SDG-positive corporate loan-based transactions on the agenda for Dutch pension fund.
Dutch pension fund provider PGGM is looking for opportunities to support energy transition and UN Sustainable Development Goals (SDGs) through similar transactions to a credit risk sharing (CRS) deal announced last week.
On Friday, PGGM said it had entered into a CRS deal with Spanish bank BBVA, in partnership with Swedish pension fund Alecta. The transaction effectively moves a share of the credit risk arising from €500 million of project finance loans to the funds, a third of which relate to renewable energy-related projects.
Such arrangements allow banks to reallocate regulatory capital to new loans, thus increasing the flow of capital to target sectors.
PGGM has been building its CRS portfolio since 2006, often including climate-related objectives and SDGs in its selection criteria. PGGM said it is actively seeking other CRS deals that can further increase such sustainability-led exposures, both via project finance and corporate loans. The deal is BBVA’s first such transaction.
“We see a win-win for banks and investors to enter into CRS transactions based on their project finance lending books. It helps banks to attract the necessary capital for this part of their business specifically, which not only provides capital but also enables the bank to manage their overall risk profile across lending books,” said PGGM Senior Director Angélique Pieterse.
“For investors it provides a welcome diversification versus corporate exposure, while at the same time fitting very well with our client’s ambition to support the energy transition that is necessary in order to fight climate change.”
PGGM is a not-for-profit pension fund service provider which manages €291 billion in pension assets for 4.4 million beneficiaries. Clients include PFZW, the €277 billion pension scheme for the Dutch healthcare sector, which has committed to one fifth of its investments across all asset classes being linked to SDGs, specifically climate and healthcare, by 2025.
Pieterse said PGGM is “pro-actively discussing” corporate loan-based CRS transactions focused on borrowers with strong credentials in managing climate change or providing solutions and services that contribute to SDGs.
“Banks have an important role to play, both in terms of motivating clients to take the necessary steps, as well as by functioning as their partner and advisor. Banks and investors alike face the challenge of how to measure corporates’ performance in this respect.”
PGGM is involved in developing measurement standards, including via the Sustainable Development Investments Taxonomy, a collaborative initiative aimed at measuring how companies contribute to SDGs.
Sustainability criteria, plus ‘skin in the game’
PGGM typically looks for more than 50% of underlying loans in any CRS portfolio to be contributing to SDGs. In the case of the BBVA transaction, the SDGs supported were SDG 7 (climate), SDG 6 (water), SDG 4 (education) and SDG 9 (infrastructure).
Alongside sustainability impacts, PGGM’s criteria for future CRS transactions include a 20% minimum residual exposure to credit risk by bank counterparties – to maintain “significant skin in the game” and risk-return structures to minimise non-cyclical losses.
According to PGGM, investing in project finance risk transactions offers diversification versus corporate credit risk-based investments in parallel with opportunities to contribute to the real economy and climate-focused investments in particular. The fund says it compensates for comparative lack of diversification by identifying “well-structured transactions with a robust risk-return profile”.
“The longer dated profile of loans to infrastructural, social and energy related projects fits well with the long-term, buy-and-hold approach of our mandate. Next to that, the transaction reflects both our and our end-investor PFZW’s ambition to contribute to the SDGs,” said Pieterse.
“One of the ways to do that is by teaming up with banks that have high-quality origination capabilities and providing them with capacity to grow the lending to projects that help fight climate change.”
PGGM has a dedicated allocation to CRS investments and has closed more than 50 transactions with more than a dozen major banks. Alecta has been co-investing with PGGM in CRS deals since April 2020, as part of its expansion into private market assets, including a transaction with JP Morgan relating to US$ 2.5 billion corporate loans.
Separately, PGGM is backing a new partnership to support Paris-aligned decarbonisation pathways for the real estate sector, alongside APG Asset Management and Norges Bank Investment Management.
The Science-Based Targets initiative (SBTi) and the Carbon Risk Real Estate Monitor initiative (CRREM) have agreed to align their existing methodologies to develop a series of ‘CRREM-SBTi pathways’ for all major use-types and real estate investment hubs globally. The resulting pathways will be the only basis for real estate companies and corporates with real estate holdings to set science-based targets validated by the SBTi.