Stockholm (NordSIP) – As demand for meaningful ESG investment opportunities continues to grow, one of the main hurdles remains the scarcity of financial products available to investors. Aegon Asset Management also a member of Cambridge Institute for Sustainable Leadership (CISL), offers a solution with funds that invest directly into mortgages. Last week, NordSIP met with Rens Ramaekers (pictured left), Portfolio Manager ABS & Mortgages and Gerard Moerman (pictured right), Head of Client Investment Solutions at Aegon Asset Management (Aegon) to discuss this strategy as well as other features of Aegon’s sustainability integration.
Whereas the green ABS bond market in the Netherlands is mainly focused on the highest environmentally rated, A- and B-labelled mortgages, Aegon offers another approach. Thinking outside the “green box”, the firm offers a differentiated mortgage-backed strategy, taking a more holistic view on what constitutes sustainable mortgages, enabling borrowers to make their house more energy-efficient. “Some mortgage providers in the Netherlands offer more attractive mortgage rates to A-labelled houses, as they have already achieved the highest environmental rating. However, with this strategy you disregard a large part of the borrower pool in the Netherlands. As affordable housing should be for everybody we do finance all houses, from the least energy-efficient houses to the most energy-efficient houses, but we enable the borrowers to invest more in the energy efficiency of their house. We want to reach the entire pool of borrowers, so that a person with a G-labelled house, having the lowest rating, could invest in solar panels or better insulation in order to achieve energy savings. Homeowners can borrow smaller amounts for upgrades, and therefore it costs them less than when purchasing a new property. Their energy bill will decrease, their home will be more energy efficient and they will enjoy a better quality of life,” says Ramaekers.
Aegon Asset Management has a close relationship with sister company mortgage lender Aegon Hypotheken, where the mortgages are originated. According to Ramaekers, investors benefit from significant spread over more traditional asset classes, while benefitting from a good diversification into consumer risk, thanks to this direct access. The Dutch Mortgage Fund Strategy is available to institutional investors in the Nordics.
Aware of the complexity of upgrades in comparison to new projects, Ramaekers and Moerman are keen to echo the concerns of the rest of the market about the lack of a common definition of what constitutes environmental sustainability. In the absence of consistent and complete international agreement on what is “green”, it is easy to focus on the simplest but larger projects and ignore the large incremental gains that smaller projects can offer.
“The EU is working on draft regulation but nothing will be in place for another two or three years. Until then, in the absence of strong regulation, Dutch investors are uncertain as to where they should allocate their money. Rather than relying on easy labels and green-washing, we have to be as transparent as possible, so that the clients fully understand the product they are investing in,” says Moerman.
Investors are not only keen on the spread they can achieve, but mostly on the impact strategy itself, Moerman and Ramaekers point out. One of the ways Aegon channels what it calls impact investing is by focusing on the “S” of ESG. “Social housing is a significant target for our lending program,” Moerman explains. “There’s a guarantee from the government which facilitates a lower funding rate for the corporations that want to build the accommodation, but still higher than a normal Dutch bond, which appeals to investors. The government has put some minimum conditions for the quality of social housing and energy efficiency, and we can rely on those standards,” adds Ramaekers.
“One has to be careful with using the word impact,” says Moerman. “The opportunities for impact investment, in the traditional sense, are still scarce at the moment. The limited supply, the small size and complexity of microfinance projects, for example, means Aegon prefers to stay closer to home with these social housing and mortgage projects.”
Overall, engagement remains Aegon’s preferred approach regarding responsible investing. “Engagement allows us to support and stimulate those companies that wish to improve,” Moerman continues. “Take, for example, Royal Dutch Shell which was considered a laggard when it came to addressing climate change. The company now has soft targets to make the company more environmentally friendly, which is a step in the right direction. It may sound counterintuitive but energy providers like Shell are where we believe engagement makes sense. If we can convince them of the transition into the green economy and stimulate them become a part of the solution too, we can also move the needle.”
Another opportunity for engagement is the rising interest in ESG in the USA. “In the US, people have gone from ignoring the issue to wanting to be leaders in the field. This trend allows us to take advantage of our presence in the USA, which we inherited from Aegon’s acquisition of Transamerica, while leveraging on the expertise we have developed in Europe to explore the new opportunities that are slowly emerging over there,” Moerman says.
Like many asset owners, Aegon draws a hard line when it comes to industries or companies that cannot turn around their activity due to their very nature. The manager blacklisted tobacco for example, in 2018.
“ESG is in our DNA. Aegon has a dedicated ESG team of twelve analysts that supports all the portfolio managers in order to ensure that sustainability considerations are integrated at all levels of decision-making. We are still growing, of course. You can never reach far enough in your ESG journey,” Moerman concludes.
Picture © NordSIP