Election of EU ‘Green Deal’ Architect Timmermans as Dutch Leader could Thrust the Netherlands into the Forefront of European Climate Investments
September 5, 2023
Frans Timmermans’ lightning strike to take command of a new coalition of centre-left/green parties in the Netherlands has sparked strong gains for the alliance in recent political polls and could sweep the former European Union vice president into the Dutch prime minister’s office after November’s parliamentary elections.
An electoral triumph for the architect of the EU’s ‘Green Deal’ energy transition plan would place the Netherlands in the frontline of the growing politicisation of climate policies and pit his incoming government against parties to the political right across Europe, which have been seizing on public disaffection with some high-profile environmental measures to boost their standing in the polls.
A Timmermans victory could also thrust the Netherlands into a leading role in climate investments and ESG structuring of assets with the deep-pocketed backing of the €1.5 trillion1 Dutch private pension funds industry – the largest institutional capital pool in the EU, bigger than the rest of the Eurozone combined – due to the dependence of countries such as Germany and France on ‘pay as you go’ first pillar2 state pension systems.
Dutch retirement plans – whose collective investment firepower outguns the $1.0 trillion AUM of Blackstone, the world’s largest alternative investments manager – are increasingly adopting ‘Double Materiality’ impact principles, or the equal weighting of financial returns and societal and climate returns, in their investment decisions.
Timmermans’ PVDA/GroenLinks (Labour Party and Green-Left) coalition leapt to the top of the political opinion polls in July after he announced his candidacy for the alliance’s leadership, with a projected 11-seat gain over both parties’ showing in the 2021 elections, for a total of 28 seats (18%) from the 150 in the Dutch parliament.
In August, former Christian Democrat (CDA) politician Pieter Omzigt launched a conservative-left party, Nieuw Sociaal Contract (New Social Contract), which has since edged past the PVDA/GL coalition in the latest polling with a forecast 31-seat (20%) win in November’s polls. Some 40% of those polled who said they would switch their allegiance to the NSC came from the Farmers Party (BBB).
The BBB electrified Dutch politics with its strong gains in March’s provincial elections, based on opposition to government plans to slash livestock numbers to cut nitrogen emissions to meet its EU Green Deal commitments, and Timmermans was vilified as the farmers’ political nemesis in Brussels in that campaign.
Both potential PVDA/GL and NSC voters hold broadly similar opinions on two of their top three issues: the provision of more affordable housing and a greater focus on social policies, such as healthcare and poverty alleviation. Where Omzigt and Timmermans supporters differ widely is in their priorities on climate change, the top issue for the PVDA/GL, and migration policies, a ‘hot button’ area for the NSC.
Climate change and migration are therefore likely to be key battleground issues between the parties in the upcoming election campaign.
Politics and Pensions and the Polluter Pays
An incoming Timmermans-led coalition government would face the Herculean challenge of financing the enormous investment in clean technology and green infrastructure required to achieve a carbon neutral Dutch economy by the European target of 2050. The Netherlands is the fifth largest and most densely-populated major economy in the EU, and top polluter by carbon emissions per capita, above Germany, France, Italy and Spain.
But with the Netherlands also having the highest ratio of pension assets to gross domestic product (GDP) globally at about 166% (2022), there is potentially a vast pool of ‘moral money’ available to support the country’s energy transition.
An institutional investment ‘top-up’ for a Dutch Green Deal could turbo-charge the current government’s €28 billion package of measures, announced in April, aimed at cutting the Netherlands’ carbon emissions by 55% to 60% by 2030 compared to 1990 benchmark levels.
The biggest Dutch pension funds and their asset management organisations have been influential in the evolution of the institutional investor framework around the EU’s climate change policies – from the creation of the cornerstone EU Taxonomy, sustainable financial framework, to the Sustainable Finance Disclosure Regulation (SFDR), which have formed the roadmap towards the ‘deep cleaning’ and ‘deep greening’ of their portfolios in recent years.
The ‘DC Democratisation’ of Dutch Pension Plans
A PVDA/GL-led coalition government would coincide with the transition of the Dutch pensions market from a defined benefit (DB) system to a defined contribution (DC) structure, due to be in place by 2028, which is more insecure for individual retirement plan members since it is more dependent on financial market outcomes.
