Sustainability in KfW s Portfolio Management August 2013 Bank aus Verantwortung
Motivation of KfW New corporate claim: Responsible Banking Responsible Banking implies: Reinforcing growth: Financing for renewable energy sources, energy efficiency and environmental technologies Boosting innovation: Financing the foreign projects of German companies makes a key contribution to the exchange of knowledge, technologies and innovation Increasing stability: Increasing stability is about financing private-sector investment in developing and emerging market countries KfW signed UN PRI in 2006 2
The UN Principles for Responsible Investment Principles for Responsible Investment A financial initiative of the United Nations Environment Programme (UNEP) and the UN Global Compact Development of a framework for responsible investing 6 principles Integrate the consideration of environmental, social and governance (ESG) issues into investment decision-making Transparent communication and raising awareness on sustainability issues in the capital market Signatories Currently more than 1200 institutional investors, asset managers and financial service providers Approx. USD 34 trn assets under management 3
KfW s Liquidity Portfolio Approximately EUR 21 bn Objective in 2007: Implement a sustainable investment approach for KfW s liquidity portfolio, starting in 2008 Apart from credit assessments of bond issuers, sustainability aspects are also taken into consideration in investment decisions Liquidity Portfolio: Implementation of Portfolio strategy PRI since 2008 Pure fixed income portfolio Buy-and-Hold strategy Risk reduction via guidelines addressing minimum ratings, bond duration and diversification. Single issuer exposure is capped by overall limit process Portfolio objective Ensure liquidity of KfW return targets are of lesser importance Asset Mix Sovereigns, agencies, supranationals, covered bonds and financials 4
Sustainable Investment Approach 1. ESG-Integration 2. Exclusion Criteria 3. Engagement Environment Social Governance Exclusion criteria according to the IFC Exclusion List Ł ESG-analysis of all issuers Issuer categories 20% NNN 60% NN 20% N 100% Limit 90% Limit 70% Limit 5
Experiences since 2008 Ratings are relative upgrades or downgrades can occur although a specific issuer s score has not changed Approximately 10 rating adjustments per month on average Limits can be exceeded: no forced selling language, but investment stop Overall portfolio effect: Total limit size has been reduced by about 8%, i.e. KfW does not use available limit size of more than EUR 3 bn! Exclusion criteria: only few excluded companies so far Approach of KfW is new (implementation April 2011) little experience, approach has to be monitored closely Engagement: 95 letters have been sent to issuers at the beginning of 2013 overall positive feedback 6
Outlook Engagement Intensify communication and dialogue with issuers Work together with other PRI signatories regular meetings of the German PRI-network Cooperation in PRI-workstream Fixed Income, support for E-RISC project of UNEP FI Further development of our own approach Enhance sustainability practices of issuers 7
Current Sustainability Ratings of KfW 82 scores B- / Prime Positive Sustainalytics: 82 points out of 100, third place among 73 non-listed banks Oekom Research: Prime status among the group of best-rated financial institutions. The sustainability rating is B- (on a scale ranging from D- to A+) imug: 26 points out of 36, second place among 127 banks worldwide 8
portfolio institutionell Award 2011 KfW awarded as Best Responsible Investor 9
Contact Treasury Dr. Solveig Pape-Hamich Asset Allocation - Investmentstrategies Ext.: - 4893 solveig.papehamich@kfw.de Marion Marinov, CFA Asset Allocation - Investmentstrategies Ext.: - 4131 marion.marinov@kfw.de KfW Bankengruppe Palmengartenstrasse 5-9 60325 Frankfurt am Main Phone +49 69 7431 - Ext http://nachhaltigkeit.kfw.de/ EN_Home/index.jsp 10
Annex: The 6 Principles We will be active owners and incorporate ESG issues into our ownership policies and practices We will incorporate ESG issues in investment analysis and decisionmaking processes We will each report on our activities and progress towards implementing the Principles We will seek appropriate disclosure on ESG issues by the entities in which we invest We will promote acceptance and implementation of the Principles within the investment industry We will work together to enhance our effectiveness in implementing the Principles 11
