened to sue critical shareholders, instead of going through the SEC process, is extremely worrisome. And so is their new voting procedure. Through this program, retail shareholders can sign up to have their votes automatically cast in line with the recommendations of the board of directors at shareholders’ meetings. If that becomes the standard, the rules of the game change completely.”

This shift, she warns, could spread. “We’ve always relied on the idea that voting rights and shareholder engagement follow a certain logic. But if companies gain ways to undercut that logic, we need to rethink how we protect our influence as institutional investors.”

Van Schagen links this concern to a broader global divergence. “Standards, legislation, and expectations differ enormously between countries, managers, and companies.” He sees significant potential in emerging markets for engagement on ESG topics. “It is difficult: companies are often less responsive, governance structures are less developed, and sustainability scores are lower. But that is exactly why engagement matters.”

Ross adds that this applies to both equity and fixed income in emerging markets. “We invest in both. Expectations are slightly lower because data availability is lower, but that makes engagement even more important if you want real change.”

Houbrechts views the issue through a systemic lens. “Climate change is a key systemic risk. DNB and ECB say so, and large collective engagement initiatives, such as Climate Action 100+, Spring, or Nature Action 100+, focus on it. However, we also need long-term government policy to enable and stimulate companies to invest in transition and adaptation. Engagement and voluntary actions have had some success but also show limitations. To get to the next level, a clear vision and stable framework from policymakers is required.”

Duguid adds a dose of realism. “You can’t engage an oil company in reducing supply while demand is high. That’s unrealistic. But you can reduce methane leakage, seek better capex discipline, accelerate carbon capture, and get companies to publish better transition plans. That is progress.”

The way forward

Czylok connects data improvements to portfolio construction. “Climate and labour data are improving, biodiversity data are still scarce, but guidelines of the Taskforce on Nature-related Financial Disclosures (TNFD) are emerging. We are trying to give clients principles for structuring portfolios: ownership, governance, independent judgment, and seeking less dependence on data providers. Stewardship itself won’t fundamentally change under the Wtp, but expectations around transparent reporting will rise.”

Meekel: “Pension funds have been focused on the transition, so there may be a need for funds to re-engage with participants on sustainability. This is an ideal moment for boards to review whether their ESG policies remain current and to consider options such as more concentrated equity portfolios or stronger ESG integration in bonds. Many clients are already taking factors beyond exclusions into consideration, and under the Wtp, I expect that trend to continue.”

Van Schagen: “The Wtp generally allows for riskier investments. Higher equity exposure also makes stewardship more important, both for risk management and for achieving impact. But we must remain realistic: in the current geopolitical climate, it is increasingly challenging to engage companies on specific sustainability issues and actually drive change.”

Houbrechts flags a systemic risk. “Engagement and voting have become less effective because support from the big asset managers for sustainability seems to have dropped dramatically. Pension funds should therefore ensure that their managers’ stewardship programmes are aligned with their own themes and objectives. Otherwise, you risk your engagement activities becoming ineffective, as the manager you are paying is pursuing a completely different sustainability course. Part of the solution is tailored mandates rather than off-the-shelf investment funds. Because mandates allow you to keep full control of the choice of sectors and the companies you invest in, and what is done in terms of stewardship.”

Duguid concludes with a broader perspective: “Chinese companies can be very well-managed on ESG indicators. They may disclose less, but progress is possible. Disclosure itself is the first step.” He closes the discussion with a final thought: “Don’t give up on the ESG agenda. We have the same planet, but more people, richer people, and fewer resources. These themes don’t disappear; they become more commercially material.”

Participants:
→ Anna Czylok
Senior Investment Strategist, Fiduciary Services – Investment Strategy,
Aegon AM
→ Bruce Duguid
Head of EOS Stewardship, Federated Hermes
→ Louise Dudley
Portfolio Manager, Federated Hermes
→ Erwin Houbrechts
Manager Sustainable Investing, PGB Pensioendiensten
→ Menno Meekel
Executive Director XIG, GSAM
→ Matthew Ross
Head of Manager Selection, Univest
→ Annette Van der Krogt
Head of Responsible Investing, Achmea IM
→ Mark van Schagen
Portfolio Manager at CZ, Trustee SBZ Pensioen

Federated Hermes Stewardship (EOS)

EOS at Federated Hermes Limited is a leading stewardship services provider offering corporate and public policy engagement alongside voting, screening, and advisory services. With a focus on achieving positive outcomes for our clients’ portfolios, EOS advises on $2.2 trillion in assets, making us one of the largest stewardship providers globally. We have built up over 20 years of track record in providing corporate engagement services, securing high-level corporate access and promoting positive change to the mutual benefit of our institutional clients around the world, the companies we engage with, and the communities in which they operate.