The pension plans will have to decide between two different types of DC set-ups, according to a Rabobank report:3
- A “solidarity” contract, where the plan still decides on the investments and how returns are shared between different age cohorts; and
- a “flexible contract” that resembles a more traditional DC set-up, where members can choose their own investment mix.
Although Rabobank predicts 70% of the Dutch pensions pot will go into solidarity contracts, which are favoured by the labour unions, the influence and scrutiny of individual pension members over the types of investments their retirement money is placed into, and the sustainable and societal credentials and domestic market bias of those assets, could be expected to increase.
There are signs the greater ‘democratisation’ of the Dutch pension fund industry is already underway. ABP, the €475 billion civil servants’ and teachers’ pension fund, acknowledged that pressure from large groups of its pension participants and employers had played a key part in the plan’s 2021 decision to stop investing in fossil fuel producers. Europe’s largest pension plan also indicated last year it would invest €30 billion in the energy transition, with a large proportion of that investment directed towards the Dutch economy.4
The political hue of the employment sectors that constitute ABP’s three million active and deferred members, together with second-ranking PFZW, the €225 billion AUM health workers’ retirement plan that marshals around three million participants, is also likely to mostly favour the Green Deal policies of any future Timmermans-led ruling coalition. In the 2021 elections, Dutch civil servants mainly voted for the D66, and Green Left, while doctors in the healthcare sector mainly gave their vote to VVD and D66.5 Around a third of the Dutch population participates in either the ABP or PFZW retirement plans.
The Investment Unshackling of Institutional Moral Money
The radical reconstitution of the Dutch pension funds industry from a regulatory-based DB framework to a DC economically-driven system by 2028 is predicted to result in a ‘Great Rotation’ of institutional capital within portfolios.6 Hundreds of billions of euros could flow out of current asset allocations, particularly government bonds, the mainstay of Dutch pension portfolios under today’s regulatory system, and into a wide spectrum of sustainable societal-focused investment opportunities, particularly in the domestic market.
Private credit and corporate bonds, funded by pension annuities, might help fill the gap left by retreating banks weighed down by regulatory constraints and tougher credit standards in the coming wave of corporate financing and refinancing demand. Dutch institutional investors would be in a strong position to set green terms on this lending. The total additional investments coming from the reshuffling of portfolio asset allocations stemming from the pension reforms is estimated at potentially the equivalent of the entire €300 billion European AA-rated corporate bond market.
Green infrastructure is another asset class likely to be high up the retirement plans’ shopping list. The Netherlands, like most countries, is facing formidable bottlenecks in the implementation of the energy transition and ‘electrification’ of its economy through renewables such as wind and solar power, particularly due to capacity constraints on national grids. The scaling up of nascent ‘green hydrogen’ production and distribution to replace natural gas for energy-intensive industrial use also requires massive investment.
The Housing Crisis and the Motherlode of Global Emissions
Investment to tackle the Netherlands’ housing supply crisis is a further potentially fertile area for policymakers to coordinate more closely with pension funds. The government estimates 900,000 new homes need to be built just to keep up with a growing population. Demand for care homes is also soaring due to a structurally ageing society and the afflictions of old age, such as the dementia epidemic.
The heated political debate over housing has too often been coloured by accusations that small-scale local ‘house milkers’ investors and greedy foreign private equity ‘vultures’ are profiting from the crisis through soaring rents. This has led to proposals for stronger rent controls and the imposition of higher taxation that, together with tougher environmental rules and the leap in financing rates, have resulted in a wholesale investor retreat from the housing sector just when it needs the capital most.
Dutch pension funds, which on average allocate around 10% of their investment portfolios to real estate, would seem natural partners for the government in solving this housing conundrum. A stable investment environment that spurs residential development through underpinning a sufficient level of returns to support the future income of retirees, who will also live in the homes built, would leverage a virtuous circle of pension investment in the rental housing sector. A ‘joined up’ state and institutional investment strategy in housing could also deliver the environmental, social and governance overlays in construction and operating models, and affordable rents, that pension funds increasingly demand.
Real estate contributes about 40% of total global greenhouse gas emissions through heating and cooling in operation and in the production of construction materials such as concrete, steel and glass. Around three-quarters of those emissions come from the housing sector, the largest asset class by value and bigger than everything else combined, including equities, fixed income and commodities, since that’s where eight billion of us live.
