Daan Spaargaren, PME Senior Strategist for Responsible Investment, with a Warning for Asset Managers

How are asset owners emerging to drive the sustainable finance agenda? Listen to Jason Mitchell discuss with Daan Spaargaren, PME Senior Strategist for Responsible Investment, about how PME is evolving its investment approach to include more active, sustainability-driven strategies; what that means functionally in the asset allocation process; and why it’s great to see asset owners like PME take on a bigger leadership role in the sustainable finance ecosystem.

Recording date: 17 June 2025

Daan Spaargaren

Daan Spaargaren is Senior Strategist for Responsible Investment at PME, the Dutch pension fund representing the metal sector and the tech industry in the Netherlands. Before PME, he worked as a Policy Advisor in Sustainability at Eumedion, the Dutch interest body for institutional investors where he was closely involved in drafting the first Dutch Stewardship Code. Daan started his career at Sustainalytics, now part of Morningstar.

Episode Transcript

Note: This transcription was generated using a combination of speech recognition software and human transcribers and may contain errors. As a part of this process, this transcript has also been edited for clarity.

Jason Mitchell:

I am Jason Mitchell, Head of Responsible Investment Research at Man Group. You're listening to A Sustainable Future, a podcast about what we're doing today to build a more sustainable world tomorrow.

Hi everyone, welcome back to the podcast, and I hope everyone is staying well. So when I think about where sustainable investing is headed over the next couple of years, two competing narratives keep coming up. The first is a hopeful one that as regulators grow more cautious and asset managers increasingly pull back from their ESG commitments, asset owners start to emerge to really drive the agenda. In fact, that was a key theme in my conversation earlier this year with Dan Mikulskis at the People's Partnership. And in this version of the story, we could see a shift towards more sophisticated reallocation strategies that actively integrate risk, return and sustainability.

The second narrative is less optimistic. It's one where the notion of asset owner-driven leadership is more myth than movement, that the few asset owners actively reallocating to sustainability are outliers, anomalies that don't really reflect broader sentiment as ESG de-risking takes hold.

Now, I want to believe the first, but I do worry about the second, which is why I am always looking out for asset owners who are actually walking the talk, who are designing sustainability approaches that don't sacrifice portfolio returns. And in all honesty, I'm drawn to those who are willing to speak openly, even critically about their asset managers when they fall short. It's why it's great to have Daan Spaargaren from PME, one of the largest pension funds in the Netherlands on the podcast. We talk about how PME is evolving its investment approach to include more active sustainability-driven strategies, what that means functionally for responsible investment in the asset allocation process, and why it's great to see asset owners like PME take on a bigger leadership role in the sustainable finance ecosystem.

Daan is Senior Strategist for Responsible Investment at PME, the Dutch Pension fund representing the metal sector and the tech industry in the Netherlands. Before PME, he worked as a policy advisor in sustainability at [inaudible 00:02:22], the Dutch interest body for institutional investors where he was closely involved in drafting the first Dutch stewardship code. Daan started his career at Sustainalytics, now part of Morningstar. Welcome to the podcast, Daan Spaargaren. It's great to have you here and thank you for taking the time today.

Daan Spaargaren:

Thanks for having me, Jason. I'm looking forward to the conversation.

Jason Mitchell:

I really, really, really am. So Daan, let's start with some scene setting. PME is one of the largest pension funds in the Netherlands. What are the drivers? Is it stakeholder beneficiary preferences? Is it from cultural drivers that have put sustainability at the core of PME's investment strategy?

Daan Spaargaren:

Yeah, I think you're right. The reason that we put sustainability at the core is because we are aware that financial institutions play a critical role in addressing the major transitions and challenges of our time. So one of those is obviously the climate crisis and honestly, I believe asset owners like pension funds, but also insurers carry probably the greatest responsibility here. And it's always important to realise that we are managing money and on behalf of real people. So in our case, our participants, over 600,000 pension beneficiaries, and they expect a secure and a solid pension. But increasingly, they also I think, expect us to invest their contributions in a way that reflects their values, including sustainability. And I think what's unique about being a pension fund is our connection to the Dutch metal sector and the tech industry, and why energy transition is such an important topic for us is because the energy transition cuts right through the heart of our sectors.

