|KfW is in the process of assessing climate risks (both physical and transitional) more systematically. There are questions around the scenarios used as well as how wholistic the approach will be.
|Project-level climate risk management procedures
|Scope of coverage of project-level climate risk management
|Enhancing client climate resilience
|KfW is assessing environmental risks at project level and plans to assess climate risks of individual counterparts.
|All projects by KfW Development Bank, KfW IPEX and DEG are assessed for E&S risks. Since
2020, KfW Development Bank assesses climate-related risk systematically under the Climate Mainstreaming process.
|KfW will assess counterparty risk exposure. It is not clear if KfW intends to work with clients to increase climate resilience.
|KfW has slowly increased its levels of adaptation finance although
it is still relatively low.
Disclaimer: KfW Group is comprised of four institutions: KfW Development Bank, KfW IPEX Bank (International project and export finance bank), DEG (private sector finance in developing and emerging markets) and a branch for domestic lending and support. Unless specified otherwise, the provided information concern the entire KfW Group.
KfW (Development Bank, DEG, IPEX) assesses the environmental and social impacts of projects it finances. These Environmental and Social Impact Assessments (ESIA) are at the centre of KfW’s ESG risk management. While they do take climate elements into account, the ESIAs are formerly not aligned with the Paris agreement and are based on other standards, such as the Equator Principles.
According to 2020 Sustainability Report, KfW Group currently employs a double materiality approach. This means, that the Bank assesses both the impact it has and the external factors it is impacted by.
KfW preforms routine assessment within the “New Products Process” that show the impact of new credit lines and programmes. The Environmental and Social Impact Assessments (ESIA) are conducted for projects in developing countries and emerging economies as well as all export and project financing. Since 2020, KfW Development Bank applies a systematic Climate Mainstreaming process, including climate-related risks, covering both transitional and physical risks. This screening is conducted during the conception of projects. The climate assessment “aims to incorporate climate change into the design and implementation of all projects and to address the challenges of climate change mitigation and adaptation more effectively”. KfW Development Bank releases information on the environmental and social risk classification of all projects on the transparency portal since mid-2019.
KfW Group assesses external climate risks as part of its Taskforce for Climate-Related Financial Disclosure reporting. KfW is currently in the process of establishing a climate risk assessment system as part of its tranSForm project. So far, KfW has assessed in an exemplary exercise the physical climate risk exposure of 6 of the top 10 corporate customers. The results will feed into an institution wide screening of physical risk exposure.
KfW has also conducted climate stress tests in a pilot project. The stress test assumed a disorderly transition in which CO2 prices would increase dramatically. The transitory risks were assessed through estimating the financial impact at counterparty level and thus deriving financial loss probabilities for KfW.
The results of the scenarios and stress tests suggest no major risk exposure for KfW’s portfolio. However, this should be viewed with caution, since KfW used only the IEA’s 2017 Beyond 2°C scenario, which leaves significantly more scope for fossil fuel-related activities than the more ambitious net-zero scenarios.
According to KfW, the minimum criteria of its sectoral guidelines have been selected to ensure that investments are in line with Paris aligned decarbonisation pathways throughout their entire technological lifetime time (technological lock-in).
KfW also states that “the assessment of options for embedding ESG factors more strongly into the fixed written rules, rating tools and credit processes was deferred to the year 2021”.