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KfW Bankengruppe

PRI reporting framework 2018

You are in Strategy and Governance » Investment policy

Investment policy

SG 01. RI policy and coverage

New selection options have been added to this indicator. Please review your prefilled responses carefully.

01.1. Indicate if you have an investment policy that covers your responsible investment approach.

01.2. Indicate the components/types and coverage of your policy.

Select all that apply

Policy components/types

Coverage by AUM

          Engagement policy
        

01.3. Indicate if the investment policy covers any of the following

01.4. Describe your organisation’s investment principles and overall investment strategy, and how they consider ESG factors and real economy impact.

Sustainability is a core value of KfW's mission statement. Accordingly, we endeavor to assume responsibility in a variety of roles on the international capital markets. As an institutional investor, we apply a responsible investment approach to our three portfolios taking into account the specific objectives and characteristics of each portfolio.

Liquidity portfolio: KfW's liquidity portfolio is designed to ensure that KfW remains capable of taking action even if it has no access to the capital markets as KfW refinances its promotional activities almost solely via bonds issuance. On this background, the key investment objective of the liquidity portfolio is to secure liquidity, while return targets are of secondary importance. KfW acts as a buy-and-hold investor and invests exclusively in bonds with good credit quality (investment-grade).

Green Bond portfolio: KfW has the promotional mandate to set up a € 2bn green bond portfolio, which is supported by the Federal Ministry for Environment, Nature Conservation, Building and Nuclear Safety (BMUB).

ABS promotional portfolio: On behalf of the Federal Ministry for Economic Affairs and Energy (BMWi), KfW has the promotional mandate to invest in asset-backed securities (ABS, ABCP, SME-collateralized bonds) in favour of small and mid-sized companies (SMEs).

Please see SG.01.5

01.5. Provide a brief description of the key elements, any variations or exceptions to your investment policy that covers your responsible investment approach. [Optional]

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.


SG 02. Publicly available RI policy or guidance documents

New selection options have been added to this indicator. Please review your prefilled responses carefully.

02.1. Indicate which of your investment policy documents (if any) are publicly available. Provide a URL and an attachment of the document.

02.2. Indicate if any of your investment policy components are publicly available. Provide URL and an attachment of the document.

02.3. Indicate if your organisation’s investment principles, and overall investment strategy is publicly available

02.4. Additional information [Optional].

The governance structure of organisational ESG responsibilities for the Asset Management activities of KfW performed within its treasury department is embedded in the overall sustainability management system of KfW Group. A group's sustainability program with objectives designed to improve the Group's sustainability management (e.g. sustainable investments), accountability and responsibilities are drawn up by the sustainability officers of each unit and the Group's sustainability officer. For more details, please see: http://sustainability2015.kfw.de/reports/kfw/annual/2015/nb/English/8530/kfw-sustainability-programme-2015-2017.html. An updated sustainability program for 2018 is currently in preparation.

The investment objectives and the ESG approach are different in all three KfW's portfolios. For more details on the objectives and ESG approach in KfW Green Bond portfolio, please see: https://www.kfw.de/nachhaltigkeit/KfW-Group/Sustainability/Sustainable-Banking-Operations/Sustainable-Investment/KfW-Green-Bond-Portfolio/

For more details on the objectives and ESG approach in the liquidity portfolio, please see: https://www.kfw.de/nachhaltigkeit/KfW-Group/Sustainability/Sustainable-Banking-Operations/Sustainable-Investment/KfWs-Sustainable-Investment-Approach/

The specific guidelines for the ABS promotional portfolio are defined in the mandate letter from the German Federal Ministry for Economic Affairs and Energy (BMWi) addressed to KfW as well as in the internal portfolio guidelines. They are not publicly available.                                                                                                                                                                                                                                                                                 


SG 03. Conflicts of interest

03.1. Indicate if your organisation has a policy on managing potential conflicts of interest in the investment process.

03.2. Describe your policy on managing potential conflicts of interest in the investment process.

KfW's asset management activities are part of its bank wide treasury operations. Any conflicts of interest that might arise are addressed by KfW's overall compliance management. https://www.kfw.de/KfW-Group/About-KfW/Verantwortung-und-Corporate-Governance/Integrität-Compliance/

03.3. Additional information. [Optional]


SG 04. Identifying incidents occurring within portfolios

04.1. Indicate if your organisation has a process for identifying and managing incidents that occur within portfolio companies.

04.2. Describe your process on managing incidents

          Issuers of our liquidity portfolio are monitored on an on-going basis (e.g. controversies) and their ESG scores are regularly updated based on the analyses performed by the ESG research provider Sustainalytics. Hence, any new incident can be identified and reflected in the ESG score of an issuer which we use as basis for the investment decision.
        

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