So on the one hand, we represent traditional carbon intensive industries like the steel productions, and on the other end we have companies driving the energy transition, so manufacturers of wind turbines, solar panels, and EV charging infrastructure for example. So our beneficiaries aren't so to say, sitting on the sidelines of these transitions. I think that they're in the middle of it. We see truck driving manufacturers, for example, shifting to electric fleets and we see tech firms that develop smart solutions to accelerate the shifts. And what I see is that there's this kind of shared awareness, I think that the change is both necessary and already underway. That's what I see in the sector that we represent and that alignment between our investment strategy and the evolving reality of our sector is I think a key characteristic of the pension fund.

Jason Mitchell:

Let me push you a little bit more on this because I think it's really interesting. How does PME's sustainability, and in particular its decarbonization efforts, resonate with the beneficiaries, many of whom I'm guessing and who you've kind of characterised particularly from the metal sector, probably come from very emissions intensive industries that sustainable investors tend to, on the margin, underweight or skew away from?

Daan Spaargaren:

Yeah, that's true. Well, we have active dialogues with our participants and also with our pensioners. So we regularly meet them, we have focus groups, we have sometimes meetings with pensioners. Hundreds of them come to these meetings and we explain to them how we invest their money and also how we take into account climate change, for example. And although for some companies in the sector it is difficult to transition, for example, when you're a supplier to the oil and gas industry, solely for the oil and gas industry, it might be difficult to change and to create a new business model. But broadly, I feel a great sense of the need of the transition. So there's awareness of the fact that we need to make this transition and that's also what we want to reflect in our investment policy.

Jason Mitchell:

One of the major reasons I originally reached out to you was the recent Bloomberg article that was titled, U.S. Fund Managers Put On Notice by 65 Billion Dutch Investor. You're quoted in that article as saying that U.S. managers, "Aren't condemning what Trump is doing and how he's operating and how he's handling issues like climate change and demolishing the judiciary." Is this specifically about managers defecting from Climate Action 100+ and net-zero asset managers initiatives, or is it about something else?

Daan Spaargaren:

This is a really important question and why, especially in these times, it's also important to zoom out a little bit because I think it really gets to the heart of what I've been advocating for over the past decades, and in some cases even longer, large asset managers have embraced sustainability as part of how they invest. They've committed to ESG integration, active ownership, climate targets, you know the drill. They joined coalitions like [inaudible 00:07:27] and net-zero initiatives. Many asset owners like PME have allocated capital to these managers not just for their performance, but also because of their sustainability direction. So we now see some of those same managers walking back their commitments and in some cases actively distancing themselves from climate goals. And that's not just disappointing, at least for me and for PME, but it's also irresponsible I think. So essentially they're making a values decision on behalf of their clients without asking and that should not be their role, I think.

So the decision in the end how funds are managed, that decision belongs to the asset owners I think. And frankly, we as asset owners need to step up here. So it's not only the fault of asset managers, we have to be, as asset owners, more focal, more specific. I think also a little bit more assertive about what we expect from people, from the people and the managers that are managing our money. I think at PME we've already started to shift our pool of external managers toward managers aligned with our values and what's happening now, including how some U.S. managers are responding to political pressure or remaining silent on issues like climate denial or also democratic backsliding. I think this only reinforces how urgent that shift really is. So our message is quite simple. If you want to manage capital for long-term, value-driven investors like us, like PME, you need also to show that your convictions are durable, not just when it's easy, not just when there there's a hype or a trend, but especially when it's hard, like in times like this, I think.

Jason Mitchell:

That's a great way to set it out. In that same Bloomberg article, you go on to add that, "Existing frameworks on benchmarking different asset managers, the old frameworks, aren't working anymore." Say more about this, specifically how PME is revising its manager assessment approach and screening process. I guess in other words, what manager traits are you elevating and what are being lowered?

