Case study: How NN Group is tackling its responsible investment goals
Jelle van der Giessen, Chief Investment Officer of NN Group, explains how the insurer is facing up to climate change, the trick to overcoming data challenges and how to tackle ESG across different asset classes.
Sara Benwellposted on Tuesday, March 23, 2021
Sara Benwell: What are your responsible investment goals and how were these decided?
Jelle van der Giessen: Responsible investing is integrated in most of our investment processes as we believe that ESG factors can increase our returns and mitigate our risks. On top of this, responsible investing is very much in line with our company values and our strategy to contribute to the well-being of our planet.
I would like to put some extra emphasis on climate change, because that is the part that we are particularly focused on. Social and governance are also important, but climate change is something that we believe requires a very urgent approach.
We have committed ourselves to a net zero carbon portfolio by 2050, to help limit global temperature rises to one and a half degrees Celsius versus pre-industrial levels. We are aligning with the Paris agreement and with the other institutional investor committees on climate.
“Responsible investing is integrated in most of our investment processes as we believe that ESG factors can increase our returns and mitigate our risks”
And we contributed to development of the recently launched Net Zero Investment Framework from the Institutional Investor Group on Climate Change (IIGCC). This framework offers investors with a global roadmap to help decarbonise investment portfolios and increase investment in climate solutions.
So, these are, in short, our responsible investment goals. This has been our strategy and values for quite some time, but last year during our Capital Markets Day, we presented our new strategy, in which we set broader targets, not just financial ones and will hold ourselves accountable to the progress that we make on these non-financial targets. As a result, we have stepped up quite a lot on ESG and climate change and it's now embedded in our objectives.
These targets have been set by the management board alongside the supervisory board. Then I translate that into more concrete steps around what we will do in the investment portfolio.
Sara: Are you on track to meet your targets and ESG goals?
Jelle: We have an integrated annual report, and we report on responsible investing. We also are working on climate change risk analysis disclosures – so that’s how we are becoming more transparent.
The second priority is to decarbonize our portfolio, so we are developing strategies for asset classes on what we need to do to meet the net zero target.
Key to this decarbonisation is engaging. So, we have conversations with the companies that we invest in about their carbon policies and we are also excluding or phasing out the most polluting industries like thermal coal and oil sands.
“We are developing strategies for asset classes on what we need to do to meet the net zero target“
The third step is green investments, and we are investing in climate solutions, green bonds and renewable energy. We also invest in improvements of our real estate portfolios, so that the buildings we own are also working towards net-zero carbon emissions. And if we have the feeling that we do not get anywhere with investee companies, then exclusions will be the last resort.
For us, engagement is the key word. Exclusion does not impact the real world - it looks nice, but it would only start to have an impact if all investors agreed not to own such assets – and that, so far, has not been easy to achieve.
However, there are certain industries where engagement will have very little impact and hence exclusions make sense to me.
Sara: What are some of the challenges you’ve faced when trying to meet your responsible investment goals?
Jelle: One major challenge is that data is not readily available. For instance, we started to report on the carbon footprint for real estate and making sure that the data is complete and consistently reported across all of our real estate investments is something that we find is challenging.
This is being improved, for example by working together with disclosure initiatives and data providers to encourage underlying entities in our investment portfolio to disclose better information, and this is an important focus for us as we look to set and achieve science-based targets. There is often not enough information available and measurable to show impacts and make full disclosure.
“One major challenge is that data is not readily available”
With the engagements that we do, we can disclose, and we can do great storytelling on where we are successful and why, but to add up all the impacts of engagement across your portfolio and to relate that to our targets and ambition to deliver improvement in the real economy, that still needs more work.
Another issue is finding green investment solutions. Those are still scarce, and everybody is interested in the same opportunities. You know, we invest in green bonds, we invest in renewable energy, and we invest in our real estate to make adjustments to the buildings in order to reduce carbon emissions. As everybody jumps on those same green investments, the returns will be under pressure.
Sara: How are you tackling the data challenges within your portfolio?
Jelle: There is an increasing number of providers that you can use to obtain the data, but this data is also difficult for those suppliers to source. That means even when we are able to buy the data we want, we need to then take further steps to make sure it is reliable.
Disclosure and being transparent about what you are doing and the impacts it has is obviously very important because then we can be far clearer about what we are trying to achieve with responsible investing.
Sara: Thinking about the entire range of assets that you invest in, are some classes more difficult than others when it comes to responsible investment?
Jelle: For the majority of our asset classes, for example equities or fixed income, ESG is integrated in the investment decisions. Whether we buy bonds or equity, these factors need to be part of the assessment.
That is an important first step but then, obviously, as an equity investor you can influence factors, for instance by proxy voting. This means you can express your opinion and vote in the annual meetings via your asset manager.
As a fixed income investor, I still think we have a seat on the table, though not in the annual general meeting, but we can engage with these companies on our climate principles. A good example of this is Climate Action 100+, which engages with the world’s most polluting companies on behalf of all the investors that are part of the initiative.
“As an equity investor you can influence factors, for instance by proxy voting”
Fixed Income is also significant when it comes to direct lending, because the asset manager and sometimes the insurance company, can argue that certain aspects of ESG need to be part of the loan documentation.
We have an example, for instance, where we were talking to an energy company and they did not really meet our requirements - so we said: “well, that's not possible, we can’t do it”. They then agreed to close 30 percent of their more polluting energy production and we said, “fine, that is great, let's put that into the documentation as a milestone or a covenant. And if you don't meet the deadlines for closing this production within the timeframe that we agree, then you need to repay the loan immediately.”
“Fixed Income is also significant when it comes to direct lending”
With real estate, as a direct owner of real estate we can decide how much money we want to invest to reduce carbon emissions and to enhance the buildings that we own. Normally, the returns on those investments are very good.
So yes, approach and performance can differ per asset class, but all in all I believe we are on the right track and I am pleased that our company has received external recognition for our efforts to integrate sustainability in all parts of our business by being included for the fourth time a row in the Dow Jones Sustainability Indices, both the World and Europe index.