Transparency helps KfW transform sustainable bond issuance
KfW has one of the largest and most successful green bond issuance programmes in the market and now, with a new mandate from the Federal Government to help deliver ambitious climate goals, it is pushing ahead with a strategy that enshrines sustainable transformation as the Group’s primary strategic goal.
KfW Group’s primary strategic goal calls for the “transformation of economy and society to improve economic, ecological and social living conditions worldwide.” KfW is supporting this goal with a group-wide project ‘tranSForm’ with three major principles: UN Sustainable Development Goal contribution from KfW financing; Paris Agreement alignment of KfW financing; Strengthen environmental, social and governance risk management.
“It’s really important that KfW is now clearly developing into a transformational promotional bank,” says Tim Armbruster, treasurer and head of financial markets at KfW. “The mandate we have from the German government to help deliver the 2030 climate protection programme with the clear goal to meet its greenhouse gas neutrality target is a great responsibility for us. We need to support our customers in the transformation process of the German economy.”
Enhanced transparency is a key tenet of the transformation for KfW, building on the work it started in 2019 to map all of its financing activities to the SDGs. In February, it published its mapping for its 2020 promotional financing, unsurprisingly showing a big increase in funds linked to SDG 8 (decent work and economic growth) due to pandemic-related measures. Larger amounts of funds also flowed into three other core SDGs: affordable and clean energy (SDG 7); sustainable cities (SDG 11); and climate action (SDG 13).
Currently KfW is establishing a group wide impact management, which shows the actual economic, ecological and social impacts of KfW financings. This impact management also includes an aggregated impact reporting tool for internal and external reports.
“The impact management strengthens the database and enables us to focus on where we are contributing to the SDGs, giving more transparency of course to our investors, our owners but also importantly for ourselves."
Transparency is also key in its new sector guidelines for lending being in line with the Paris climate goals. Based on climate scenarios of the International Energy Agency, guidelines have been developed which gradually increases the technological requirements in the greenhouse gas-intensive sectors.
So far, these guidelines comprise the sectors of power generation, buildings, shipping, automotive, iron and aviation. Future financing in these sectors will have to adhere to the Paris-aligned sector guidelines and will hence contribute to KfW’s transformational strategic goals.
This holistic approach means that it’s not just the ‘Made by KfW’ green bond programme that is sustainable, but to an extent, its regular bond issuances, too.
KfW’s green bond framework finances assets from two loan programmes, renewable energy (with solar and wind generation accounting for around one-fifth of 2020 issuance) and energy efficiency (with residential buildings accounting for around four-fifths).
KfW has already issued €6.7bn of its €10bn green bond target for 2021 — up from €8.3bn in 2020 — but that is only around 13% of its funding programme and a lot less than the approximately 40% of its promotional business that is green. So why hasn’t KfW increased the proportion of green issuance accordingly?
“We're looking at how we can reduce this gap because from our investor side, there's strong demand for it, no doubt about that,” says Ambruster. “But data quality is important for us.”
He means that the reporting hurdles and portfolio structure required to issue green bonds fit better with its large, well-defined promotional business programmes than other assets. However, tranSForm underlines and strengthens the sustainable principles for all of its liabilities.
“Of course, we have large portfolios like the energy efficient housing for which it is easier to produce the data,” he explains. “If investors buy our green bonds then, of course, they want to be aware of the impact in the relevant portfolio but increasingly the mindset of investment managers is focused more about the sustainability of a company in the future, how prepared it is in its business and how resilient it will be.”
“Our focus is on the overall asset side where our transparency means that we can say today that every euro or dollar invested in the liability side will count towards at least one SDG and is Paris-aligned.”
Meanwhile, the green bond programme allows the bank to meet other goals — enhancing its sustainability profile among investors, diversifying to new investors such as asset managers, increasing environmental investments by being a capital markets catalyst and supporting the low-carbon transition.
KfW has been selling its benchmark bonds for decades using the mantra of transparency, liquidity and continuity, and injecting the sustainability element means that it is now doing so on a deeper level.
“The bottom line is that we are aiming to offer our investors liquid bonds on a continuous basis but it’s going to be even more transparent as to what we’re financing, what the impact is, and what reporting investors can expect from us,” says Armbruster.