Dutch pension PME criticises traditional ESG rating frameworks

The leading pension fund in the Netherlands says the current practices won’t build long-term sustainable portfolios.
Dutch pension PME criticises traditional ESG rating frameworks

The head of ESG at Dutch pension fund PME has told AsianInvestor that the investment industry must shift from traditional ESG measures to a more impact-based approach if it is to make investment sustainable for the long term.

Daan Spaargaren, head of responsible investment at the €50bn fund has criticised the limits of using traditional ESG ratings frameworks to build sustainable portfolios, as the fund prepares a more impact-based approach, due to be approved by its board in the autumn. 

“With traditional ESG scores, sectors like mining, which in social and environmental terms are poor, but have a high governance score, have a very good chance of being included in an ESG portfolio. That is strange and unwanted,” he said. 

Daan Spaargaren, PME

Spaargaren challenged the principle that an ESG scoring model, that rewards companies that are good in some areas but bad in others, could reliably build a sustainable portfolio. 

“[If scoring] doesn’t work to exclude some products or services that are unethical, it is wishful thinking that you will end up with a sustainable portfolio.”

“It’s a relative score, not an absolute score. A company can be relatively well performing while being absolutely bad. This is a fault in the system of ESG that we need to address,” he said. 

The fund recently excluded Glencore from its portfolio on account of its involvement in coal and other mining operations. Despite low scores on E and S, it had a high G score. “And while it had a low turnover from coal, in absolute terms, Glencore had a huge exposure to the sector,” he said. 


Adapting existing ESG measurement tools to build a sustainable portfolio is possible, Spaargaren added, but it requires a sector specific approach which ensures all elements of the ESG complex meet a threshold. That complex and sector-specific approach is difficult to explain to pensioners and vulnerable to methodological changes from ESG data providers, he said.

PME’s current approach used data from MSCI to exclude the worse performing 20% of a sector, combined with carbon screenings applied to high-emitting sectors like steel or cement, also using MSCI data, which cut a further 50% of stocks. The third pillar of the approach is voting and engagement, he said. 

While the fund has practiced exclusion – it cut all fossil oil and gas holding in summer 2021 – screening is not a solution by itself, Spaargaren said.

“Screening out the laggards, is necessary but not sufficient. Rather than asking ‘where don’t we invest’ you need to ask ‘where do we invest’. That is almost never a question that is asked in traditional asset management.”

“With our prior approach, there are always dark corners in your portfolio that are not relating to our sustainability ambitions. We don’t want to have those corners: asset owners should be part of solution not part of the problem. We require a completely different approach to sustainable investing,” he said.  


The fund’s revised approach will adopt thresholds that all investments must meet around 24 themes, from union membership to the energy transition.

The result will be an investment universe from which external managers will be asked to build portfolios. It will be far smaller than those offered by benchmark providers like MSCI, but the fund will be intimately familiar with the ESG profile of its constituents. 

“First of all, we want a portfolio that we know, that is specifically selected based on our criteria and ambitions. We need to know because we need to be able to explain to our pensioners and other stakeholders why all of these companies are in our portfolio,” he said.  

The fund is still testing its new approach and a completed strategy is due to be put in front of its board to approve in the autumn. Spaargaren hopes implementation will begin for the equities portfolio by then end of the year, followed by fixed income.

“Implementation for the other asset classes like real estate and private equity will take longer,” he said. “But all asset categories are part of the plan.”


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