The proceeds of KfW’s €1.5bn 0.375% July 2019 bond go towards its Renewable Energies Programme — Standard. KfW has already measured the amount of greenhouse gas emission reductions that an investment in the programme can achieve, allowing buyers of the bonds to say that with their investment they have reduced emissions by a tangible figure.
This is big news for green bonds. If more and more issuers adopt this strategy, then the growth in the investor base could be exponential — pension funds, for example, will find it much easier to attract investors to a green fund if it can tell them exactly what their investment will do for the environment each year. So if widely adopted it could increase the amount of money that backs green financing.
Other issuers have made steps to increase impact reporting on their projects — the World Bank, for example, includes quantitative estimates on many of the projects backed by its green bond programme.
But before we all get too excited about impact reporting, investors must recognise that this is something only the most sophisticated issuers with large funding programmes will be capable of working on for now.
For many potential debut issuers, especially those that only have the assets to sell a small green bond every few years, the work involved in just setting up a ring-fenced use of proceeds bucket and arranging for detailed reporting to investors on what projects they will back with this use of proceeds is onerous enough. Add impact reporting and they might just decide that that is one expense too far for a product that doesn’t yet offer them a lower cost of funds.
And that is another issue where KfW has been breaking ground. At €1.5bn in total, with an average ticket size of less than €30m split among 90 investors, this deal is set up to be one of the most liquid green bonds ever, giving potential green issuers, syndicates and investors a meaningful comparison level. This could be the deal that finally persuades a borrower to price a new issue green bond inside its vanilla curve.
It may take time for its impact to be felt, but KfW’s green debut has what it takes to change the nature of this market. The seeds of this budding market need water — KfW’s bucket of liquidity could well be what the market has been waiting for.