GIZ, Germany’s state-owned company specialising in economic development in emerging markets, has awarded Deutsche Bank’s asset manager (DeAWM) a mandate to manage €371m worth of its pension fund money – and to do so in a highly ethical fashion.
GIZ, Gesellschaft für internationale Zusammenarbeit (‘Corporation for International Cooperation’), claims to be the world’s leading provider of international cooperation services for sustainable development.
The mandate follows the GIZ’s decision to remove most (65%) of its defined benefit (DB) pension liabilities from its balance sheet and put them in a Pensionsfonds – the German equivalent of the equity-oriented Anglo-Saxon style pension fund. Following an auction in which 10 European providers of Pensionsfonds participated, GIZ last month decided in favour of the ‘Deutscher Pensionsfonds’, a joint venture between Swiss insurer Zurich and DeAWM.
In the venture, Zurich handles the administration of the corporate pensions – i.e. reporting, client service and payouts – while DeAWM invests the money to pay the pensions.
GIZ’s mandate requires a strict ethical investment approach, involving a combination of wide-ranging exclusions and “best-in-class” equity and bond selection. Neither DeAWM nor Zurich was willing to comment for this article.
Regarding the exclusions, RI understands that for sovereign bonds, the GIZ demands that countries that violate human or labour rights be excluded.
But it goes further than many, insisting that countries which still employ the death penalty (e.g. the United States) or those that discriminate against women, minorities or the disabled also be avoided. Even countries which score poorly in terms of climate protection, corruption and freedom of the press are to be omitted.
The exclusions on the corporate side are no less comprehensive. Again, like other responsible investors, GIZ does not invest in companies that violate human rights, labour rights or environmental standards. The exclusions extend further in that companies deemed corrupt or those that practice accounting fraud also are avoided.Finally, GIZ’s exclusions pertain to weapons, pornography/sex tourism, biocides, tobacco, gambling as well as companies that develop violent video games.
After applying the exclusions, DeAWM must, under the mandate, rely on best-in-class. That means Deutsche’s asset manager selects the top 40% firms in a given sector which meet GIZ’s sustainable standards. To help determine who those companies are, the GIZ says research from a “major ESG firm” will be drawn on. Given the strict ethical nature of the mandate, industry sources say Munich-based oekom research is a likely candidate.
RI further understands that DeAWM must generate a return of at least 3.5% per annum with GIZ’s pension money, which some observers say could prove difficult given the investment restrictions. Said a German pension executive who participated in the auction for the mandate: “We looked at it and decided that it wasn’t doable. The restrictions are so far-ranging that you wind up just investing in Scandinavia. That’s not enough to meet the target return.”
As DeAWM is currently conducting an asset-liability management (ALM) study, the exact allocation for GIZ’s pension money has not been decided. The study’s results are expected by the end of August. GIZ’s ethical restrictions would seem to considerably limit sovereign bond choices, which can be problematic if the ALM study dictates that a huge portion of the assets must go to fixed income. Generally speaking, German institutional investors are very conservative, allocating between 70-90% to fixed income. And a big portion of that is in government bonds.
On the other hand, if the ALM study for the GIZ allows for a sizeable equity portion, DeAWM would have more flexibility to meet the 3.5% target. That’s simply because even with the exclusions and the best-in-class approach, DeAWM’s (global) equity universe is considerably larger than its bond one.
With offices in Germany’s former capital of Bonn and Eschborn, the GIZ is basically the corporate arm of the Federal Ministry for Economic Cooperation and Development (BMZ). Through its business, which totalled €2bn in 2014, the GIZ aims to promote economic development, reduce poverty, and improve education and health.