Embedding the Economy Back into the Ecology and Limits to Growth
The energy transition to a carbon neutral economy presents a fundamental dilemma for governments and populations because, if successful, it almost certainly means the acceptance of much lower levels of future economic growth due to the cost efficiency of fossil fuels relative to renewable energy sources.
Climate research shows today’s fossil fuel-dependent economic system needs an EROI (energy return on investment) of above 15 to 20 to keep it running. A radical switch to sustainable alternatives, such as solar panels, yields an EROI of below 5. Investment manager Catella7 calculates that it is, therefore, impossible to transform the energy mix from fossil fuels to renewables while maintaining current levels of energy consumption and GDP growth.
Catella contends that the UN’s standard IPCC (Intergovernmental Panel on Climate Change) model is questionable because economic growth is taken as an exogenous variable – it therefore does not count in the model and is held constant. But biophysical research shows that with declining energy consumption, GDP also declines with a correlation of almost one.
The Netherlands is in the forefront of the ‘limits to growth’ political debate, as seen with the government’s moves to curb emissions by enforcing cuts to the number of flights from Amsterdam’s Schiphol Airport and sharply reduce the livestock numbers of the country’s farmers.
With the Dutch population the second richest8 in the EU after Denmark, the Netherlands would possibly be better placed than most countries to maintain social consensus and withstand the wealth impact that the limits to growth imposed by a rapid decarbonisation of the economy would imply.
The Polder Model Dikes for Climate Change and Global Boiling Revelations
The Dutch have an existential relationship to the threat of climate change: 40% of the population live on the third of the country lying below sea level to the west, while the major Rhine and Maas river systems flow through it from the south. The Netherlands’ famous ‘Polder Model’ of seeking political and social compromise is metaphorically associated with the egalitarian system of all levels of society collaborating over centuries to build the dikes to protect lives and property against the common external threat of rising water levels.
If Timmermans’ coalition is successful in taking power after November’s elections, this would solidify the axis of the EU Green Deal agenda between the European Commission in Brussels and the Dutch government in The Hague. And it would bring with it all the resources of a sovereign state, plus a giant pool of institutional capital focused on investment solutions to climate change and greater social egalitarianism.
Such an outcome could have major political and economic ramifications across Europe and ripple out across the world – much as the Green Deal itself led the regulatory framework for the implementation of the Paris climate accords, and the EU’s General Data Protection Regulation (GDPR) set the global standard for the privacy and legal protection of individuals’ personal data. It might, for example, produce a pan-European political counterweight to the increasing politicisation of climate change policies on the far right, as seen by the rise of Germany’s AfD party in the polls, partly helped by protests against the future ban on the use of gas-fired domestic boiler heaters.
Frans Timmermans, with his bushy beard and appearance of a biblical prophet, won’t have the time to wander in the wilderness like Moses to contemplate the challenges ahead, and would be hard-pressed to find solitude in the densely-populated Netherlands anyway. Neither will he be able to ascend much above the level of the polders to get closer to the Almighty for guidance on the direction of travel. Moses received the Ten Commandments on Mount Sinai (2,629 metres). The highest peak in the Netherlands is just 322 metres – a topographical reminder of how exposed the country is to the threat of climate change.
1 DNB Q1 2023
2 The World Bank three pillar typology classification of pension systems: First – Publicly managed mandatory systems; Second – privately managed mandatory systems; Third – Personal account
3 The Financial Times – May 31, 2023: “About that Dutch pension plan overhaul”
5 https://publiekdenken.nl/partners/ambtenarenpanel/kabinet-rutte-iii-scoort-een-voldoende/ https://www.medischcontact.nl/actueel/laatste-nieuws/artikel/vvd-wint-de-artsenstem
6 AXA IM media briefing June 25, 2021: “The Great Dutch Pensions Bond Billions Rotation Gets Underway” https://www.bellierfinancial.com/blog/
7 Catella Residential Investment Management in Vastgoed Journaal (https://www.linkedin.com/posts/catella_european-residential-investment-valuations-activity-7084411601147035648-fuEc?utm_source=share&utm_medium=member_desktop)
8 GDP per capita purchasing power parity, if city state Luxembourg and Ireland, whose ranking is distorted by the tax domiciling of major global multinationals, are excluded.