Rob Bauer, Greening Finance Prize winner: “You also have to ask questions that people don’t like to hear asked in practice.”
Last October, Netspar researcher Rob Bauer received wonderful news. The Finance Professor at Maastricht University learned that he had been awarded the Greening Finance Prize of the University of Oxford. Last week, he gave a lecture in the historic university city in response to this prestigious award. In this interview, he shares his views on sustainable finance and responsible investment, and discusses the role of science in the debate about it.
When we speak to Bauer, his enthusiasm radiates. He has only just returned from Oxford, where he spoke at Keble College about the years of research he and his colleagues conducted on sustainable finance and responsible investment. According to Bauer, research into this was not obvious before. “When I started doing this around 2000, I was told by peers, ”Finance has nothing to do with sustainability at all, right?” This has slowly changed and now you can even publish about this in top journals.”
Bauer was one of the first researchers in his field to take up the topic of sustainable finance and responsible investment. The Greening Finance Prize honors him for his decades of effort around this topic. The special thing about his research, always in collaboration with a large number of colleagues, is that it bridges the gap between science and practice. This was also one of the reasons for awarding him the Greening Finance Prize, following, among other things, his research into the sustainability preferences of private investors and pension participants, and the effectiveness of active ownership.
“Sustainability is not one big party”
While Bauer is enthusiastic about the award, he is down-to-earth on the subject. “My message has always been that you have to keep a down-to-earth approach to it,” he stresses. “I sometimes sense in the pension sector that sustainability is one big party. That you can achieve ánd high returns, ánd low risks ánd also real impact, without any trade-off.” Bauer therefore sees it as his role to make comments: “I think this is your role as a scientist. That you also ask questions that people don’t like to hear asked in practice.”
The comments Bauer makes are about what many banks, insurers and pension funds put in their investment beliefs. These are fundamental beliefs that form the basis for investment policy and guide investment decision-making. Bauer: “As scientists, we need to think about whether what is in these makes sense. We need to ask questions such as: do sustainable portfolios really have higher expected returns? Do they indeed have low risk? And is the impact in the real world readily measurable? The research on this is still in its infancy.”
In addition, further research into data on sustainability is needed: Bauer: “Suppose a company in Genoa has a production facility next to a river that floods three times a year. Investors in that company know very well that things can go wrong there. They take it into the valuation, and/or push the company to move the facility if it’s at least economically viable. However, valuing difficult-to-measure sustainability information, think human rights violations in the supply chain or how companies treat employees, is not so easy. That’s much harder for portfolio managers and analysts to incorporate into their analyses.”
Reading tip
View a selection of relevant publications on the topic of sustainable investing and preferences.
“Involve the participant in choices”
What can the pension sector do? And what then is the role of the Dutch pension sector when it comes to sustainable finance and responsible investment? According to Bauer, this is an open question that cannot be answered in one defined paper. However, it was announced this week that a consortium led by Netspar will conduct further research on this in the near future with funding from the NWO (Dutch Research Council). Bauer is one of the researchers participating in this multidisciplinary consortium, along with researchers from other universities and project partners from the field.
As a pension fund, are you making the choice to get started with sustainable finance and responsible investment? Then Bauer says it’s important to involve the participant, though. “In the Netherlands, many of us employees are obliged to pay off a large part of our salary for pensions. You only do something like that if you can also trust that your pension fund is investing the money well. As soon as a fund starts making political choices with this money, it must also be able to demonstrate that it does not negatively affect the other objectives in terms of return and risk, the core task of a pension fund. I am particularly interested in how to effectively involve participants in these decisions.”
Bauer then talks about the trend of choosing concentrated portfolios. This is visible in some pension funds. They opt for a portfolio with a limited number of stocks in light of sustainable financing and responsible investing. “Andreas Brøgger, Joren Koëter and Mathijs van Dijk recently conducted research on this. This shows that you have a higher risk with such a portfolio. You can also get very large differences in returns compared to a broadly diversified portfolio. You must then also be able to explain this to participants.”
(The paper by Brøgger, Koëter and Van Dijk is currently being reviewed by the Netspar Editorial Board of and is scheduled for publication on the Netspar website later this year).
Both feet in practice
It is precisely into involving participants in investment choices that Bauer has done research. During his lecture in Oxford, he talked about this, among other things. Bauer: ” I went into, for example, how to put together portfolios that fit what your participants want and still be financially prudent. In doing so, I discussed how you can measure participants’ preferences with surveys, or by organizing a deliberative mini-public as we recently did in collaboration with the Retail Pension Fund.”
Just this kind of research is what drives Bauer: head in science and both feet in practice. “I want to be working on what is also called translational research, research that can be translated into practice. Like the experiments we conducted with the Dutch Retail Pension Fund. I like that: when you see your research catch on in practice.”
“The pension fund is proud of the citizens’ consultation they organized and the enthusiasm among the representative group of participants who were allowed to contribute ideas,” Bauer concludes. “The fund then responded to all recommendations regarding responsible investment from the participants in the deliberation. This way, pension participants are involved in strategic decisions of the fund in a well-informed way. That’s what I do it for.”
Listening tip
In the Dutch-language Netspar Podcast Pension & Science, moderator Saskia ter Ellen talks with Rob Bauer and Louise Kranenburg of the Dutch Retail Pension Fund. They address the question of whether you can better involve pension participants with a mini-public.