Annex: ESG-Criteria for Non-Governmental Issuers Environment Social Corporate Governance Formal Environmental Policy Environmental Management System Programmes and Targets to Reduce Direct GHG Emissions Programmes and Targets to Increase Renewable Energy Use Carbon Intensity Trend % Primary Energy Use from Renewables Environmental & Social Standards in Credit and Loan Business Assets Under Management in Responsible Investment Policy on Freedom of Association Formal Policy on the Elimination of Discrimination Programmes to Increase Workforce Diversity Employee Turnover Rate Activities in Sensitive Countries Guidelines for Philantrophic Activities and Primary Areas of Support Policy on Bribery and Corruption Whistleblower Programmes Signatory to UN Principles for Responsible Investment Tax Transparency Policy on Money Laundering Disclosure of Directors Remuneration In-house Team Dedicated to Responsible Investment/Finance Board Independence 12
Annex: Exclusion Criteria for Non-Governmental Issuers 1. Production or activities involving harmful or exploitative forms of forced labour or child labour as defined in the ILO core labour standards. 2. Production, use of or trade in pharmaceuticals, pesticides/herbicides, chemicals, ozone depleting substances and other hazardous substances that are subject to international bans. 3. Trade in animals or animal products that are subject to the provisions of CITES (Convention on International Trade in Endangered Species of Wild Fauna and Flora). 4. Production of cosmetics etc. involving testing on animals. 5. Commercial logging operations for use in primary tropical moist forests. 6. Production of wood or wood products other than from sustainably managed forests (enterprises with less than 50% FSC-certified production are excluded, FSC Forest Stewardship Council). 7. Production or trade in controversial weapons or important components for the production of controversial weapons (anti-personnel mines, biological and chemical weapons, cluster bombs, radioactive ammunition, nuclear weapons). 8. Production or trade in tobacco. 9. Drift net fishing in the marine environment using nets in excess of 2.5 kilometers in length. 10. Controversial forms of gambling: operation of casinos, production of devices or other equipment for casinos or betting offices or companies that generate turnover via online betting. (So-called "short odds" are defined as "controversial forms of gambling"). 11. Any business activity involving pornography. 12. Production or distribution of racist, anti-democratic and/or neo-nazi media. 13
Annex: ESG-Criteria for Sovereign Issuers Environment Social Corporate Governance Country Ecological Footprint Achieving CO2 Reduction Targets Annual CO2 Emissions per Capita Trend Total Annual CO2 Emissions Percentage of Energy from Renewable Sources Change of Forest Area between 2000 and 2005 Proportion of extinct and endangered Species Agricultural Water Stress Index Risk Exposure to Natural Climate Catastrophes Human Development Index GNI per Capita Child Labour GINI Index Global Gender Gap Public Expenditure on Education as % of GDP Net Primary Enrolment Rate Quality of Life Index HIV prevalence (% aged 15-49) Number of Internet Users per 100 people Number of Homicides per 100,000 people Political Rights Press Freedom Rule of Law Government Effectiveness Regulatory Quality Capital Market Access Global Competitiveness Corruption Perception Index Military Expenditure (% of GDP) Conflict Involvement Treaties and Conventions 14
Annex: KfW Bankengruppe at a Glance Germany s flagship development bank, founded in 1948 Shareholders: 80% Federal Republic of Germany, 20% German federal states Headquartered in Frankfurt am Main, branches in Berlin, Bonn and Cologne Worldwide presence: over 70 representative offices Total assets as of 2012: EUR 511.6 bn Explicit and direct guarantee from the Federal Republic of Germany, expressly provided in the KfW law Rating: AAA/Aaa/AAA outlook stable/negative/stable 0% risk weight of KfW s bond issues One of the leading issuers in the international capital markets 15
Annex: Business Areas: Overall Business Volume as of 31 December 2012 (EUR 73.4 bn) KfW Mittelstandsbank (SME Bank) KfW Privatkundenbank (Private Client Bank) Promotion of small- and medium-sized enterprises, business start-ups and other commercial clients in Germany Housing programmes, environmental and climate protection, and educational finance for private clients in Germany 33% 24% KfW Kommunalbank (Municipal Bank) Financing for public clients, such as municipalities and regional promotional banks 12% International project & export finance Promotion of developing & transition countries Capital Markets Customized financing for exports and project & corporate financing world-wide KfW s public (KfW Development Bank) & private sector (DEG) development cooperation activities Treasury and funding, securitisation and other capital markets-related activities 18% 8% 5% 16