Daan Spaargaren:

Yeah, that's also a good question and it is honestly, it is work in progress. So I cannot be too specific on this, but I think that things are really shifting, also how we look at them as external managers. The retreat that we are seeing among some of them, some of these asset managers have made one thing to me very clear. Asset owners, like pension funds, can no longer rely on the old assumptions. So as I explained for years, we didn't need to dig too deeply into whether managers shared our values on sustainability or not because the major players were all broadly at least moving in the same direction. And I think that's no longer the case obviously. So at PME, we are now revisiting our whole approach to assessing and selecting managers, and it's no longer just about performance and risk management.

Of course, there are key items when we assess, but we're now explicitly also screening for alignment with our own values and our own views. Things like long-term value creation, commitments to international climate goals, but also protection of fundamental human and labour rights. Those are also quite fundamental. So this means that some indicators are rising in importance, transparency, policy, consistency is important, good, credible, long-term vision on economy and society and others are being downgraded. Think of fake ESG claims, for example, that are not backed by action that we expect. So at the end of the day, I think our mission is clear. We want to generate long-term returns for participants, but we do that by executing a strategy that is as sustainable as possible, and that's what our members also expect from us. So they expect that we take this sustainability lens into account. So it's exactly also what we expect from the managers that we entrust with the capital of our participants.

Jason Mitchell:

That's great. Yeah. I want to come back to the sustainability lens, but from my perspective, one of the areas that's really, really refreshing to see is PME's willingness to assume a bigger, much more visible role in responsible investment. It just kind of feels like with regulators and policymakers much less willing to lead and asset managers now much more limited in their scope. It seems like there's a big opening for asset owners to have greater agency in driving the agenda and obviously setting expectations. I guess talk more about this point. How do you think of your role as an asset owner evolving in the sustainable finance ecosystem vis-a-vis the political pressures we're seeing?

Daan Spaargaren:

I agree with you, Jason. Asset owners I think absolutely need to take a bigger role in driving sustainability both in finance and in society more broadly. I think that if we look back for too long, some asset managers have carried ESG banner on the fronts of their offices a little bit too easy with ... I think that there was a strong commercial incentive also to look good on sustainability. But now that there is a bit of a political headwind, we see some of them retreating, which tells us how empty some of those commitments really were. And that's disappointing of course, and that's also the attitude of asset owners like pension funds. That is difficult to relate to for us to see, well, you can easily retreat from certain commitments. We cannot do that. We cannot say to our pensioners and participants, "Hey, we stopped doing that."

We are accountable to our participants, and that means serving not just their financial interests like we do with generating good returns, but also have an eye on their long-term well-being, which includes a stable climate, a fair society, and also resilient economy, which is important to generate returns. So for me, the role of an asset owner is evolving. Maybe I can illustrate it in three concrete ways. I think first we need to serve as long-term stewards with a clear view on how our investment decisions has impact on the world and also the world that our beneficiaries will retire into.

Second, I think we need to develop a coherent social and environmental vision. We should be willing to act on it, so not only write it down in a policy, but also be firm on the action. And that means that pension funds need to implement their own voting policy, for example. We already do that at PME and many others do it, but when you let your capital be managed by an external asset manager, you should make sure that you have the tools like pass-through voting, for example, to make sure that the voices of your participants are kind of reflected more directly in how you manage the funds.

And third, I think we need to be more transparent in our own portfolios. So it's I think no longer acceptable to invest in companies without understanding how they operate, the risks that they carry or what the real world impact is. We know and it's the know what you own narrative, you should know which companies, which investments you have in your portfolio to also know what the impact is. So is PME a leader or an outlier? I think in some ways, yes. We've been quite vocal and intentional also about the shift as an asset owner, but I think that the movement is broader. We won't have the position for long. We are already seeing more asset owners taking action moving forward. And different from asset managers, pension funds do not compete with each other. So we can easily share good practises, we can build frameworks together, we can learn from each other, and pension funds have a social role to play, and that should also be reflected in their investment policy. And I think that there's a growing sense that if asset owners are stepping up, they are the ones to lead the transitions.

