ESG factors are integrated in the due diligence PGGM performs in any CRS transaction. We also engage with our risk sharing partners to further develop their ESG policies and practices. In addition, we actively approach banks on opportunities for risk sharing in loan portfolios which focus on companies that provide a positive contribution to climate-related topics: Investing in solutions (impact investing / thematic investments).
We aim to participate in the core business of the bank and build a long-term relationship. This enables us to get to know the loan origination and risk management process of the bank increasingly well. This is achieved through our thorough due diligence process and also via the monitoring of our individual transactions. This feedback loop provides an opportunity for continued dialogue on the choices made, directly with the people driving these processes within the banks. The CILI team's focus regarding responsible investing for CRS transactions can be divided into two main themes. Firstly, we believe these risk sharing transactions can contribute to a more stable financial system and add value to the real economy. By entering into a credit risk sharing transaction, the bank will free up capital which can be redeployed and will enlarge the bank's capacity to lend. In addition, we consciously take up our role as one of the largest investors in this asset class in promoting and contributing to financial system stability. We do this by exchanging views with market participants and regulators on how CRS transactions can be structured in a sustainable way to ensure genuine risk sharing that indeed contributes to a stable financial system. When selecting the banks to partner with and the loan portfolios in which we share the risk, ESG factors are an integral part of the analysis and decision process. ESG factors represent a wide range of aspects which can have an effect - directly or indirectly - on the borrower's ability to service its debt obligations in the future. We strongly believe that banks taking these factors into account are better equipped to assess credit risk of their corporate clients.
During the initial phase of a potential CRS investment the CILI team assesses whether there are specific ESG topics to consider with regards to the envisaged risk sharing bank, as well as the industry sectors and countries in the envisaged portfolio of loans for the risk sharing transaction. Next to our own understanding, we utilise country, sector and bank-specific research from dedicated research firms like MSCI and Sustainalytics, to give guidance regarding which topics the due diligence should focus on. These reports serve to provide examples of where controversies have arisen in the past, in relation to the banks´ lending activities in the relevant countries or industries. Those topics will be discussed during the due diligence interviews. The bank's overall ESG rating, together with the ranking of the bank on the PGGM Sustainability Ranking list, is relevant for determining a more general view on whether the bank fits PGGM's profile of a valued long-term risk sharing partner. The list scores PGGM's financial counterparties on how they contribute to a stable and sustainable financial system, and has the objective to maintain the dialogue on their respective ESG policies.
In light of the due diligence performed, it is relevant to note that the loans in which we share the credit risk remain part of the banks' balance sheet and risk management processes. The risk sharing is realised by means of a bilateral contract with the bank, based on which the bank will receive compensation in case a loan is not repaid. This means it is instrumental to develop a thorough understanding and assess the quality of the loan origination and monitoring process of the bank we partner with. The way in which the bank takes into account ESG factors is an integral part of that assessment. During our assessment of the banks origination strategy and quality of the risk management process, we investigate which ESG policies the bank has implemented, how it ensures these are being adhered to and impact the bank's decisions, and to what extent the convictions behind these policies are part of the bank's culture
We investigate whether the bank has defined policies, relevant to its regions and client base. For instance, on sectors where pollution and impact on the environment play a role we seek for the bank to set clear guidelines on what activities it will not finance or require approval at higher level of seniority and input from sustainability risk managers. Examples of such sectors are mining, oil & gas, forestry and palm oil. In the case of project finance, we verify if and when the bank has signed up to the Equator Principles. If the policies are not publicly shared, we request to receive the policies as part of our due diligence, in order to see the scope and depth of the framework. We look into the bank's approach and course of action in case of sensitive sectors or ESG related topics. In some cases, banks will pursue engagement instead of exclusion, by setting clear goals as part of the financing facility they provide, in that way motivating the company towards the desired change of behaviour. As part of our due diligence we establish how the ESG lending policies are governed. Who provides input and has authority to make decisions with respect to the policies followed and the lending decisions. Besides verifying that appropriate policies are applied, we also verify to what extent the bank's employees, who the CRS deal team meets during the various due diligence conversations, demonstrate a true knowledge of these policies and how they form part of the bank's credit approval process. The CRS deal team reviews actual loan proposals to see how the assessment of ESG risks takes place in practice. We assess which decision-making bodies are involved when potential ESG arise, who is responsible for flagging, and whether there is sufficient countervailing power between risk management and the business.