KfW delves deeper into sustainability
On 16 December, executives at KfW Bankengruppe reviewed the 2020 funding year and shared their expectations for capital markets issuance to fund promotional activities in the year ahead. While recognising that investors are increasingly looking at issuer-level sustainability credentials, and working to enhance these, KfW also expects increased issuance of green bonds in 2021.
KfW plans to raise €70-80 billion (US$85-97 billion) in international capital markets next year. This compares with €65.7 billion issued in the year to 30 November 2020, via 160 transactions in 14 currencies, and €79.4 billion issued in the same period in 2019, through 128 deals in 12 currencies.
Tim Armbruster, Frankfurt-based treasurer at KfW, says funding volume was down in 2020 for three key reasons, all related to COVID-19. First, pandemic-related volatility in the first half led to a home-market funding bias. This means the decrease in funding volume was mainly felt in international currencies rather than euro funding.
Second, for the first time, in June 2020 KfW participated in the EU’s targeted long-term refinancing operation via TLTRO III, to the tune of €13.4 billion.
Third, KfW teamed up with Germany’s federal government to fund a special programme for COVID-19. “The result was a new source of funding for KfW via the new federally owned Economic Stabilisation Fund – the Wirtschaftsstabilisierungsfonds – WSF,” says Armbruster.
He explains that funding for the KfW Special Programme 2020, which the bank is implementing on behalf of the federal government to support the German economy through the COVID-19 crisis, is being made available from the WSF and can be drawn by KfW up to a maximum of €100 billion. Approaching the end of 2020, KfW has received around €38 billion from the WSF. Armbruster says whether or not KfW will use further funds from the WSF next year will depend on how the KfW Special Programme develops.
A strategic funding focus for KfW next year will be to add 15-year benchmark issuance in euros. “Demand in the euro market has shifted to the longer end,” confirms Armbruster.
KfW expects issuance of “Green Bonds – made by KfW” to increase to €10 billion in 2021, in a variety of currencies. This compares with green-bond issuance of €8.3 billion in 2020 to 30 November and €8.1 billion in full-year 2019.
During 2020, KfW expanded its green-bond programme’s framework. In addition to its renewable-energy standard promotional programme, it has also been funding the energy-efficient construction promotional programme via green bonds.
Says Armbruster: “In this way, we have succeeded in raising our green bonds to benchmark volume in euros and US dollars. We have thus developed the market in the same direction as the Bund is now doing: building a green curve for global investors with liquid bonds.”
According to Armbruster, KfW’s goal continues to be to support quality and liquidity in the green-bond market segment. He comments: “Adding together KfW’s issuance and those of the Bund makes volume of around €20 billion from the ‘green-bond Bund family’ in 2020. This constitutes a clear, strong signal from Germany.”
KfW has benefited from its green-bond issuance. Petra Wehlert, head of capital markets at KfW in Frankfurt, comments: “Oversubscription in KfW’s green bonds has resulted in a ‘greenium’ compared with conventional bonds, of around 1 basis point. We saw the same with the green Bund.”
She adds that KfW aims to keep its green bonds at the same liquidity level as its conventional bonds. “This should be possible: we have green-bond lines of €6 billion and €4 billion, which will be added to in 2021 with the planned €10 billion of issuance.”
“Green bonds are regarded as a key capital market product for the financial market’s contribution to achieving a climate-neutral world. They are an outstanding instrument for us to mainstream the principle of sustainability in the capital markets.”
According to Armbruster, KfW’s “DNA is green” and green bonds will remain in focus. “After all, green bonds are regarded as a key capital market product for the financial market’s contribution to achieving a climate-neutral world. They are an outstanding instrument for us to mainstream the principle of sustainability in the capital markets.”
However, he also acknowledges that issuer-level sustainability credentials are becoming more important than labelled bonds for investors.
KfW has made great strides in its corporate sustainability objectives but says there is no question of resting on its laurels. In the last two years, the bank has undertaken a detailed analysis within the context of its sustainable-finance roadmap project to assess ways it can assist the German federal government to better meet sustainability and climate targets.
Karl Ludwig Brockmann, group officer, sustainability at KfW in Frankfurt, says developing the roadmap has also meant KfW is following the mandate issued by the federal government under its Climate Action Programme 2030 to further develop KfW into a transformative promotional bank that supports the transformation of economic sectors and the financial market for a greenhouse-gas-neutral future.
At the heart of the roadmap is embedding sustainability into KfW’s business management. One element of this is maintaining first-class sustainability ratings, including sustainability targets embedded within the bank’s steering system. As of mid-December, two new sustainability-related parameters will be introduced to the bank’s central strategic steering group. These are the contribution of KfW’s financing to the UN Sustainable Development Goals (SDGs) and the Paris Agreement compatibility of KfW financings.
“In principle, if we get to the point that everything we do is sustainable, there should be no difference between a conventional bond and a green bond. Having said this, the green bond programme offers very sophisticated reporting based on deep scientific evaluation. I’m not sure we could offer this level of impact reporting for any financing KfW does.”
In addition, KfW plans to strengthen the organisational structure and procedures of environmental, social and governance risk management even further. Brockmann says: “It is evident that the risks from changes in the environment and climate, social tensions and weak governance can become stronger drivers for the financial assessment of our portfolios. We are gradually expanding the reporting on climate risks in our portfolio on the basis of the Taskforce for Climate-related Financial Disclosures standard.”
With the backdrop of mainstreaming sustainability into KfW’s operations and financing, KfW could have the option of issuing all its bonds from a sustainability framework and not printing use-of-proceeds green bonds at all.
Armbruster says, however, that it is hard to predict how the market will develop. “The KfW roadmap aims to map all our promotional activity to 99 per cent of the SDGs so, yes, in future it could be said that all our financing activity is sustainable. Right now, though, the green bond is a good programme for the market as it allows us to offer a lot of transparency with regard to reporting.”
Brockmann adds: “As a sustainability officer, my task is to mainstream sustainability into all of KfW’s business processes – including staff, bank operations and financing. In principle, if we get to the point that everything we do is sustainable, there should be no difference between a conventional bond and a green bond. Having said this, the green bond programme offers very sophisticated reporting based on deep scientific evaluation. I’m not sure we could offer this level of impact reporting for any financing KfW does.”
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