Jason Mitchell:

Let me ask you though, I mean, so this is the asset owner PME response, but to what degree do you see you yourself as an outlier in this respect? And I guess if it's such a big leadership opportunity for asset owners, to what degree are you seeing other asset owners reaching out to you to try and sort of amplify these effects?

Daan Spaargaren:

I am leaning on a broad network within social society at companies, but also other investors and pension funds because what my role is currently also is connecting the dots. So to be ahead of the developments that are going on politically, financially, sustainability, all these aspects I should try to bring together what's going on in society and especially with our pensioners and participants. These people are saving one working day a week for their retirement and they want a good pension in a livable world, which is also contributing to their pensions. And there, I think that's what the role of me is, but I expect that also from other pension funds and I'm very willing and happy to make sure that this conversation is there at pension. I'm happy to contribute to that.

Jason Mitchell:

That's great to hear. What are the silver linings in all of this anti-ESG backlash? There's a really interesting argument to say that there's now a higher, call it dispersion or active share in the RI manager selection process. In other words, it's easier for asset owners to now differentiate between asset managers who remain in initiatives, I guess, who are constantly investing in team resources, data research and stewardship versus asset managers who are instead maybe withdrawing or defecting from signatory initiatives, downsizing teams, and broadly disengaging from responsible investment. What's this look like from an asset owner's perspective?

Daan Spaargaren:

Yeah, I think that oddly enough there are some silver linings to the anti-ESG backlash, although I'm not very happy to say that. But what we are seeing now is a much clearer distinction I think between the asset managers who are genuinely committed to sustainable investing and also those were mostly doing it for the show. So the ones who remain, who are still investing in research teams, data stewardship, as you said, they're now much easier to identify. And from an asset owner's perspective, that actually helps us to make better decisions how to allocate our funds. But still, I think we should be clear that the backlash itself isn't helping us to solve the biggest challenges that we face at this moment. So denying climate change or rolling back climate policies is I think reckless. More and more companies, governments and also investors like pension funds are now dealing with the real and immediate consequences of climate change.

So our participants, for example, they feel it in their daily lives, also in the shelves of the supermarket. Coffee, olive oil, potatoes, you can name it, the prices are rising because harvests are failing due to extreme weather. So climate change is no longer something of like a distant threat or something for future generations. It's happening now. Our oldest pensioner is 107 years old now. The people that are entering our fund are just coming from university, in their 20s. So these two, they span about three or four generations, and that's also the term that we are investing for.

So that's really the long-term view. And then we know that it's clear that extreme weather will intensify and also the economic consequences of climate change will intensify. So it's not just a values issue anymore, it's also a financial one now. And as a pension fund, it's in our long-term interest, I think to take climate change seriously to support the transition to a more resilient and low-carbon economy. So while the backlash that is currently going on the way has made it easier to spot who is serious and it was not, I think that the backlash also raised the stakes.

Jason Mitchell:

What do you think this means for asset managers who were increasingly pulled in different directions, at least jurisdictionally? There's sort of a current perception that asset managers kind of talk out of both sides of their mouth. I'm thinking I've talked about this before, but I'm thinking of that Groucho Marx quote, "These are my principles, and if you don't like them, well I have others." But the reality is obviously much more complex in that U.S. expectations now differ dramatically even legally from UK and EU expectations. So is the answer to start distinguishing managers at a firm level and separately at a product level?

Daan Spaargaren:

Yeah, that Groucho Marx quote is spot on, I think. And fortunately, it really also captures how many asset managers are perceived right now. So saying one thing in the U.S. and something entirely different in the European Union has become almost the norm now. But from the perspective of an asset owner, that's just not good enough. I think we think asset owners have a clear choice to make. If U.S.-based firms are increasingly influenced or even constrained by political pressure, then that only strengthens the case for building a more autonomous and value-driven European financial sector. And asset owners should maybe contribute to that as well. In that context, I think It's really disappointing also to see that the EU is now backpedalling on key regulations like the CSRD and the CSDDD. I fully understand the concern about administrative burdens. We feel that ourselves with SFDR for example, but we should not lose sight of, I think what this legislation is actually about. And we should, I think, be more clear about that. The European sustainability regulation isn't just a bureaucracy. It's also a reflection of fundamental rights. Things like human rights, labour conditions, care for the environment. I think that these are rights that EU citizens should be able to count on and expectations that we believe companies and by extension also their investors should uphold across their global supply chain. So weakening that framework doesn't just lower the bar, it undermines what Europe stands for. And for us at PME, that makes it all more important to partner with managers who can truly operate within and also support that European value-based approach.

