Water shortages, raw material scarcity and human rights controversies pose risks to the Dutch financial sector, said a report by De Nederlandsche Bank.
The Dutch regulator's "Values at risk? Sustainability risks and goals in the Dutch financial sector" report provides the results of a survey of 25 large and medium-sized financial institutions in the Netherlands. The sample comprised 10 pension funds, 10 banks and five insurance companies, together accounting for €3.5 trillion ($4 trillion) in assets and 82% of the Dutch financial sector's total assets. The DNB focused on sustainability for the survey and report, addressing principles and objectives of sustainability policies, implementation methods, monitoring, reporting, and evaluation.
Regarding water-related equity investments, the report said the Dutch financial sector has a combined €83 billion of exposure to facilities located in "extremely water-stressed regions" within equity portfolios, accounting for about 17% of total equity holdings. "Given that pension funds have relatively large equity holdings, they account for 94% of this exposure," the report said.
The analysis also showed that the Dutch financial sector had invested at least €151 billion in businesses that depend on critical raw materials, with pension funds accounting for the largest exposure at €95 billion.
Regarding human rights controversies, about 643 were found in businesses whose shares were held by Dutch financial institutions at the end of 2017.
Dutch investments in those businesses were worth €85 billion, representing 17% of equity portfolios. Dutch pension funds account for €79 billion of the exposure.
The DNB made a number of recommendations in the report, including that financial institutions analyze environmental and social risks closely and mitigate them where needed.
"Financial institutions need to have a 360-degree view of the risks they face and be aware of how environmental and social risks contribute to their aggregate risk position. This enables them to take mitigating action. Risks may of course vary considerably from one institution to the other," the report said.
The DNB said even where data may not be available, scenario and stress tests can help provide insight into the magnitude of risks.
The report also recommended the further development of environmental and social risk management instruments. "For example, most of the financial institutions we surveyed integrate ESG factors into their investment or loan decisions in one way or another, but the indicators they use are not always an appropriate measure of the risk involved. Similarly, they primarily integrate ESG factors into new investment decisions. Only a handful analyze entire portfolio exposures to environmental and social risks," the report said.
The DNB said it is working to expand and share knowledge of environmental and social risks, and is working in partnership with the Sustainable Finance Platform in the Netherlands and other ESG organizations to provide more insight into risk impacts.