The decision came shortly after SOKA-BAU, which serves the German construction industry, signed a Mandate agreement with Ardian to build a €200m globally diversified Private Equity portfolio using both Ardian and third-party funds.
ESG factors as fully part of the investment decision-making process
Mr Hofmann says the decision to integrate ESG went beyond risk management. “Alongside, financial returns, liquidity and collateral security, we think ESG is an additional dimension in our investment decision-making process,” he explains. “This supplementary step helps us to optimize our risk-adjusted return, because we believe that on the one hand, ESG integration can minimize our risk exposure, and on the other that we will invest in more sustainable companies. Therefore, we expect to generate outperformance – additional alpha – by using ESG factors in the investment process.”
SOKA-BAU was set up by the German construction employers’ organizations and sector’s trade union. It brings together two separate entities under one roof: the paid holiday and vocational training scheme for German construction works, originally set up in 1949, and the €12bn occupational pension scheme for the construction sector, established in 1957.
In terms of membership, SOKA-BAU is the largest pension scheme in Germany, with around 1.8m people contributing and about 400,000 receiving benefits. About 80000 construction sector companies receive benefits and services from SOKA-BAU.
A twofold approach and an ESG scoring methodology
The organization’s approach to integrating ESG into its investment strategy is twofold. It excludes certain types of investment completely on ethical grounds, including weapons and pornography. It then assesses managers on a range of factors that vary according to the asset class involved. These factors include the managers’ compliance with the UN Global Compact, the extent to which they integrate ESG factors into their investment decision-making process, their level of engagement with portfolio companies on ESG issues and their approach to impact investing.
For private market investments, the main tool SOKA-BAU uses to integrate ESG into its allocation is an ESG scoring system based on the answers managers provide to an ESG questionnaire.
We have developed an ESG survey which is sent to our managers, including Ardian, on a regular basis,” says Mr Hofmann. “The answers all help us to generate an ESG score for each manager and our policy is to avoid investments with managers that have low ESG scores.
The questionnaire covers areas including the manager’s integration of ESG factors into its investment decision-making process, how it engages with portfolio companies on ESG during the holding period and how it measures progress at exit. The survey also assesses the ESG performance of asset management companies themselves in areas such as gender diversity and representation of women in senior roles. Managers complete the survey before they are appointed and then provide updated answers once a year after that.
We started the process of integrating ESG into our investment process at the beginning of 2019, just after we made our first commitment under the mandate we have with Ardian, so we are still really at the beginning of our ESG journey,” says Mr Hofmann. “But we knew when we made the decision on the mandate that Ardian was strong when it comes to ESG and we were aware of their rating from the UN PRI.
ESG has become increasingly important for us since then.