Jason Mitchell:

In 2021, you led PME's divestment from fossil fuels and the reallocation into renewable energy, grid and storage-based sectors. What did that reallocation, that shift teach you in particular the subsequent rebound of fossil fuel, not to mention the vulnerability that the renewable sector has to political cycles? I'm obviously pointing to the second Trump administration and the impacts that that's had on the Inflation Reduction Act and the incentives around renewable.

Daan Spaargaren:

Yeah, good question, Jason. In 2021, I think, so let's take you back to 2021. We asked ourselves a few tough, but I think necessary questions. First of all, I think the most important question was, is engagement with oil and gas companies actually working and does it harvest results? Are these companies truly positioning themselves as part of the energy transition? Do they respond to investor pressure, for example, when they support shareholder resolutions, climate resolutions?

And second, do we actually need oil and gas companies in our portfolio to deliver strong returns? And are these companies contributing meaningfully to our long-term financial performance? And honestly, we had to come to the conclusion that the answer to all these questions was no. At the same time, our responsibility to align with the goals of the Paris Agreement, including Article 2.1(c), always call that article. This article calls for shifting financial flows towards a low-carbon economy, and that article is becoming more urgent, so that urgency hasn't gone away. In fact, for long-term investors like pension funds, it's only become more obvious.

So yes, we have seen fossil fuel prices rebound, especially during the energy crisis. And yes, renewables are vulnerable to political cycles that's currently happening in the U.S. It's something that we see everywhere and we are watching of course, how that plays out now. The uncertainty around the Inflation Reduction Act and the potential return of Trump was of course by then not on the radar, but we of course dealt with it. I think that none of these developments changes the long-term fundamentals of the decisions. So as fiduciaries, we are not making decisions based on the next election. We are investing for the next generation and the generations afterwards. And from that perspective, the transition to a clean and resilient low-carbon economy, in my opinion, is not a gamble and it's a necessity. And political sentiments may shift. I think that our role and responsibility should not.

Jason Mitchell:

That's interesting. But talk about how your approach to the energy transition has evolved over the last three or four years since the energy crisis. There's an argument that the energy majors have invested the most in absolute dollars in renewable energy. Obviously I recognise that small as a percentage of total CapEx and also that they've been responsible for the most number of green patents filed. In other words, is there a case that some element of the traditional energy complex needs to be part of transition investing?

Daan Spaargaren:

Over the last four years, we intensified our investments in the energy transition because what we did in 2021, we excluded the oil and gas sector and these companies, but the money that came out of those investments were directly committed to the energy transition. So there's always this argument when you exclude oil and gas companies, you don't know who is then holding these stocks afterwards. And that is true, and you don't know what the moral ambitions and reflections are of these parties. I tend to use this argument the other way around. We as an asset owner have to make a decision where we want to invest the funds in, and that was by the time not the oil and gas companies, but we wanted to invest in the energy transition.

So yes, we have seen oil and gas companies making moves, but we still see, and the data is clear about it, that when it comes to the CapEx of the oil and gas companies today, you see that they're moving away from investments in the energy transition and they are putting more efforts in taking oil and gas out of the ground instead of being part of the energy transition that we really need. So I'm not very hopeful that the oil and gas companies are willing to take also the long-term view and be part of the transition that we need to make.

Jason Mitchell:

In a recent interview, and I do want to stay on this topic because it's super interesting. But in a recent interview you talked about the fact that PME has effectively already achieved its 2030 emissions reduction target by 2024. And I do want to particularly highlight your focus on real world emissions reductions, not paper portfolio reductions via metrics like carbon intensity. So I highly commend you on the explicit focus around raw, real world CO2 emissions reductions. But how do you see emissions reductions being delivered going forward? Does PME have a focus on transition opportunities as we just talked about outside of these divested sectors?

