“Just because we don’t have ownership rights or voting powers doesn’t mean we cannot influence behavior”

Published on: 28 August 2023

On behalf of its clients, APG uses its influence to improve companies’ sustainability and long-term performance. In this series, we explore how stewardship is applied in the different asset classes and strategies that make up APG’s diversified portfolio. In this third installment, Rik Fennema (Manager Credit Research) and Willem Hettinga (Senior Responsible Investment Manager) show how multifaceted engagement can be. Hettinga: “When we engage on credits, we engage at all the different stages of investment. This gives us the opportunity to influence issue terms, a company’s ESG approach, and market standards from the word go.”


“When people think of stewardship, they often think of exercising your rights as an owner of a company, for example, by voting or expressing your views at an AGM. But credit investors have no ownership rights or voting powers,” explains Fennema. “That doesn’t mean, however, that they cannot influence behavior. Far from it, in fact.” Investing in credits means investing in different types of instruments, rather than just one, as is the case with equities. “New structures and products are constantly emerging, and we can play a role in shaping these developments to fit our clients’ investment criteria in terms of cost, risk, return and sustainability.”


Large, committed investor

APG’s contact with issuers often starts before a bond is issued, this is partly because, in contrast to equities, APG makes many of its investments by participating in the initial financing transaction (primary market), rather than by buying in the secondary market. According to Fennema, this process strengthens ties with issuers and helps ensure APG can shape terms and communicate its ESG requirements at the pre-issuance stage. “Our size makes us an active player in the primary market. This and our long-term commitment help us to maintain some influence even when the market is strong”, explains Fennema. “If liquidity is plentiful, it is easier for issuers to (re)finance. However, in weaker markets, these same issuers need us too. This highlights the importance of relationship building – in both good and bad times. Most credit issuers need to tap the market on a regular basis, so as a large, prominent investor, we have quite a bit of leverage. Issuers also want good quality investors holding their bonds.”


An additional aspect that affects APG’s engagement, is the fact that part of its market consists of relatively small and quite often unlisted companies in the high-yield segment. “Reporting requirements are less stringent, and companies often do not automatically publish the ESG information we need. Nor are they used to liaising with external parties, have no investor relation teams, and so on”, continues Hettinga. “In such cases, engagement is also used to ascertain whether the company has the right policies in place, which also gives us an opportunity to make them aware of our expectations with respect to ESG risk frameworks and reporting. We can help get them on the right track and share best practice examples.” It is encouraging to see that in response to these type of engagements by APG and other investors, companies in this segment have become much more proactive in focusing on ESG factors and reporting, even though this is not always picked up by ESG data providers.  


Long-term engagement approach

Another difference with other asset classes is that bonds have a fixed life – at some point they mature. So, by definition our investment will come to an end. That said, this does not have a major impact on the process of engagement. Fennema: “Many of the issuers we engage with, banks, for example, are constantly re-issuing. In addition, we generally take a long-term view that focuses on encouraging companies to fulfil our clients’ ESG investment criteria; a process that does not need to stop if we are temporarily not invested. For example, we are currently engaging with a number of major banks on money laundering. This dialogue continues whether we hold positions or not. That said, it is important to note that if issuers repeatedly fail to meet our standards, we won’t invest again and will divest our existing holdings.” As an organization, through its responsible investment team, APG also pursues thematic engagements at industry level, for example, with the auto and airline sectors on tackling the specific challenges they face in making the transition to a low carbon business model.


Forging best practice

APG has been involved in the development of the sustainable debt market from the outset. “In the labeled bond segment (green bonds, social bonds, sustainability-linked bonds, etc.), our market engagement comes to the fore”, explains Hettinga. Here APG works with others to structure instruments that help investors make their credit portfolios more sustainable.  “We proactively maintain contact with the banks who underwrite the issues to discuss deal terms and to share our APG guidelines, in this way we can influence the direction the market moves in and help set standards. Our APG labeled bond roundtable, an annual event in the sustainable fixed income calendar in New York, attended by institutional investors, banks that underwrite the bond issues and other market players, is a good example of this market engagement in practice.”


How it all comes together – Ørsted's blue bond

Earlier this year APG’s Credits team made an investment that shows how all the threads of engagement come together. A pioneering investment in a new type of product, where APG built on an existing relationship with both the issuer and the bank organizing the deal. APG was able to give input on the structure and terms, and on how the proceeds will be used.


On behalf of ABP, APG participated in a 5-year blue bond, issued by leading Danish offshore wind power and former state oil company, Ørsted. Fennema: “We already had a well-established relationship with the issuer. Blue bonds are still quite a new concept. They are similar to green bonds in terms of the use-of-proceeds structure but focus on contributing to healthy seas and oceans. In this case, we were enthusiastic about the bond’s biodiversity focus as that aligns with our pension fund clients’ responsible investing ambitions. It targets projects that contribute to the conservation and restoration of marine ecosystems, and sustainable sea transportation.”


“The bank arranging the financing, NatWest, approached us as one of three parties to invest via a private placement”, explains Hettinga. “As a result, we were able to make agreements with Ørsted about certain terms, for example, the maturity and to influence the structure of the projects that the bond’s proceeds were to finance, by ensuring that a certain percentage would be biodiversity focused. An example of an engagement process where our efforts put us in a position to invest in a cutting-edge issue that creates real-world impact for our clients.”


Click here to read more about Ørsted's blue bond in a recently published interview.