Expanding our approach to include bespoke solutions to fulfill client goals

The global credit markets offer increasingly diverse ways to finance change and contribute to a sustainable world. Tim Slütter (Head of APG’s Credits team) and, Josh Linder (Senior Credit Analyst, Lead Sustainability Research) based in Amsterdam and New York respectively, reflect on how their focus is expanding. “In addition to the ‘bread and butter’ labeled bond market, we are finding more bespoke opportunities that can offer our clients attractive returns and contribute to their responsible investing goals.”

The US is currently experiencing an ESG backlash with companies becoming less willing to be vocal about sustainability and in some cases dialing back on plans altogether. Europe, on the other hand, is increasing regulation and tightening disclosure requirements to keep ESG top of mind. APG clients’ ambitions on RI are increasing too, as reflected in largest client ABP’s new policies. “It is vital that, on behalf of our clients, we encourage companies to make sound ESG choices. Here, debt has a leading role to play in financing change and driving real world outcomes,” acknowledges Linder. Slütter: “At APG, we have the size and the infrastructure to be innovative and guide the market. We can take the initiative to source attractive responsible investments on behalf of our clients and work with issuers to find structures that best fulfill their financing needs. And the more we do this, the more opportunities there seem to be.”

Labeled bond market is where it all started

APG was involved very early on in the labeled bond markets (green, social, sustainability and sustainability-linked bonds). “In the early years, we were already helping set standards and critically assessing issuers’ plans and their use-of-proceeds reporting,” explains Slütter. “Labeled bond investments have helped us target certain projects that are hard to reach via other asset classes – our investments in electricity transmission and distribution companies, for instance. Via these semi-government owned entities, we have been investing in the energy transition for many years now. These green bonds offer attractive returns and diversification benefits. So although we increasingly seek more bespoke solutions, standard bond issues like these still serve us well too.”

As the labeled bond market has matured and developed, APG’s standards have become more ambitious over time. “In many cases we actively seek out deals that go beyond the status quo,” says Linder. “For example, in early 2023, we invested in a green bond issue from chemical company Air Products and Chemicals Inc. This transaction stood out as it offered us a rare opportunity to finance scalable hydrogen and ammonia projects and we participated in both the EUR and USD tranches of the deal, making it a unique cross-border transaction.”

Infrastructure and expertise in place

The experience APG has built up and its involvement in the market’s development has helped strengthen the team. In addition to running the credit portfolios, the teams in Amsterdam and the US are looked to for leadership in setting market standards and establishing best practices. "They act as sounding boards for issuers, syndicate teams and banks,” explains Slütter. “And our size and resources enable us to spend time on more complex deal structures, ensuring a healthy pipeline of issues. But there are also challenges. We have to be mindful of the time we spend researching and arranging deals, and need to make sure that the extra work this requires really pays off. The synergies across the broader fixed income teams at APG (government-related, sovereign and emerging-market debt) also give us additional support and expertise in tackling these challenges.”

From “bread and butter” to bespoke

Slütter: “In addition to the ‘bread and butter’ labeled bond market, we are finding more bespoke opportunities in private placements and more illiquid structures that can offer our clients attractive returns and contribute to their responsible investing goals. Our existing relationships with issuers often pave the way. This was the case with an innovative blue bond issued by Danish offshore wind power company Ørsted. The bank arranging the financing, approached us to invest in a private placement. As the lead investor of the three parties involved, we were also able to discuss the terms. The result was an investment that contributes to the conservation and restoration of marine ecosystems and closely aligns with ABP’s commitment to invest in biodiversity.”

Going the extra mile

According to Linder, debt financing is ideally suited to tackling challenges ranging from the energy transition and circular economy to gender equality and affordable housing. “Our starting point for evaluating potential investments is always sound financials and an attractive risk-return profile, but we also want to go the extra mile to research and source transactions that can really deliver what our clients want. External data is not always available or reliable, so we need to stay on top of market developments and assess new issuers and structures in a systematic way.”

Although it was not the first asset-backed security (ABS) transaction, last year’s investment in Solar ABS was a new area for APG. “We proactively contacted originator GoodLeap to discuss opportunities in this area and having this relationship helped ensure a favorable allocation when the deal was launched,” explains Linder. “It brought a new renewable energy dimension to our portfolio by supporting the energy transition on a residential level, making solar power more accessible in the US, and at the same time offering an attractive return. The deal also paved the way for future ABS transactions in other areas such as sustainable agriculture and social housing.”

Building on our experience to make an impact

Being more flexible on liquidity and having a long investment horizon enables APG to provide capital where others may not be able to and this offers attractive opportunities, but also requires patience, acknowledges Slütter. “Our subordinated debt investment on behalf of ABP in H2 Green Steel, a low-carbon steel making facility, took several team members over a year to finalize. This investment is a greenfield example as the plant has yet to be built, which increases the risk and complexity, making the stakes high in every sense. But this transaction also enabled us to invest in a project with clear intentionality and objectives, and measurable outcomes.” The new plant targets steel production that reduces CO₂ emissions by up to 95 percent compared to traditional steel making.

Tackling highly specific issues in innovative ways

This approach also enables APG to participate in innovative deals that address highly specific issues. The Women’s Livelihood Bond issued late last year provides access to capital for women entrepreneurs in several Asian and African countries, improving the lives of around 800,000 women, while offering an attractive investment return. Linder: “As an anchor investor in the transaction, we engaged closely with Impact Investment Exchange (IIX), the Singapore-based issuer of the bond, to gain confidence in their process for gathering and verifying impact data – a crucial element in helping us show the true impact the investment creates for our clients. This deal received the Environmental Finance award for Sustainability Bond of the Year and was a great way to end 2023.”

Looking ahead, the team sees a strong pipeline of opportunities in debt markets that can support companies’ and investors’ ESG ambitions. But it is a challenging and increasingly diverse and complex investment space. Slütter: “We need to be constantly vigilant and critically evaluate the sustainability claims of products and issuers. This means continuing to allocate time and resources to our due diligence activities. Ultimately, we must ensure we deliver on our clients’ sustainability ambitions while generating good risk-adjusted returns in a constantly changing economic environment.”