Dutch central bank switches to active management in search of Paris-aligned investments

DNB unveils new responsible investment policy for €9bn of funds and will begin taking a more active stewardship approach.

Entrance to the Dutch Central Bank

The Dutch central bank (DNB) is switching its externally managed portfolios to active managers in order to better align its investments with the Paris Agreement and has unveiled a new responsible investment policy.

The policy applies to around €9 billion of investments, including around €4.5 billion of internally-managed bond investments which are used for FX interventions.

The externally-managed investments had previously been in pooled funds across nine asset managers, but DNB is looking to transfer these funds into segregated mandates. It launched the first Paris-aligned fund in July and aims to launch two more mandates over the coming year for its developed market equity investments.

Headshot of Rianne Luijendijk
Rianne Luijendijk

Rianne Luijendijk, head of the responsible investment team at DNB, told Responsible Investor that the new mandates explicitly steer on carbon reduction targets in line with the EU’s Paris-aligned Benchmark framework.

She said a partial motivation for the switch was that DNB wants to be a fundamental, bottom-up investor.

“When you look at the fundamentals of the companies, you are able to also incorporate forward-looking information into the selection process and then ensure that these companies are on the right track to realise carbon reductions. That’s what we’re looking for.”

The funds are being invested in discretionary mandates because DNB’s search failed to turn up existing products with sufficient size and the bottom-up approach it was looking for, Luijendijk said.

Similarly, with existing passive investments, “the voting and engagement approach is considered a little bit less effective” as the ability to divest an unresponsive company is limited, she said.

Engagement action

DNB has also hired a voting and engagement manager to help its active stewardship approach.

Headshot of Kommer van Trigt
Kommer van Trigt

Kommer van Trigt, the bank’s CIO, told Responsible Investor: “What we want to do here is change the behaviour of companies, and there are more ways to do so than just divesting. We have exclusions in place but that is really setting minimum standards.”

DNB is developing its own voting principles, and has hired a voting and engagement provider which is aligned with these. The principles are based on pre-existing guidance, including the Dutch corporate governance code. This mainly focuses on disclosure quality and the comprehensiveness of transition plans.

While DNB is not naming the provider, Luijendijk said it had chosen a manager with “a very comprehensive methodology” for checking transition plans, which “didn’t shy away from voting against directors or escalating if a climate transition plan isn’t sufficient or engagements aren’t proceeding”.

Explicit references to biodiversity also featured in the search, and DNB is carrying out a TNFD pilot for its own investments to see how far it can get with assessing its impacts and dependencies on nature. However, van Trigt said it was nowhere near setting any nature targets.

While the selected voting and engagement manager is an active part of collaborative groups, DNB will also look at signing up as a non-active “endorser” of some collaborative initiatives such as the PRI’s human rights engagement Advance or biodiversity engagement Spring.

Bonds in focus

DNB’s internally managed bond portfolio, used for FX interventions, is mainly in domestic government bonds and SSA holdings, which are mostly dollar-denominated.

The bank has a target of holding 20 percent of this portfolio in green bonds. While it has hit this target, van Trigt said it was a struggle due to the limited availability of suitable investments.

Filling the portfolio with issuers rated single-A or above who raise dollar debt “actually is quite challenging”, he said. “You have to think about the volume and liquidity in this segment.”

The bonds themselves need to be aligned with both the ICMA Green Bond Principles and the Climate Bonds Initiative standard. DNB also conducts issuer-level assessments, such as fossil fuel revenues for sub-sovereign issuers or MDB governance structures.

Some eligible issuers are moving from green to sustainability bonds because it gives them more flexibility in using the funds for social and green projects, Luijendijk said. She also noted that MDBs do not necessarily need the green label to appeal to responsible investors.

With this in mind, DNB is having active discussions about expanding the target to allow other use-of-proceeds bonds apart from pure green, and there is further discussion on how the target works and how to expand it while still investing in names which contribute to real world impact.