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IORP II: Identifying ESG risks on your investment portfolio

The considerations of IORP II state that Environment, Social & Governance, the ESG factors, are important for the investment policy and risk management system of pension funds. It also requires pension funds to disclose explicitly where ESG factors are taken into account in investment decisions and how they are part of the risk management system. Finally, it requires reporting on this. How can you identify ESG risks in your investment portfolio?

01 May 2020

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"Look-through” information
Determining policy and determining and managing long-term ESG risks requires an ESG screening of the portfolio. The screening tests whether your investments comply with the UN Global Compact guidelines, or with the guidelines formulated by your pension fund itself.

This screening can be carried out for investments which your fund holds at its discretion, but also for investments in fund structures. The latter can be done on the basis of 'look through' information. These provide a detailed insight into the individual investments of the funds. The portfolio screening can be used to determine how the portfolio scores on ESG grounds. The screening can take place at various levels, by individual investments, by managers, by asset classes or at total portfolio level. A distinction can be made between different policy areas (e.g. environment, tobacco, controversial weapons, etc.).

ESG policy
The results of the portfolio screening support you in determining your policy and serve as a baseline measurement for monitoring the results of your ESG policy. It is essential for the effectiveness of your policy that you also use the screening information in your communication with the fiduciary manager and, by extension, the asset managers. Pension funds can choose to do the ESG screening themselves, but they can also use independent parties or the custodian for this purpose.

Frequency of ESG screening
The frequency with which the screening takes place depends on the way in which you conduct your ESG policy and have set up your portfolio. For example, if you work with discretionary investments, it makes sense to screen your portfolio on a daily basis and set up alerts if investments are not in line with your ESG policy. If, on the other hand, you invest in funds of which the detailed information on individual investments becomes available periodically, then a periodic screening is an obvious option.

KAS BANK N.V. has been part of CACEIS since September 2019. CACEIS is a European specialist for the custody and administration of securities and high-quality risk and reporting services. We focus entirely on providing securities services to professional investors in the pensions and securities world. The acquisition of KAS BANK N.V. strengthens CACEIS' position in the Netherlands, Germany and the United Kingdom. Our combined product range makes us market leader in custody services and fund administration in Europe. CACEIS is part of Crédit Agricole, the world's largest cooperative financial institution.

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Pol de Jaeger

More information about IORP II or ESG?

Pol de Jaeger

Business Development Manager
+31 (0)20 557 2293