Risk management
Integrated Risk Management Framework SSPF
SSPF ensures that its business operations are conducted in a controlled and ethical manner, and in that context is responsible for the management of the risks. SSPF has set up an integrated risk management control framework, the guiding principle of which is to have a control structure that fits the profile of SSPF and the risks that SSPF faces. The framework helps the board to structurally identify risks from within the long-term objectives of SSPF and with due consideration of the internal and external environment, and to set up a control structure accordingly. Within this framework, risks and control measures are identified, the impact and likelihood of these risks are determined, and actions are defined to mitigate the risks to the desired level. SSPF assesses the (development of the) risks every quarter, or more often if (market) conditions so warrant, and takes appropriate measures.
The fund continuously monitors the risks related to the Wtp. A project team has been set up, along with a risk matrix, to ensure the consequences of the Wtp and its implementation are addressed in a timely and effective manner.
To manage risks as well as possible, it is essential to consider them in their mutually interdependent context. The policy of SSPF is aimed at managing risks in such a way that there is a careful, responsible and balanced weighing up between the risks on the one hand and, on the other, the returns, stability in the premiums, chance of additional payment, efficiency in administration and costs. The Board emphasises that some risks can manifest themselves differently than estimated and/or expected beforehand, for example as a result of demographic changes, risks of wage inflation and developments on the financial markets.
Integrating sustainability risks into investment decision procedures
One important part of SSPF’s investment policy is the management of investment risks. SSPF mitigates investment risks primarily by ensuring a healthy diversification of investments across - and within - the various investment categories.
Sustainability risk is a specific type of investment risk. European sustainability legislation requires pension funds to provide information on how they handle sustainability risks when making investment decisions. The text below discusses the various types of sustainability risks that can be associated with investments, the potential impact of sustainability risks on SSPF’s investment portfolio, and how SSPF addresses sustainability risks.
A sustainability risk is defined as a development on an environmental, social or governance (ESG) level that could have a negative impact on the value of an investment.
Sustainability risks for companies
SSPF invests in shares and bonds from a variety of companies. Companies may be affected by developments relating to environmental, social and governance factors.
The main environmental risk involve climate risks. Climate risks can be divided into two types: physical risks and transition risks. Physical risks are related to the physical impact of climate change and environmental degradation. One example of a physical risk is the negative effect of climate change on businesses, such as damage to factories or work sites due to extreme weather conditions. Transition risks are related to the transition to a lower-carbon and more environmentally friendly economy, for example changes in climate and environment policies, in technology or in the consumer and market sentiment. Companies that fail to take adequate action here may see their profits decline, causing their stock prices to fall and their creditworthiness to suffer.
Companies can also face social risks. There are many different types of social risk. One example of a social risk is when a company experiences damage to their reputation, such as negative publicity due to poor working conditions. This could include situations where employees are not allowed to form a union or if they have to work in unsafe conditions. However, social risks can also be related to social unrest that may occur in countries where the companies are based.
Governance risks can arise when, for instance, internal control over management is inadequate, thereby increasing the likelihood of misguided or even fraudulent decisions that are not in the company’s best long-term interests.
Environmental, social and governance risks can all have a negative impact on a company’s market value and share price.
Sustainability risks for governments
In addition to investing in companies, SSPF also invests in government bonds. Sustainability risks may also play a role here. Climate risks such as droughts, floods and heat waves can affect a country’s economic situation, particularly in sectors such as agriculture, infrastructure and tourism.
When investing in government bonds, social factors such as the education level, health and level of income of the population are also important, as they influence economic growth.
Good governance conditions within a country are also crucial. Factors such as political stability, law enforcement, levels of corruption and the quality of governance determine a government’s ability to repay debts. Deterioration in a country’s social and governance circumstances may affect the valuation of bonds issued by that country, as well as its ability to repay loans.
Sustainability risks for real estate
In the real estate sector, sustainability developments can have a negative impact if sustainability issues are not properly considered in the development, management and operation of properties. Climate change can lead to physical damage to properties through flooding or heat, for example, thereby increasing the operational costs and driving up insurance premiums.
Environmental transition risks involve changes in legislation that impose higher requirements on, for example, the energy consumption of buildings, thereby leading to additional costs for sustainability. Nitrogen emissions from construction and the possibilities for obtaining an environmental permit are other examples of transition risks.
Social risks can arise when property managers do not pay adequate attention to the interests of tenants, which can then lead to negative publicity and make the property less attractive, for example. Reputational damage due to involvement in controversial projects or environmental scandals can also affect property values and rental incomes.
Potential impact of sustainability risks
If sustainability risks arise within the investment portfolio, this could lead to a lower yield. For SSPF, this would potentially mean lower future pensions for participants. It is not easy to measure the anticipated effects of sustainability risks quantitatively. With regard to climate risks, it is evident that certain sectors are more sensitive to these effects than others. However, the political environment is also important in terms of quantification because it partly determines the transition risks and can also fluctuate. For this reason, SSPF does not yet consider it appropriate to make a statement on the exact impact of sustainability risks. Nevertheless, it is clear that sustainability risks are becoming increasingly relevant to the portfolio, which has led SSPF to implement (general) measures to manage these risks. These measures are described in the next section.
Integration of sustainability risks
It is therefore of paramount importance that SSPF applies procedures to manage sustainability risks. These risks are (partially or completely) mitigated by:
- Monitoring the exposure of SSPF’s investments to sustainability risks.
- Incorporating ESG factors into investments by selecting investments with a better sustainability performance than those of other companies. A range of different factors are examined, such as the social, environmental and governance scores of companies, the CO2 emissions of companies, the transparency of real estate investments with regard to sustainability, and the governance scores of governments. The exact ESG factors taken into account vary according to the asset management company and the asset class.
- Selecting external asset management companies that have established sustainability policies and act in accordance with sustainability principles such as the United Nations Principles for Responsible Investment (UN PRI).