Daan Spaargaren:

I think that PME is committed to the Dutch financial sectors climate pledge under the National Climate Agreement. So that is a fact. And as part of that, we have set clear emission reduction targets, first, the relative targets and now absolute ones. And I think that is a critical shift. Why? Because if the economy grows or the size of our fund increases, our total carbon emissions still need to come down. And not just in theory, as you said, but also in practise. And that means that we need real world reductions from the companies that we invest in and we focus on where these reductions are actually happening. Yes, that is sometimes hard because we got a lot of CO₂ emissions from our portfolio by excluding first coal in 2018, then oil and gas in 2021. And it is of course easy to move on with that and to exclude also the highest emitting companies.

But I think that we are now at a point where we have to realise that it's now up to the companies themselves also to make sure that these real world reductions are happening. Maybe it's a little bit too early draw conclusions if that is happening. It is not something that happens over a year. That's a trend that we can, I think, identify in a couple of years if it's really happening. On a broader level, you see that the European industry is really making progress in many sectors, and that energy reduction is really a part of how companies operate. So I am a little bit hopeful that in a couple of years we can really see this trend in real world reduction of CO₂ emissions.

Jason Mitchell:

Yeah, I wanted to get your view on this because I regard you as a big thinker in this space, but there have been a few academic papers, notably one that I always point to called Counterproductive Sustainable Investing. Kelly Shue at Yale University has been a previous guest, but the paper makes the argument that sustainable investors largely don't do it right. They effectively skew to green sectors, I.E. technology and financial sectors, and they end up underweighting brown sectors to achieve those CO₂ reductions. But as the paper says, that strategy kind of backfires. It ends up raising the cost of capital for brown companies. It forces brown companies that are much more vulnerable to financial shocks, to become much more short-sighted and ultimately dirtier. How do you think about that kind of conundrum, that paradox?

Daan Spaargaren:

Yeah, it is interesting, and I'm following these discussions, of course. I'm also familiar with the academic work that you're referring to. These papers are questioning whether sustainable investing is really achieving environmental and other sustainability goals. And I really don't doubt the quality of their research. And I think that they're often raising issues that are important, but I think that are also often asking the wrong questions. I will explain that asset owners like PME aren't required to invest in thousands or sometimes tens of thousands of companies. We have the freedom and the responsibility to ask, "Can we achieve our return goals without investing in certain sectors?" And sometimes the answer is yes. Take tobacco for example. The social costs of smoking far outweigh any financial returns that we might generate for our participants, not to mention the enormous health impact of smoking. So we made a principled decision to divest from this sector whether or not that slightly shifts the cost of capital for tobacco companies.

I think that's frankly not really the point. That kind of value-based decisions making isn't really accounted for in most of the academic models. I think researchers can analyse the cost of capital effects of course, and that is useful, but they don't quantify the full diversity of beliefs and principles and long-term goals that asset owners like pension funds can bring to the table. And because of that, I often feel that academic insights in this space don't fully reflect and do not support the real challenges that we face as asset owners. So to bring it back to the brown industries, I think that we are still focused on reducing emissions in the real world economy, and we are doing it in a way that reflects our values, but also our fiduciary duty in the long term, our role in shaping a livable future for our pensioners and beneficiaries. And that's what they expect from us. And I think that's also credible point that they expect that from. But in most of the academic work in this field, I don't see that perspective being reflected.

Jason Mitchell:

Thanks for that. There seems to be a big push in the Netherlands among asset owners working to, I guess, triangulate between three factors: risk, return and sustainability/impact. Do you think of sustainability primarily as a constraint? We've talked about exclusions before, or is it a means to drive alpha, I.E. portfolio returns?

