$26bn Nestlé pension fund to scrutinise climate risks

The pension fund of Swiss multinational Nestlé is planning to establish a climate risk-management framework for its entire investment portfolio, which will be integrated into its sustainable investment strategy.

The decision comes after the latest financial results of Fonds de Pensions Nestlé (FPN) make dire reading: its performance dropped so steep compared to its Swiss peers that the FPN is proposing a number of risk-management solutions, including an extensive assessment of climate risks and challenges before allocating fresh funds.

The Vevey, Switzerland-based fund wrote in its latest financial report that the fund’s performance dropped by a record 13.6 % in 2022.

"Admittedly this was slightly above its strategic benchmark, which fell by 14.5 %, but it was below the average for Swiss occupational benefits institutions (our peers), which according to the Credit Suisse and UBS indices declined by around 10%," according to FPN's latest financial statement.

 The CHF23bn, or $26bn, fund added that "underperformance in 2022 was mainly due to its riskier asset allocation relative to its peers."

The Swiss fund has just under 40% of its assets invested in fixed income, about a quarter of its portfolio is invested in listed equities. It also has a significant real estate exposure of 22%.  Last year, it reduced its exposure to listed equities and real estate marginally and increased its allocation to alternatives, from 8.7% to 10.5%. 

Following these results, in addition to establishing the climate risk-management framework for investment opportunities as part of its sustainable investment policy, the pension said it is planning to make private equity impact investments a "top priority".

Peter Vogt (pictured below), chairman of the pension's board and since 2013 also head of human resources at the Nestlé food giant, explained that "we analysed the expected financial impact of climate change on our portfolio of financial assets according to various scenarios."

Responsible investing policy

Since 2018, the Fund has had a responsible investing policy through which it aims to generate more sustainable performance and to manage investment risks more effectively by taking into account environmental, social and governance (ESG) criteria.

The policy is regularly reviewed and updated, based on four aspects.

Firstly, it takes into account ESG criteria in the fund’s long-term investment strategy, in addition to returns, risks and costs .

Secondly, it emphasises implementation, which consists of making ESG criteria an integral part of the process when selecting external asset managers and defining investment mandates , according to the report.

Thirdly, regular checking and monitoring of ESG factors within the fund’s investments by assessing external asset
managers  and, finally, communication about the pension's activities and developments regarding responsible investing.

Last year, the fund commissioned an estimate of the financial impact that climate risk is expected to have on its investments, based on a range of different scenarios.

"The main conclusion of the study is that climate change will have a negative but bearable impact on the fund’s investments," the report read.

"The investment fluctuation reserve would allow the Fund to absorb a short-term climate-related financial shock," it concluded.

This year, "a more formal framework for managing climate-related risks and opportunities as regards the Fund’s investments will be defined and integrated into its responsible investing policy," the fund wrote.

Finally, its investment committee will soon begin work on "an analysis of private equity investment opportunities
that have a positive ESG impact, particularly as regards the climate ," the report concluded.

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