'Sustainability doesn't have to cost anything'

Published on: 6 November 2020

Run on first EU corona bond. This was the headline in the Financieel Dagblad on Wednesday, October 21. APG was one of the buyers of this “social bond”. Why did APG participate in this? What is so attractive about social or green bonds? Sandor Steverink, Head of Treasuries at APG, about return versus sustainability, the increasing importance of sustainable bonds and the rationale behind investing at a negative interest rate.

With its SURE program (the term stands for Support to mitigate Unemployment Risks in an Emergency) the EU wants to pick up a total of 100 billion Euros in loans, to issue to the member states. The goal of this is to support them in their efforts to keep companies and their employees working during the corona crisis. The first batch of these, valued at 17 billion Euros, was issued in October. The buyers of these “social” bonds, including APG, were lined up: the issuance was oversubscribed as many as fourteen times; a record.

APG ended up with 170 million Euro’s worth. Happy?

“Meh. We had registered for about 500 million Euros. Usually, you end up getting 50 to 80 percent of that. This time it was only 30 percent. Considering the enormous oversubscription, that percentage is not too bad: parties that do long-term investments, like us, were assigned relatively more bonds, because they are not going to put those bonds back onto the market right away.”

Why is APG investing in these bonds anyway?

“Because they are socially responsible. In addition, we have also tested them – like we do all bonds – for these factors: return, risk and costs. The results told us that this was an interesting investment. And we were not the only ones who thought this, as shown by the massive interest. I had expected that there would be a lot of interest; these social bonds provide relatively better returns than state bonds from triple A-rated countries like the Netherlands and Germany. They are very tradable, and they are safe if we look at the credit risk: the EU won’t topple anytime soon. Plus, the EU has created a sort of loan-loss reserve for this SURE program that has 25 billion Euros in it; a guarantee that provides investors with extra security.”

How important are the green and social bonds to APG?

“They are becoming more and more important to us and to our clients. We have now invested some 9 billion Euros in green bonds, compared to less than two billion in 2016. And 1 billion Euros in social bonds. Our investments are based on the United Nations' Sustainable Development Goals. Investing in green and social bonds - both of which come under the heading of sustainable bonds - fits in well with that. And we use our own classification system to check whether the claim of social or green is correct.”

Does every major investor use its own sustainability test?

“No, most institutional investors are satisfied with the stamp that the issuing party puts on them, based on the general guidelines and principles. APG started developing its own sustainable investment department, as early as 2007. That department has an enormous amount of knowledge by now. Using our own guidelines, we can therefore accurately measure the extent to which an investment is really sustainable.”

Do APG's clients demand that you invest sustainably as much as possible? Or do they mainly look at returns?

“Both. We have on-going close consultations with the pension funds that we invest for. We want to be at the forefront of sustainable investment because, just like our clients, we can see the benefits of it. They want an increasing portion of their pension assets to be invested responsibly, to be invested with impact. In 2025, for example, ABP aims to have 20 percent of its assets invested in Sustainable Development Goals, including these SURE bonds. But that could just as well be sustainable equities, sustainable social housing or a wind farm.”

Sustainability doesn't have to cost anything

Back to the SURE bonds. The 170 million Euros consists in part of 20-year bonds with a yield of 0.13 percent and 10-year bonds with a yield of -0.24 percent. Why not choose only bonds with a positive return?

“I’ve been asked that question before. We don’t just look at returns. If, as a bond investor, we only opted for positive-yielding bonds, the risk of that portfolio would also increase. The trick is to combine high-risk investments, often with a slightly higher return, with a less risky investment. At the portfolio level, this creates a better risk/return ratio. We invest for the long term with a balanced consideration between risk and return.”

Diversification pays off?

“Absolutely. Don’t forget that we don't usually hold bonds for their entire term. We sometimes sell in the interim, for example if the bond price gives us cause to do so, or if we see better alternatives. Incidentally, of the 170 million Euros in SURE bonds, we have invested the vast majority - ninety percent - in 20-year bonds, which therefore yield positive returns.”

Will all EU countries now receive a share of the proceeds of these SURE bonds?

“No, not all of them. Minus the United Kingdom, we now have 27 member states. Fifteen of them had subscribed to this bond, mainly countries from Eastern and Southern Europe. The Netherlands didn’t, because we can borrow cheaper ourselves, because we score so high on creditworthiness. Just like Germany.”

If costs and risk are average for a potential investment, then as a portfolio manager you have to choose between sustainability and returns. What prevails for you in that case?

“In other words, do we have to pay a price for sustainability? Actually, it doesn’t have to be that way. And the two can also go together very well. But that choice can create an area of tension. Sometimes it’s easy to assess the options. Three years ago, for example, we bought French green bonds for some 700 million Euros. At that time, they had a higher yield than an ordinary French government bond, plus they were green. That was a no-brainer for us. But currently, a green bond increasingly produces a relatively lower return. In that case, we’d rather opt for an alternative with a higher yield. We’re not a charity, we want to invest the pension assets entrusted to us prudently.”

Ultimately, these social bonds also create more prosperity

Participants could argue that their pension contribution via this social EU bond is used to support the weak brothers in the EU …

“Well, that is actually true. But that’s the way the world is. Ultimately, these social bonds also create more prosperity. European countries with the lowest credit rating are not necessarily the weakest link in the chain, which determines the strength of the entire chain. By cooperating within the EU, you are more than the sum of the parts. And the strongest shoulders carry the heaviest burden. This is also reflected in the ratings. The EU as a whole has a higher rating than the average of the individual EU countries.”

As a portfolio manager, how do you know for sure whether APG’s money is actually being spent in a social or green way through sustainable bonds?

“As a country or a company, if you want to borrow money through a sustainable bond, you must indicate in advance which projects you want to use it for. Last year, for example, the Netherlands raised just under six billion Euros with its first green bond. The state will then be accountable to the investors. For example, we know that the proceeds were earmarked for the construction of the mega-sized bicycle parking facility in Utrecht, the reinforcement of the Afsluitdijk and a pilot to insulate rental housing in Hengelo. As an investor, you want maximum transparency. You want to know exactly what you’re investing in - lesson 1 for every investor. Fortunately, as a bond investor, we don’t have to check all the projects ourselves to see if the proceeds of the bond actually go to those projects and we can make use of that country or company’s accountability.”

And what if a green investment like that turns out to be gray after it’s checked?

“If you don’t keep those promises, you do have a problem and we no longer see those investments as sustainable. I think it would certainly damage your reputation. But as far as I know, there are no examples yet, but I certainly do not rule out the possibility for that to happen in the future.”