KfW is not a typical institutional investor due to the specific function and characteristics of the three portfolios it manages. On this background, we do not follow an investment policy in the classical sense of the term but we rather apply an investment strategy in accordance with the respective internal portfolio guidelines, the respective responsible investment approach developed for each portfolio and/or the promotional mandate. For this reason, our answers to the questions from SG 01.1 to SG 01.3 refer to these different elements.
The RI investment approaches for each portfolio can be described as follows:
Liquidity portfolio (ESG integration, exclusions, engagement): The liquidity portfolio is made up solely of bonds issued by governments and supranational organisations, financials, covered bonds and ABS. It includes the following asset classes: SSAs, corporate (financial), securitized.
The sustainable investment approach for the liquidity portfolio consists of three elements:
At the beginning of 2017, we critically reviewed the existing sustainable investment approach for the liquidity portfolio and decided to modify it in order to achieve a higher impact. The new investment approach is based on a best-in-class approach. The eligible investment universe is defined based on diversification criteria, rating of the issuer as well as its sustainability assessment. The sustainability assessments are provided by the external sustainability rating agency Sustainalytics. Companies are assessed based on several ESG criteria which are differently weighted depending on the sector. Currently, the ESG criteria are applied with a weighting of 30% for environment, 32% for social and 38% for corporate governance issues for financial institutions. The three ESG criteria are weighted as follows for sovereign issuers: 15% environment, 35% social, 50% governance.
Our new best-in-class approach stipulates that for the liquidity portfolio, we will only invest in bonds of issuers whose sustainability score is among the best 80% of the respective sector.
In addition to the integration of ESG criteria, KfW introduced the use of exclusion criteria in its liquidity portfolio for non-governmental issuers early 2011. These criteria are based on the IFC Exclusion List. The aim is to ensure that, as a matter of principle, no fund provided by KfW through the purchase of bonds for the liquidity portfolio flows to an issuer which is engaged in activities which, from our perspective, are likely to have unacceptable negative environmental and social impacts.
As KfW's investment approach considers issuer sustainability in relation to their peers, we feel that it is appropriate to inform issuers about their current sustainability rating and any potential exclusion criteria. Hence, we provide issuers with detailed information about the sustainable investment process and their current sustainability rating via our engagement letters and we offer to enter in an open dialogue on sustainability topics with them.
Sustainability ratings for ABS investments in the liquidity portfolio are based on the ABS originator as sustainability ratings for ABS issuers are not available.
Green Bond portfolio (Sector specific RI guidelines, exclusions): The objective of the Green Bond portfolio is to finance climate and environmental protection measures via the capital market. Investments can be made in the following asset classes: SSAs, corporate (financial), corporate (non-financial) and securitized.
With the purchase of green bonds, KfW seeks to contribute to the realization of projects, e.g. in the fields of renewable energies, energy efficiency, environmental friendly transportation, waste industry, (waste) water-management as well as biodiversity measures. The Green Bond portfolio proves the commitment of KfW to expand its sustainability strategy on the capital markets, in addition to its lending activities and its own green bond issuances. KfW's long-term goal is an active contribution to the global reduction of environmental pollution and climate change through further funding of sustainable projects by green bonds.
By getting involved as an investor, KfW also aims at contributing to the qualitative development of the green bond market. For example, KfW supports the development of the market via the Green Bonds Principles or engagement with green bond market participants. Before investing in green bonds, KfW obligatorily checks the following minimum criteria.
- Fully transparent process of the allocation of funds raised via the green bonds as well as a competent project selection
- A clear description of the projects to be refinanced (including goals and - where feasible - projected impacts) and the management of proceeds
- A frequent, public reporting including project description, development as well as the allocation of funds
- A qualified verification of the project selection and use of funds from an independent third party
KfW will continuously develop and advance its minimum requirements to be in harmony with the Green Bond Principles and current market developments.
ABS promotional portfolio (asset class-specific guidelines): The objective of the ABS promotional portfolio is to promote financing options for SMEs by supporting (indirect) access of SMEs to capital markets. While initially focused on Germany, the mandate of KfW has been extended to Europe in 2015.
The investors' basis for capital market instruments (especially securitizations) with a focus on SMEs is still very limited. As Germany's most important promotional bank, KfW has a long experience in financing SMEs and as such, it can play an important role to support and promote capital market funding of SMEs.
Taking into account the importance of SMEs in the European economy, it is expected that by facilitating access to credit for SMEs, KfW's ABS promotional portfolio is contributing to stimulate growth in Europe.
For each transaction included in the portfolio, KfW verifies the use of proceeds. For ABS and ABCP, information on the use of proceeds is included in the transaction document and the information available regarding the securitized pool of assets.