Historically, sustainable and responsible investment in fixed income has been much less developed than in equity. But in recent years investors have been making headway in this respect. APG - on behalf of its pension fund clients - paves the way: we aim to improve issuers’ ESG performance and to further develop the market.
Equities still receive the lion’s share of attention from the responsible and sustainable investment community. Compared to other assets, equity includes a large body of ESG (Environmental, Social and Governance) research, numerous benchmarks and indices, and clear connections to corporate engagement. But change is under way, says Tim Slüttter, Head of European Credits at APG Asset Management. “Investors are discovering that fixed income is well suited to both benefit from and provide finance for ESG-related efforts. APG wants to be at the forefront of this development and pave the way for further market development.”
In the past few years, APG has made headway in integrating ESG into the investment process. Since fixed income accounts for about one third of assets under management, strengthening ESG performance in this asset class contributes greatly to the responsible investment ambitions of our pension fund clients. It also reduces ESG-related risks in the portfolios and improves ESG in the broader fixed income market.
APG’s approach towards ESG in fixed income is not that different from investing in equity. “When making investment decisions, we always consider return, risk, costs and ESG, regardless of asset class,” explains Herman Slooijer, Managing Director Fixed Income. “But it is precisely the consistent integration of ESG across asset classes – what we call inclusion – that is particular to our approach.”
Still, responsible and sustainable investing in fixed income differs in some important respects from equity investment. “Bondholders obviously cannot exercise voting rights,” says Slütter. “So you’d think that fixed income investors can exert less influence over companies. However, we see that companies that are receptive to the views of their shareholders also listen carefully to their bond holders. This is especially true for companies that regularly need money for growth or refinancing.”
Under the radar
Another difference is that although the universe of possible investments in equity and fixed income is similar, it is not exactly the same. “As bondholders we are also in dialogue with smaller non-listed companies”, says Slütter. These are companies that remain under the radar in the equity space. “Many such companies are not used to having to disclose financial data - let alone ESG information - on a regular basis to a larger group of investors. We have reached out to over several hundred such companies. With most of these we now have a productive exchange of information on issues such as environmental risks, supply chain oversight and workers safety.“
Driving the green bond market
A fairly recent innovation in the fixed income space are sustainable, green and social bonds. At the end of 2018, APG had € 6.9 billion invested in bonds of which the proceeds are earmarked for specific environmental or social projects. This makes us one of the largest investors in the worldwide green bond market. “Over the years, we have established a productive dialogue with issuers and potential issuers, as well as banking syndicates, regulators and certifiers,” says Slooijer. “We use our network, experience and knowledge to further develop the green bond market.”
Clearly communicating or expectations can help alleviate issuers concerns about the market’s response to a potential green bond program and thereby serve as a market stimulus. Therefore, APG earlier this year published its Guidelines for Green, Social and Sustainable Bonds.
“In the US, we also see rising awareness from both companies and investors, albeit from a lower base, with companies increasingly integrating ESG in their risk frameworks and strategies,” says Ann-Marie Griffith, Managing Director Credits US. “We have been building our presence and are now reaping the fruits of our efforts.” In the US market, APG has been particularly active in fostering (corporate) green bond issuance, which still lags far behind the European market. This involvement resulted, among other things, in the recent issuance of the first-ever US bond related to the UN Sustainable Development Goals.
The road ahead
Going forward, Herman Slooijer identifies three ambitions for APG when it comes to ESG in fixed income. “First, to continue our work on improving disclosure and performance of issuers. Second, to further develop the green bond market, and make sure we better understand and measure real world impact . And third, to create an approach for ESG integration in government bonds. ESG-awareness has greatly increased over the past years. The next step is to capitalize on that.”