NN IP’s van Nieuwenhuijzen on the challenges of ESG integration

The CIO reflects on diverging views on how to integrate ESG

“There is no universal truth in responsible investing and in ESG so we need to set the bar quite high,” says Valentijn van Nieuwenhuijzen, Chief Investment Officer at NN Investment Partners (NN IP), the Netherlands’ third largest asset manager. 

In August, NN IP announced it had integrated “stringent ESG” criteria for 66% of its €287bn in assets – joining a growing number of asset managers focused on ESG integration company-wide. 

RI interviewed van Nieuwenhuijzen in October. One month later news broke of a row over ESG that led to the departure of a number of its emerging markets debt team. 

NN IP is not alone in having disagreements with its portfolio managers over ESG integration. RI understands that other high-profile asset managers have faced resistance, with “portfolio managers throwing their toys out of their prams”, according to one firm. 

RI conducted a later follow-up email interview with van Nieuwenhuijzen on the issue, which saw a walkout of 11 staff (many of whom have joined William Blair Investment Management).

He says the disagreement came as NN IP tried to steer its strategic direction towards leadership in responsible investment. “The way NN IP implements ESG integration is that the investment teams have the freedom to implement ESG integration in a way that is specific to the asset class, as well as fitting it into the existing investment process.”

He continues: “After extensive discussion, the EMD team expressed diverging views on NN IP’s strategic direction, more specifically related to responsible investing.” 

"We are convinced that ESG factors enhances our investment cases and therefore helps deliver attractive return for our clients within their risk limits while also contributing to society at large." – van Nieuwenhuijzen

Van Nieuwenhuijzen says it has put in place an interim team to take over EMD activities (see RI coverage).

“We continue to manage the portfolios of the EMD strategies along the same strategy, with strong focus on risk management and liquidity. Given the new situation that is created by the EMD team leaving, NN IP will move forward by building a stronger and more aligned EMD team with our company strategy and values.”

When asked if there have been issues with other teams over ESG integration, he says: “This is not the case. Looking at the other investment teams within NN IP, the responsible investment strategy does result in a constructive dialogue between the investors, our responsible investing specialists and other stakeholders.”

Overall, van Nieuwenhuijzen stresses that NN IP wants to continue to invest in upholding its leadership role in responsible investing. “We are convinced that ESG factors enhances our investment cases and therefore helps deliver attractive return for our clients within their risk limits while also contributing to society at large.”

Back in October, RI met van Nieuwenhuijzen in NN IP’s offices in The Hague where the discussion began on credible ESG integration. 

“Transparency is crucial,” says van Nieuwenhuijzen, who has an almost 20-year career at NN IP, and its predecessor ING Investment Management (NN IP rebranded in 2015). He took up the CIO role in 2017. 

“We can show in what way we look at the E, S and G,” he says. “We can show you where it fits in and what role it plays throughout the investment process. We can basically show you the backlog. It’s in a consistent manner, which is really, really critical.”

NN IP currently integrates “stringent ESG” criteria for 66% of its €287bn in assets and says it is committed to extend ESG integration as much as possible. This reflects investments where portfolio managers analyse ESG issues separately per company, per sector and country.  This is followed by an evaluation of a company’s performance on each relevant ESG aspect. 

Van Nieuwenhuijzen says its ESG framework is material and forward-looking. It is used for risk management, but NN IP also sees ESG as a performance driver. 

“Our sustainable equity strategy has been up and running well over 20 years and it’s outperformed the benchmark well over that period at around 80 basis points on an annualized basis. And we see this with a whole range of our other sustainable finance strategies.”

NN IP has also conducted research into the link between ESG and financial performance with academics. 

“We looked at to what extent you could use ESG metrics to identify alpha,” says Van Nieuwenhuijzen. 

He says the research, conducted with the European Center of Corporate Engagement (part of Maastricht University) found it was important to be rigorous in avoiding high controversy scores to improve the risk/return characteristic of a portfolio. And that is was better to steer to stocks with higher ESG momentum. 

