Aegon was recently selected to participate in the world’s first-ever green residential mortgage-backed security (RMBS). The demand for such bonds is high. Will supply keep up?
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Last month, mortgage lender Obvion, a subsidiary of Dutch bank Rabobank, issued the first-ever green bond in the mortgage-backed sector, adding a new flavor in the busy market for green bonds. Green bonds started to take off in 2013. Between 2013 and 2015 issuance more than tripled.
What makes this bond, called Green Storm, unique is that the proceeds will be used to finance prime mortgages for new and refurbished homes that meet the highest standards for energy efficiency in the Netherlands. The bond is also backed by the same pool of properties.
Green Storm received certification from the Climate Bonds Standards Board, as well as a second-party opinion from Sustainalytics and a green bond assessment from Moody's – for which it received the maximum grade.
A deep shade of green
Only green investors were invited to participate in the EUR 500 million transaction, which was heavily oversubscribed. Allocations were then based on a thorough assessment of the investors' green credentials, including their commitment to leading global, UN and industry standards. Aegon was rated dark green, and invested EUR 17 million on its own account and EUR 43 million for third-party clients.
"Being selected as one the 'greenest of the green' in this pioneering transaction will help us find similar opportunities for our clients in the future. After all, the demand for this type of security is still very high," said Henk Eggens, European CIO of Aegon Asset Management.
Impact investments
Green Storm joins Aegon's growing portfolio of impact investments, one of the three pillars of its responsible investment approach. The other two pillars are incorporating environment, social and governance (ESG) criteria into the investment analysis, and taking advantage of Aegon's role as an active owner by applying exclusion criteria, engaging with management on ESG issues and using its voting rights.
Impact investments are direct or indirect investments that must meet Aegon's basic risk/return requirements and on top of that aim to create a measureable social or environment benefit. This is a stricter definition for 'green' investments than the approach used by many other institutional investors, notes Eggens. As a result, the universe of targeted investment opportunities is relatively small.
Green Storm matched this impact investment approach perfectly.
"Green Storm has more or less the same risk/return as non-green RMBS, and a comparable credit risk," explained Maarten Jan Hoefnagel, a portfolio manager for several asset-backed security (ABS) funds at Aegon Asset Management. "It offers good relative value for our clients while allowing them to do good for the environment at the same time."
Wanted: more like Green Storm
Hoefnagel hopes that Green Storm will mark the start of a budding new green RMBS market - a market in which Dutch banks have the potential to take the lead. Ever since last December, when more than 170 nations reached a milestone accord at the Paris Climate Conference to limit global warming, and Aegon itself signed the Paris Pledge for Action, many have been looking to the financial sector to take on a more active role in supporting the shift to a low-carbon world.
"We need more green RMBS like Green Storm," said Hoefnagel. "There is a large demand for this asset. The problem is a lack of supply. The market is limited by the number of energy-efficient homes."
Green Storm is backed by a pool of 'only' 2,500 residential properties. By contrast, the Dutch government has sent a temporary energy performance certificate to 5 million homeowners in the Netherlands. This certificate shows how energy-efficient a property is and the potential to improve energy efficiency through different measures.
Reward consumers for green behavior
The key to closing the gap between the supply of energy-efficient homes and the demand for green RMBS would be to reward consumers for investing in energy efficiency measures through a lower interest rate on their mortgage, argues Hoefnagel.
"While the Dutch government is already encouraging more investment in energy efficiency, I hope banks will follow and play a sustainable role in stimulating this market," he said. "I'm not saying that energy efficiency measures should become a condition to get a mortgage, but banks can do more to reward consumers by giving them a lower interest rate."
Hoefnagel acknowledges that a lower interest rate on mortgages would cut into the profits of banks' Dutch lending book. However, he adds, "the spreads on Dutch mortgages are the highest in Europe, so there is room to lower rates. The spread is 200 basis points for Dutch mortgages versus 150 basis points in other European countries such as the UK and France that also have a prime RMBS market."
Energy labels
Rewarding consumers through a lower interest rate would also lift the overall status and reputation of the Dutch energy performance label. "Once the quality of the energy label increases, there will be more green mortgages, which in turn will lead to more green RMBS," argues Hoefnagel.
For more information about Aegon's approach to responsible investment, read our Responsible Investment Report.