Daan Spaargaren:

I think it is a means to drive alpha. I believe that sustainability should always be a core principle of how pension funds invest just because they have this exceptionally long-term view, and that's what our participants expect from us. Good pension, but also a secure pension. And delivering that means not just chasing returns, but also building on a resilient portfolio. That's why we diversify. So across geographies, countries, asset classes, companies and sectors, we make our portfolio shockproof. That is what we do. And for us, sustainability isn't a constraint on returns. It's more a condition for long-term value creation. Climate risks, social unrest, resource scarcity. These are material factors at this moment, and ignoring them would be irresponsible from both a financial and a fiduciary perspective I think.

And as for the question of how if it is a constraint, we have been in a situation that we were being driven by exclusion policies and exclusion lists. I think that we need to change that perspective and move towards an inclusion instead of an exclusion approach. Why? Because we know that you will not end up with a sustainable investment portfolio if you continue to exclude. There will always be companies in your portfolio that are not operating in language or values and your visions, and therefore you need to make an active decision on every investment that you made, companies, but also in other asset classes, you should be accountable for the investment decisions that you make.

Jason Mitchell:

Got it. That makes sense. We've talked a little bit about your allocation strategy in the beginning, but maybe can you elaborate a little bit more on that? In other words, how do you think about the trade-offs of a concentrated discretionary strategy, I.E. a very concentrated portfolio that provides strong stewardship/engagement story versus a quantitative, I.E. quant-driven, low-vol, low-cost strategy that can systematically integrate data in the decision-making process maybe a little bit more systematically?

Daan Spaargaren:

Yeah, a good question. I think it's not either or. I think a concentrated strategy can offer powerful engagement opportunities. I think it is very, very important that asset owners try to align their ESG engagement with financial engagement because they're interlinked in the strategies of companies. Companies also manage their risks financially and environmentally together. So I think that asset owners should have the discussion at the same table. They should be more direct in influencing companies, but a well-designed quant or a low-volume approach can scale sustainability data and integrated efficiently, I think across larger portfolios. But still, I think that moving towards a more concentrated portfolio is important. It's also a matter of intentionality because whether it's active or passive, top-down, bottom-up, I think the bigger question is, is the strategy helping to deliver on the long-term strong, strong, table sustainability outcomes for our participants? And if the answer is yes, we think that a concentrated portfolio is more suitable. Sustainability is never an afterthought. It's baked into how in the beginning, to find a good investment portfolio in the first place.

Jason Mitchell:

Got it. You recently wrote an article for PensionPro titled Make a New Assessment of Investing in Defence. This strikes a little bit close to my heart because it's been an area over the last number of years that I've been interested in, this idea of climate change and national security I.E. climate security. In fact, given the Dutch link, I did actually do a podcast with former general Tom Middendorp, who was the former chief of defence for the Netherlands, and his new book called Climate General that came out a couple of years ago. So I'm interested in your kind of perspective on this. First, can you lift the text off the article and summarise your view? You seem to make a really interesting point that we're beyond the question of whether war is good or bad, but whether pension funds want to contribute to our security.

Daan Spaargaren:

Thank you. That's a very good question, Jason. And also the defence sector and defence investment is a topic that is close to my heart. I started my career at Sustainalytics Morningstar by researching controversial weapon involvement by companies. So I'm going way back on this topic and the piece that I wrote for PensionPro. In that piece, I argued that it's kind of time for pension funds to make a new and also kind of a mature assessment of what investing in defence and defence company really means. And we've moved beyond the moral binary of if war is good or bad. I think that the real question is, do we as long-term institutional investors want to help safeguard the freedoms and the democratic institutions that underpin our societies? And if we want to do that, how do we want to do that? And I think historically, pension funds contributed to defence and defence companies through investments in government bonds, especially during the Cold War era.

But over time, the defence sector has become more privatised while the military spending in Europe was reduced. And I think that's something that happened in most of the European countries. Many pension funds continued in applying increasingly strict exclusion criteria, treating defence companies also as a kind of a moral taboo. But in today's world, with democracy under threat, I think that that position is no longer sustainable. And I'm absolutely not saying that we should throw all the ethical constraints overboard. Quite the opposite honestly. I believe strongly that we should not stretch the moral boundaries. I am really opposed to investing in controversial weapons like cluster weapons and landmines, but we do need to broaden the view, I think. The defence isn't just about bombs and bullets, it's also about investing in resilience, in critical infrastructure. Cyber security is a topic, dual use technologies, energy independence, because we want to be more energy independent from the autocratic leaders.

