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Dutch pension funds and asset managers remain optimistic about the achievements and potential of the IMVO Covenant, despite a report finding that they are far behind schedule on implementing it.
The Covenant is one of a number of sectoral agreements on responsible business conduct facilitated by the Dutch government and involving NGOs, businesses and trade unions. Agreements have been signed in a number of sectors including banking, the gold trade and the garments and textile industry.
Under the agreement, pension funds commit to integrating the OECD Guidelines for Multinational Companies and the UN Guiding Principles (UNGPs) on human rights into their investment policies.
The agreement was initially signed by 73 pension funds in December 2018 representing €1.18tn assets under management (AUM), as well as six NGOs and three trade unions. The Covenant website now lists 80 funds, representing more than 90% of Dutch pension AUM.
MN, the Dutch pensions asset manager, along with its two largest clients, the metalworkers pension funds PMT and PME, was involved from the start. Karlijn van Lierop, MN’s Director of Responsible Investment and Governance, says that the asset manager was “excited” by the possibility of co-operating with NGOs and trade unions.
The Covenant is divided into two major parts, a ‘broad track’, which covers the implementation of the UNGPs and OECD guidelines into investment policies, and a ‘deep track’, a series of targeted engagements with a small selection of companies, aiming to develop and implement best practices for a specific sector.
Over the lifetime of the Covenant, the aim is to have six such sector engagements. Three of these have been publicly announced: one targeted engagement with an unnamed mining company, another focused engagement on palm oil producers and users, and a third on the tech platform economy.
While membership of the deep track – which is voluntary – is mostly limited to larger pension funds who have the capacity for extended engagement, both Van Lierop and Rogier Snijdewind, Senior Director of Active Ownership at PGGM, believe it is a useful tool.
Van Lierop says the Covenant allows deep track members to partner with NGOs who “really add value with their insights on the situation on the ground”. Snijdewind echoes this, saying that the partnership “enriches our dialogue with investee companies”, and provides useful insights, instead of investor engagers being solely dependent on information from research providers and the media.
The improved relationship with NGOs facilitated by the Covenant is not just useful for the deep track. Working together on both tracks has allowed NGOs and funds to open a dialogue and make connections which didn’t previously exist.
In the past, Dutch NGOs have often been highly critical of pension funds. According to Snijdewind: “historically, it was more the case that there would be a report issued by an NGO and we would be confronted with that through the media, and then we would have to respond to that through the media. To be able to understand each other better was really helpful”.
This hasn’t completely solved tensions. Vincent van Bijleveld, Director of ESG Investing at consultancy, Finance Ideas, which advises a number of midsize funds, says: “I don’t think the NGOs are happy where the industry is and would like them (the investors) to speed up their game in terms of negative impacts, due diligence and actually trying to solve issues”.
While this does paint a picture of mostly fruitful cooperation, the Covenant is not without its problems. The yearly report by the monitoring commission in December last year found that none of the signatories had fully implemented the OECD guidelines and UNGPs. Under the intermediate goals of the agreement, half of the funds should have done so by now. The commission said this was “worrisome”.
Van Lierop says that getting the guidelines actually implemented is a challenge: “Most funds have a responsible investment policy and apply it, but it can be difficult to fully embed it.”
While implementation is behind schedule, significant progress has nonetheless been made. The report did find that around half of the signatories had formulated policies which were in accordance with OECD guidelines.
Van Bijleveld says that there has not been enough ambition from funds, both on engaging with companies and their own asset managers.
While he is “very positive” about the Covenant, he questions the effectiveness of what has actually changed two years in: “In practice, budgets haven’t increased two or three fold for engagements. Many just said, well I’m already using [an engagement provider]. Check box…already doing that,” he says.
While some of the top 50 asset owners that were previously lagging behind have now hired engagement providers, van Bijleveld says: “the big change in negative impact due diligence hasn’t happened yet.”
“If NGOs want to push the whole sector forward they should focus more on helping pension funds to thoroughly evaluate their engagement provider and asset manager’s coverage and performance on negative impact due diligence.”
“That is where most pension funds have leverage, not in setting up and executing their own bespoke due diligence process. This is especially true for the smaller and mid-sized pension funds,” he added.
There are also concerns that smaller funds find implementing and complying with the Covenant more difficult than their larger counterparts due to lower numbers of staff and less available money.
However, the Cooperative spirit of the covenant can help to mitigate this. Larger organisations are routinely paired off with smaller funds to provide support.
As the agreement reaches the halfway mark of its planned four year duration, positivity is still high. Van Lierop says that MN is “thrilled to continue working on this”. While it is too early for concrete plans to be made for what comes after the covenant, the spirit of cooperation it has fostered is expected to continue long past the expiration date.
The RI Netherlands digital conference features a panel titled: What next for the IMVO Covenant? featuring speakers from International RBC Agreement Pension Funds, Sociaal-Economische Raad (SER), Pensioenfonds Detailhandel and CNV Internationaal on April 13 at 10.00 CET