“So it was stocks which did not necessarily have the highest absolute scores but the stocks that show the best improvement. Those are the stocks that tend to outperform. So steering for change in behaviour with a company, and helping it to move in the right direction, makes it a stronger hold in your portfolio.”

He uses the “polluting sectors” as an example. “For example in energy, if you see really good ESG momentum within a company that is engaging actively in transition to more sustainable sources of energy you reward them for that. And you get a financial return in your portfolio, along with stimulating the low-carbon energy transition. Whereas if you would exclude it because it is a polluting sector, you don’t contribute to the transition.”

Engaging on the climate transition 

NN IP is actively engaging on the low-carbon transition as part of the Climate Action 100+ investor coalition. It says investor collaborations come with both opportunities and challenges.

"Making sure that everybody is on the same page is challenging with a big group of investors."

“I think with all collaborations, not just Climate Action 100+ but also PRI collaborations, you tend to see varying levels of commitment and effort of the investors,” says Faryda Lindeman, Senior Responsible Investing specialist at NN IP. 

“So you join as an investor. And there are a couple of investors that are very active while others follow. Making sure that everybody is on the same page is challenging with a big group of investors. So in some cases, I believe it would be more effective to not have too many groups and to have smaller investor groups. 

“Sometimes it is more effective when a smaller investor group targets a company as they are able to better align on their viewpoints and be faster in their communication and collaboration. This sometimes leads to achieving more.”

As part of CA100+ NN IP is the lead investor on three companies: CEZ Group, the largest utility and biggest public company in Central and Eastern Europe, German chemical company BASF and Russia’s Rosneft.

On its experience with CA100+ so far, Lindeman says: “I have to say it is a different ballgame per company. There is currently a strong emphasis on the oil and gas sector while we also see engagement opportunities in other sectors such as utilities sector.”

For example, Lindeman says the chemical industry has no sector agreements on climate change. “You want to stimulate them to commit to the Paris Agreement but there is no sector agreement on what that looks like in measurable objectives. So it is quite a difficult conversation to have with them.”

As well as integrating sustainability in parts of its public market exposure, NNIP also does in parts of its credit markets. 

Van Nieuwenhuijzen says: “Being part of a larger insurance group [Listed Dutch insurer NN Group is the parent of NNIP] and managing a large part of its general account means we’ve a very strong footprint in fixed income.”

NNIP has some long-running sustainable credit products, he continues. And says when it saw the green bond market emerging a few years ago, “it was natural for us to explore it”. 

NNIP launched its green bond fund in 2016. It has raised €1bn to date. 

Van Nieuwenhuijzen describes its investment approach as “dark green”, avoiding industries like fossil fuels. He does not think the market is overvalued, “the demand is well matched with increasing popularity from both sovereigns and corporates to issue this type of paper. And it has proven to be a good investment for us. The fund’s performance is better than an average regular benchmark”.

NNIP sees green bonds as impact investment. But some are sceptical that green bonds – often used as refinancing instruments – deliver effective impact or contribute to the transition to a green economy. 

“This is a hotly debated topic,” says Van Nieuwenhuijzen. “I don’t think whether it’s refinancing or new money is the most critical thing. I think the most critical thing here is the transition. If I issue 100 today and do not consider sustainability and tomorrow I switch out of that 100 and make 20 deliberately tailored to sustainability or an impact objective it is already a big improvement compared to where I was yesterday where the 100 was just put into the economy.”

Going forward NNIP plans to do more academic research into ESG and sustainability. It plans a study exploring ESG integration and yield and continued research into ESG momentum with new data. It has started a research partnership with the Yale Initiative of Sustainable Finance as part of this. 

Van Nieuwenhuijzen says research, along with new technology and data is vital to provide further ESG insights into the investment process. 

He adds: “This [responsible investment] is a topic that is never fully finished or carved in stone. Societal preferences change over time and in regions. There are differences on what is perceived to be sustainable or not. You need to be open-minded.”