Pensioenfonds Werk en(re)Inegratie (PWRI), the €9 billion ($10 billion) Dutch fund for disabled workers is already well renowned for its €100 million ($113 million) highly specialist inclusion portfolio. The fund invests in around 50 listed Dutch and international companies that promote employment for people with disabilities, backed up with intense engagement.

Now PWRI is going one step further, introducing a bespoke index for its entire 35 per cent equity allocation which will tilt investment towards companies with strong health and safety, labour and climate ESG scores across developed and emerging markets to better reflect its distinctive ESG priorities.

The €2 billion ($2.2 billion) developed market portfolio was transitioned last November, and the €1 billion ($1.1 billion) emerging market portfolio will transition this month or next.

“The idea came from the board after talking with our beneficiaries,” says pension expert Xander den Uyl, vice chair of Utretch-based PWRI, who is also a board member and supervisory board member at three other Dutch funds.

The genesis for the new strategy dates from 2017 when PWRI decided to revamp its equity allocation, divided at the time between two active portfolios invested in Europe and emerging market mandates, and two passive allocations to Asia and the US.

“We had the feeling that the portfolios weren’t aligned with our ESG policy and we were also worried about the cost of active management, especially in the emerging market portfolio which didn’t’ perform well,” says den Uyl.

Working with its fiduciary manager BMO Global Asset Management, PWRI decided to develop its own index, rather than track one of the growing numbers of off-the-shelf ESG benchmarks.

This way it could ensure that strategy mirrored its own, strong ESG beliefs around climate and disability, where it particularly prioritises helping disabled people in the workplace, rather than “someone else’s” values, says den Uyl.

“The biggest challenge in the process is defining what you want. We have a long history of ESG but there is a difference between an ESG policy and stepping towards a proprietary benchmark.”

Other issues also came to the fore. For example, PWRI’s equity allocation had been in funds, so creating a discretionary portfolio involved finding a new custodian.

In the allocation, PWRI targets improving its overall ESG score by 1.5 per cent compared to the MSCI ESG Universal index.

The fund also targets reducing its carbon footprint by 20 per cent compared to MSCI World and aims for investee companies in its portfolio to score 10 per cent better than MSCI World constituents in labour rights and health and safety. In more challenging emerging markets, where a deeper level of analysis makes integration difficult, the fund targets a 10 per cent increase in broader social scores.

“ESG scores in emerging markets aren’t accurate and it’s difficult to separate out between labour and health and safety so we created one overarching score.”

However, he is convinced that as more data becomes available and more investors prioritise social investment, this will change.

“We feel we are not at the end of the process, but at the beginning.”

MSCI provides all the data on the companies that make it into the passive universe, while the strategies are run by UBS and DWS in an equally split mandate. Manager selection was overseen by BMO in a process whereby PWRI “stood back” to let its fiduciary manager work with the asset managers, and deep dive into the technology and data behind the strategies.

“We set out our policy with our fiduciary manager and then asked them to deliver on it,” explains den Uyl.

The idea behind the split mandate is that it exposes the strengths and weaknesses in the managers’ slightly different investment approaches.

“We have done this because it is new, and we can see if one approach has slightly better results. We can see how they perform and decide if we continue with what we are doing, or we change it.”

The managers weight the different companies in the index accordingly, and BMO engages with investee companies. Splitting the mandate does cost “a little more” but the additional costs are only “a few basis points,” he says. “It is quite different from what you pay with an active portfolio and a little bit higher than MSCI World, but not very much higher.”

The results of the strategy have just started to emerge.

“We now have the first results and they show that the targets can be more than met. The first results show a performance over target on carbon reduction and on health and safety,” says den Uyl.

In one surprising revelation from back testing the strategy, the emerging market portfolio outperformed. Back testing the portfolio also confirmed the low tracking error in the strategies.

“Back testing has shown that the strategy has performed in terms of our ESG targets and in terms of our performance. It proved that there is room with a relatively small tracking error to make relatively large steps towards your ESG goals.”

Going forward, the goal is to introduce more challenging targets, particularly around investee companies carbon footprint, as the strategy beds down and the performance and low tracking error continues.

“The back testing shows this is possible, but we want to see what happens before we increase our targets.”

Full ESG integration across the entire portfolio is the other long-term objective. PWRI has a 60:40 split between return seeking and matching assets where, in the former, along with the equity allocation it invests in high yield and emerging market debt, convertible bonds, real estate and has a small private equity portfolio.

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Sarah Rundell is a staff writer for Top1000funds.com based out of London. She writes on institutional investment across all asset classes, global trade and corporate treasury.