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Dominique Dijkhuis, a speaker at the marcus evans European Pensions & Investments Summit 2024, discusses sustainable investing, planning for long-term trends and why transparency to participants matters.

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“Sustainable investing is unchartered territory but the way forward. Pension fund boards need to accept that ambiguity. The direction is clear but the road ahead is not and it can be bumpy. By focusing on the long-term fundamentals and accepting some short-term deviations from the path to a sustainable economy, they can best deliver their fiduciary duties. In the meantime, it is important to be transparent with participants, to understand every asset and decision, and be able to explain how every asset fits into the policies,” said Dominique Dijkhuis, Executive Director Investments & Communications, SBZ Pensioen.

Dijkhuis is a speaker at the marcus evans European Pensions & Investments Summit 2024. 

What does sustainability and transparency mean for pension fund boards?

There should be more focus on sustainability, given the long-term horizon of pension funds. The board has a fiduciary duty to look ahead and consider what trends could play a bigger role. To ensure investment decisions generate a sustainable return, themes such as decarbonisation, biodiversity, moral rights and human rights must be taken into account.

As pension funds, we are guarding the assets of our participants. And people want their money to be invested in a sustainable way, so that they can enjoy it in a liveable world in 30 years. Their preferences need to be considered when setting policies. What themes do they find important? How ambitious are they? Do they want to be front runners or good followers? We should provide clear and transparent feedback on the choices we have made.

Sustainable investing is unchartered territory, difficult and complex. Trends are long-term and inherently ambiguous. Regulations can change. We might need to change investment policies and explain to participants why. Sustainable investing is different from doing a net return versus risks model based on past data. It is three-dimensional and far more complicated, but we must be transparent about our choices. Everyone is searching for the best way to implement sustainability. The pension fund and asset management industries need to work together. Large funds can be good role models to small funds based on what type of companies they engage or invest in. We are all facing different challenges, but we have to find a way to deal with this ambiguity. Sharing knowledge and perspectives helps in this.

Can pension funds retain control over their assets if they outsource investment management? Is it about who they select?

The board needs to ensure that everyone responsible for the investments, including external asset managers, is in line with policies and what participants want. It needs to be in control, to understand what investments they own. The selection of asset managers is very important. They must be trustworthy, independent, unbiased and able to provide the best advice possible. Sustainable investing is not a straightforward process like buying stocks or real estate, so the board and asset managers need to adopt a more cooperative iterative approach to come up with the best solutions. They need to be flexible in their thinking and have short reporting lines. This is the case whether the manager is in-house or outsourced.

Can pension funds predict some long-term trends and prepare to a certain degree?

The fact that we have such a long-term horizon puts us in the position to think way ahead and act on this. We know that climate change and biodiversity will change business models and regulation. Just by fundamentally thinking about the economy, we can guess that some companies are better prepared for the transition. We can foresee certain business models will have a tough time, but the way towards the end state can be bumpy and difficult to predict. Some companies might not survive. It helps to visualise where we are likely to be in 20 years, but how we will reach that is very difficult to predict. With impact investing, you want to invest in the business models of the future and move away from models that are unlikely to exist, even if they can provide good returns in the near term. It is a tough decision. You have to look ahead, and work with narratives more than just using past data as they won’t help you in the long run

What does this mean for policy setting, policy implementation and reporting on investments with regards to sustainability? 

It’s important that you go from your principles and view on the future economy, and work back on what criteria make sense from a policy perspective. Don’t make it too complex. If certain criteria don’t work, or could lead to very high tracking errors (when you want to keep a benchmark-based approach), or too low in liquidity, change the criteria. Remain pragmatic in implementing them. Be prepared to change your approach if new insights or developments come your way. You need robust policies but on the other hand you need to move along. As long as you can explain why you changed things, participants will understand.

What assets or sectors would you specifically recommend to long-term investors?

Investment in the energy transition will continue to boom. Industries that combine IT and energy efficiency will do well, although they are difficult to find in a liquid state. The venture capital sector is very attractive as well as infrastructure. They fit very well with pension funds.