So there are areas where there is a real financing need, where also the long-term investors like pension funds can, I think, contribute meaningfully, both financially and also contributing to geopolitical stability because that's also kind of relevant for making good and solid returns. So concluding, yes, this requires institutional change or at least change at institutional investors. It means that we need to reshape internal policies, we need to explore public private investment platforms if they can be helpful, and we should put the topic back on the agenda. And not just government, because it's always easy to point fingers at the governments who need to acquire more defence material, but we should also have this discussion on the board of pension funds. And as I argue in the article, defence is no longer just a moral side issue. In a world where with growing instability, I think that investing in peace and freedom and security is also kind of a task. It's also a duty of pension funds.

Jason Mitchell:

How widely accepted is this view by the embrace of conventional defence among Dutch investors? Or is this PME-specific just given PME's links to the engineering and industrial sectors?

Daan Spaargaren:

Yeah, I think that the link of PME with the Dutch defence industry, we are also serving a lot of companies in the Dutch defence industry, that the link is also part of the fact that we were thoroughly thinking about this issue. But I think that there's sometimes also a kind of a complacency attitude going on at pension funds that they're looking at exclusion policies is also kind of an easy step to tweak your investment, the defence investments. And I hope that we can bring this discussion a little bit further because it is the shift that's going on in the real world. So the growing instability, the need for rearmament in Europe, we need to bring that discussion also a little bit further at boards of pension funds beyond just discussing the characteristics of the exclusion policy. Of course, ethical considerations are important. I think they are the backbone of your defence policy. But on the other hand, we need to make society and economy resilient, and that's not going to happen if we turn our back to the whole topic of defence.

Jason Mitchell:

Yeah, no, I completely agree with you. Let me just kind of finish up with a few other questions on this. How do you see that happening in terms of institutional and, I guess, normative change? Not to mention the creation of mechanisms, maybe it's bond investment funds. You've talked about this like the NATO Innovation Fund, and I guess as a follow on, where do you draw the lines when it comes to nuclear? Do you start to differentiate between production versus upstream versus downstream activities?

Daan Spaargaren:

A couple of things. First of all, I think we should look at the future of warfare, which is quite different of just throwing bombs and bullets into a battlefield. Wars of the future will be different. So we need to look at unmanned, uncrewed systems. We also should look more at cybersecurity data protection to make sure that we are also secured in that way so that our infrastructure is safe from cyber threats. So the whole future of warfare is changing, and that should also be the focus in if we and how we allocate additional funds to the defence industry. The stock listed companies, the big conglomerates are I think well-financed. They have enough capital to spend and they're connected to the capital market. So there's not a big issue there.

I think that we as pension funds should focus more on the technological innovations that are taking place at the smaller startups, maybe scale-ups, companies that serve the future of the defence industry. And therefore, I think that we should be careful not to think, okay, we should now put more efforts in generating investments at the bigger companies, but look at VC funds, private equity, see what's happening there in that space, and how we can support the whole buildup of a whole new defence industry in Europe.

Jason Mitchell:

Got it. Great. So it's been fascinating to discuss how PME is evolving its investment approach to include more active sustainability-driven strategies, what that means functionally for responsible investment in the asset allocation process, and why it's great to see asset owners like PME take on a bigger leadership role in the sustainable finance ecosystem. So I'd really like to thank you for your time and insights. I'm Jason Mitchell, Head of Responsible Investment Research at Man Group, here today with Daan Spaargaren, Senior Strategist for Responsible Investment at PME. Many thanks for joining us on A Sustainable Future, and I hope you'll join us on our next podcast episode. Daan, thanks so much for your time today. This has been a great discussion.

Daan Spaargaren:

Thank you. Big pleasure.

Jason Mitchell:

I'm Jason Mitchell. Thanks for joining us. Special thanks to our guests and of course everyone that helped produce this show. To check out more episodes of this podcast, please visit us at man.com/ri-podcast.