How Germany’s largest pension fund is setting the trend on sustainability

It’s not an exaggeration to say that the Bayerische Versorgungskammer (BVK), the Munich-based pension fund for free standing trades, is the sustainability trendsetter among its peers, known in Germany as Versorgungswerke.

The BVK’s sheer size makes it easy for it to assume this role. An amalgamation of 12 Versorgungswerke, including those for doctors, architects, lawyers and pharmacists in Bavaria, the BVK looks after €61bn in assets. It is not only the largest Versorgungswerk; it is indeed the largest pension scheme in the country.

Befitting its size, the BVK sets trends. Following the burst of the technology bubble at the start of the century, it was the first of the Versorgungswerke to diversify a fixed income-dominated portfolio in a big way. This meant significant allocations to things like private equity, hedge funds and since 2009, green technology. A year ago, the fund made its biggest renewable investment to date, buying into mostly German solar parks for €120m. The Versorgungswerk expects an annual return of 5.5% from this investment.

In early 2011, the BVK again set another trend by being the first Versorgungswerk to join the UN-backed Principles for Responsible Investment (PRI). Now this month, the WPV, a €2bn Versorgungswerk for chartered accountants across Germany, has followed suit – and more are expected to follow.

After embracing the PRI, the BVK built sustainable criteria into the four corners of its portfolio: bonds (77% of the portfolio); real estate (9.7%); equities (8.4%); and alternatives like private equity and hedge funds (7.5%).

For its equity and corporate bond investments, the BVK relies on F&C’s Responsible Engagement Overlay (REO) tool.Voting at companies’ annual meetings on its behalf has been geared toward reforming executive pay and climate change.

The fund has regular meetings with external asset managers to discuss how sustainable criteria are being respected in the investment process. Like many other institutional investors, the pension fund feels strongly that sustainable investing is part of its fiduciary duty.

On bonds, the BVK is using a sustainable filter provided by Oekom Research, a Munich-based ESG advisory firm. Issuers fall under three categories: “prime” (49% of the portfolio), “not prime (39%)” and “scouting” (12%). Prime issuers are akin to best-in-class and receive grades ranging from A+ to C.

Non-prime issuers are graded C- to D- and because the BVK prefers engagement to exclusion they are called upon each year to improve their sustainability efforts. Issuers in the scouting category are those that have not yet fulfilled Oekom’s sustainable criteria.

The BVK’s alternative investments include hedge fund-of-funds, commodities, currencies, private equity, infrastructure and timber. According to the scheme, switching from mutual funds to institutional funds has enabled it to better oversee the external managers’ sustainable efforts and influence them accordingly. The BVK has so far invested €300m in timber, and the move has been certified as sustainable. Chief investment officer Daniel Just recently said that he expects a return of 7% from the timber investment this year. He also put the scheme’s overall return for 2012 at above 3.5%.

Finally on real estate, the BVK judges properties according to criteria such as energy efficiency, the amount of resources needed to build them and local impact. “When choosing tenants, our fund also is careful to avoid those parties who for ethical reasons could damage our reputation,” the scheme says.