Credit Risk Sharing: 3D Investing in the real economy

The energy transition requires significant capital mobilisation at scale. Capital that banks are uniquely positioned to deploy, given their deep sector expertise and established client relationships, serving companies of all sizes. Credit Risk Sharing (CRS) offers institutional investors like PFZW a direct way to support this effort by partnering with banks and providing targeted capital relief on specific parts of their loan books. This creates a unique way to implement PFZW’s 3D investment strategy where risk, return, and sustainability are weighed holistically, by enabling banks to direct more lending towards companies across the economy, critical infrastructure, and the build-out of renewable energy capacity.

Risk Sharing through Significant Risk Transfer (SRT)

CRS is based on the principle of sharing the credit risk of bank loan portfolios without transferring legal ownership of the loans. It is a form of on-balance-sheet securitisation, also referred to as Significant Risk Transfer (SRT) or Capital Relief Transaction (CRT). Regulators require banks to maintain substantial capital buffers to cover potential credit losses. Through a CRS transaction, the investor assumes a defined portion of this risk by stepping into the first loss position, covering credit losses in a loan portfolio up to a pre-agreed maximum, sized to absorb losses across a range of economic scenarios including periods of stress. The loans remain on the bank's balance sheet and continue to be managed in the same way. To ensure alignment of interests, the bank is required to retain a portion of the risk itself. 

Teaming up with banks supporting important societal change

By entering into CRS transactions, banks can release capital allocated to existing loans and redeploy it towards new lending. In some cases, the driver is not capital relief but internal concentration limits. The energy transition requires large-scale lending to new technologies, creating concentration risk on bank balance sheets. By sharing these risks with investors, banks can maintain and grow their lending capacity where it is needed most. 

CRS therefore helps direct capital to the fundamental building blocks of the economy, from SMEs to large-scale project finance, where access to public capital markets is limited.

Crucially, banks provide more than funding. Their deep sector expertise and established relationships allow them to actively guide companies through the transition: helping them decarbonise, improve energy efficiency, and access the right mix of capital and expertise. CRS enables PGGM to support and reinforce this role, helping banks move from ambition to action in financing the real economy's transition. 

3D Scope: The balance between Risk, Return, and Sustainability

The methodology within the CRS program necessitates an integrated assessment where return, risk and sustainability are weighed not as isolated factors, but as interdependent variables.

Risk: Credit losses in loan portfolios are relatively predictable compared to other bank income streams, which are often volatile due to factors such as M&A and investment banking activity. By focusing exclusively on the credit performance of underlying loans, exposure remains anchored to the fundamental creditworthiness of the real economy.

Return: PFZW receives a premium for absorbing first losses, generating a market-rate return directly linked to the quality of the underlying credits — creating an attractive proposition for investors able to perform in-depth due diligence and who have the expertise to structure these types of investments.

Sustainability: Sustainability acts as an important selection criterion. PFZW consciously avoids transactions with limited societal value, such as leveraged lending to financial sponsors, and instead directs capital to banks that actively support their clients' transition to more sustainable business models, or to broader societal goals such as providing access to financing for underserved communities.

The specific features of credit risk sharing transactions provide a combination of access to a type of credit risk which is not readily available via public market investments, and therefore is diversifying in nature, while contributing to return and sustainability-related targets.

Due Diligence on Core Business

CRS offers a unique advantage: rather than assessing a bank at the entity level, PGGM can look inside the institution and focus specifically on those parts of the loan book where the bank has built expertise, a proven track record, and credible sustainability standards.

Due diligence goes beyond a standard financial assessment. PGGM reviews the full lending and risk management chain to form an integrated view of how the bank supports its clients' transition. Importantly, the creditworthiness and sustainability profile of each bank partner are assessed using the same methodology applied by PGGM's internal teams for equities, corporate bonds, and treasury, ensuring a consistent 3D judgment across the entire capital structure. 

Banks that lack transparent climate policies, fail to set concrete targets for polluting sectors, or do not actively support their clients' transition are excluded from the program. 

Active Steering toward a Sustainable Real Economy

For PGGM, CRS is more than just an instrument to achieve diversification of investment risks: it is also a way to implement the 3D investment approach within the current financial arena. The instrument provides a unique position, as it allows to actively steer capital towards segments that drive societal transition in a more direct way than investing in bank shares. The strength of this methodology lies in its approach: a clear focus on banks that deploy their core expertise for responsible lending and maintain transparent targets for climate and social transition, and provide tailored capital to those activities that contribute to those transitions.

Want to know more about how PGGM puts 3D investing into practice? Read more about our general vision on 3D investing or view other practical examples in our additional 3D cases.