Harry Geels: Why virtuous investing costs money 'in theory'

Harry Geels: Why virtuous investing costs money 'in theory'

ESG-investing Pensionfunds Politics ESG
Harry Geels (foto credits Cor Salverius)

This column was originally written in Dutch. This is an English translation.

By Harry Geels

There has been a heated discussion in the media in recent days about a motion by Thierry Aartsen, adopted by the House of Representatives, which requires pension funds to focus primarily on returns. The discussion is good, the polarization is not. Why is the argument wrong on both sides?

Last week, the House of Representatives adopted a motion by VVD member Thierry Aartsen advocating that pension funds should primarily offer their participants a good pension and that sustainable policy should be subordinate to this. Not long after the motion was adopted, a heated discussion broke out. On the one hand, pension funds defended their exclusion policy of 'sin sectors', such as weapons, gambling and fossil fuels. On the other hand, proponents believed that this virtuous investing should be over.

With his motion, Aartsen not only caused a stir, but also drew the discussion that is already taking place much more clearly in the US to the Netherlands. In the US, most Red States have banned sustainable investing and even made it illegal. Sustainable investing is still encouraged in Democratic states. To prevent further polarization, it may be a good idea to look at the arguments that are used on both sides. These fall roughly into three groups: return, risk, and the will of the supporters. My position is that both camps talk their way out of it.

1) Returns

Let's start with the returns. Aartsen seems to suggest that sustainable investing costs money (why else such a motion?). This issue is a minefield. It is difficult to properly define sustainability and it is also not always easy to measure. Depending on the definition we get different results. In an interview with Financial Investigator, Professor Paul Smeets recently argued that we can actually best define sustainable investing as investments with a social return.

If we choose the definition of social return, then sustainable investing costs a few percentage points of return per year. If investments with a financial return had the same result as those with a social return, there would actually be no distinction. Then every investor can just as well pursue social returns. But if we equate sustainability with investments with high ESG scores, the picture becomes murkier. Proponents and opponents can then rely on piles of empirical studies.

Another complication: excluding sin stocks costs investors money. These stocks have been outperforming for years. For a random example, see Figure 1. This has been demonstrated in countless empirical studies. Theoretically, this outperformance is also easy to explain. If large groups of investors no longer invest in sin stocks, their prices will drop relative to the shares that are not excluded. And lower prices deliver higher future returns in the long term, the so-called 'sin premium'.

2040611 - MU Column Harry Geels - Fig 1

On the other hand, companies that are well managed and properly manage all kinds of sources of risks, including all kinds of ESG risks, also deliver extra returns. These are companies that fall into the category of quality shares, for which science has established the 'quality premium'. Empirically, there seems to be a striking overlap between the 'factors' quality and sustainability. So sustainable investors can try to make up for the missed returns from excluded sin stocks with sustainable quality shares.

2) Risk

Then there is the argument that pension funds must invest sustainably because they must pay attention to all kinds of (climate) risks. The climate is a threat to the financial system. With this argument the ECB also justifies its policy in the field of sustainability. This seems to imply that pension funds, for example, should take into account that oil companies will soon have stranded assets, or that insurers or banks will have to make higher payments or write-offs on loans in the event of more frequent climate disasters.

But isn't taking risks into account the essence of financial markets and entrepreneurship? Isn't that what investors and companies always do, with any risks? The principle 'the higher the risks, the higher the returns' also applies here. For example, a company like Shell, which indeed runs a transition risk if it does not transform quickly enough, must deliver a higher potential return due to the greater risks. In theory, excluding risks costs returns. Or is the idea behind climate awareness that markets no longer work properly?

3) Constituency

Pension is an agreement between funds and their participants. Aartsen and the supporters of his motion seem to ignore this. It is of course possible that the majority of participants in a pension fund want to invest sustainably, regardless of how we define 'sustainable'. They may even want investments with social returns. What the participants want must be clearly recorded. This can be done, for example, with a citizens' council, such as the Pension Fund for Retail once organized (see the interview with Paul Smeets).


With his motion that returns should be the primary goal of pension funds, Aartsen dropped a bombshell. There is nothing wrong with that in itself. It is a pity that nowadays this immediately leads to a polarizing debate. Let's look at it positively. The adopted motion encourages pension funds to come up with a good story to compensate for the backlog incurred by excluding sin sectors and certain risk premiums, with attractive sustainable investments. As long as there is, of course, the consent of the majority of the participants.

This article contains a personal opinion from Harry Geels