Integration of climate mitigation and resilience in key sectoral strategies

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Paris alignmentReasoning
Some progressKfW releases partial information on sector specific strategies. The assessed documents for sectoral guidelines suggest that KfW Group is not applying ambitious targets for sectoral transformation.
MitigationResilience
Energy KfW emphasises the role of renewable energy solutions and has excluded all coal investments. KfW’s energy guidelines cannot be considered Paris aligned, given a strong emphasis for natural gas investments in the coming decade(s). No information is available in how far KfW is actively considering climate resilience for its energy investments.
TransportKfW prioritises sustainable transport systems in its development branch and offers  domestic support. The sectoral criteria for aviation and maritime support are unambitious, and below targets from, for instance, the EU.No information is available in how far KfW is actively considering climate resilience for its transport investments.
Watern/a KfW does not have a water strategy and no dedicated investment in this field. KfW development branch has published a position paper on water-climate nexus. The DEG jointly developed the “Water Risk Filter” with WWF, an online tool aimed to help companies and investors explore, assess, value and respond to water risks in their operations, supply chain and investments.n/a KfW does not have a water strategy and no dedicated investment in this field. KfW development branch has published a position paper on water-climate nexus.
Citiesn/a KfW does not have a dedicated city strategy. KfW does offer climate-related financial products for urban projects as part of its domestic and development branches.n/a KfW does not have a city strategy and no dedicated investment in this field. KfW development branch includes resilience as its part of city investment.
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.

Explanation

KfW has not published sectoral strategies that outline how the Bank is intending to invest in specific sectors. However, under the tranSForm project, six Sector guidelines have been published covering power generation, modes of transport, industry and buildings. Where appropriate, these sectors have been bundled and analysed accordingly.

KfW Sector guidelines

KfW has not published sectoral strategies that outline in which sectors the bank is intending to strategically invest and through which instruments it will ensure transformative project finance. However, under the tranSForm project, six Sector guidelines have been published covering power generation, modes of transport, industry and buildings. Where appropriate, these sectors have been bundled and analysed accordingly. According to KfW, these guidelines form the core of its science-based approach to Paris alignment.

The sectoral guidelines are an integral part of KfW’s Paris alignment process and form a minimum standard across all the Bank’s branches. The bank has outlined in a background paper the rationale for the thresholds and investment guidelines for each sector. According to KfW, the minimum criteria have been selected to ensure that investments are in line with Paris aligned decarbonisation pathways throughout their entire technological lifetime time (technological lock-in).

The sectoral guidelines are based on the International Energy Agency’s Sustainable Development Scenario (SDS) which foresees a limitation of global warming to 1.65 °C with a 50% chance. Since the publication of the sectoral guidelines, the IEA has published its net-zero report which outlines a pathway to carbon neutrality by 2050 and keep 1.5°C in reach. As this scenario is closer to the political reality, with over 80% of global GDP now subject to a net-zero target by mid-century, KfW should be encouraged to update its sectoral guidelines accordingly.

Consequently, sectoral minimum criteria would be significantly more stringent, in particular in the power generation, automotive, shipping, aviation and steel sector. Furthermore, KfW is currently looking at the global decarbonisation pathways. As a public development bank, however, KfW has the mandate and responsibility to be leader in investing in decarbonisation. Hence, KfW should develop more stringent criteria than those derived from the SDS (NZR) scenario.

Energy

Under the sector guidelines for power generation, KfW outlines that it will prioritise transformative technologies, such as wind, photovoltaic, solar thermal power and sustainable biomass. The sector guidelines also specify the role of natural gas in the energy investment of KfW. According to the guidelines, KfW can commit up to one third of its annual energy investment for natural gas until 2029. The bank does not set an emission performance standard for eligible investments. The bank claims that this is aligned with the Paris Agreement. However, the recent World Energy Outlook 2021 by the International Energy Agency, using the agency’s Net-Zero Report Scenario shows, that natural gas consumption would need to significantly decrease in the coming decade.

The domestic arm of KfW offers dedicated lending Instruments for energy efficiency measures and renewable energy solutions, both for businesses and private individuals. Around one-third of the expansion of renewable energies in the German electricity sector is co-financed by KfW.

KfW development banks focuses mostly on renewable energy solutions. However, the bank continues to finance fossil gas projects in limited circumstances in emerging and developing economies. 

KfW IPEX Bank has been involved in multiple fossil fuel investments and continues to list the development of oil & gas fields as well as mid-stream activities as part of its current operations. The IEA has made clear in its net-zero report that oil and gas production capacities must not be expanded anymore.

Transport

KfW outlines Paris-alignment conditions for three transport sub-sectors: Automotive, shipping and aviation.

On automotive, the bank distinguishes between transformative and transitional propulsion technologies, the former being Battery Electric Vehicles and plug-in hybrid electric vehicles. The latter comprise internal combustion engines and hybrid electric vehicles. KfW has not set out a general ban or restrictions for specific technologies, but aims to finance at least 52% transformative technologies, while transitional technologies may not exceed a share of 48%. This rule is in place from 2021 – 2024. KfW also limits the application of this scope to new production factories and propulsion-relevant parts of the automotive production. The rule does not include the purchase of new vehicles and corporate financing through intermediary lending. KfW does not explain, whether this approach has a tangible impact on its lending.

For aviation, KfW states that currently no technology is available to promote a net-zero future for the sector. Hence, it relies on the IEA sustainable development scenario which foresees an annual reduction of 2.06% in emissions in the sector to steer its lending. On behalf of the German government, KfW has lent €9 billion to German airline Lufthansa as part of the government’s COVID-19 economic rescue packages. The short-term loan, which has already been repaid, has been critisised for the lack of conditions to improve Lufthansa’s environmental performance.

For shipping, KfW outlines in detail the reduction factors for specific shipping types, in line with the International Maritime Organisation’s GHG-reduction strategy, aiming for absolute reduction of 50% by 2050 in the sector. Note that the European Union is planning  more ambitious targets for the shipping sector. The bloc is aiming to bring emissions in the shipping sector to net-zero by 2050.

KfW Development Bank outlines extensively how it supports sustainable transport  in developing and emerging economies. However, the Bank only presents case studies and overall sectoral lending statistics (between 2014-2018). No information is available on GHG reductions and improved environmental conditions in the transport sector. KfW has confirmed that the Bank“estimates the annual Emissions and Emission reductions of all relevant projects, also of the transport sector.” 

The domestic arm of KfW offers dedicated lending Instruments for electric vehicle fleets and domestic charging infrastructure, both for businesses and private individuals.

KfW IPEX has been investing significantly in the aviation and the  shipping industry. The bank does not disclose whether such investments are subject to climate-related sustainable mobility criteria, such as an avoid-shift-improve approach.

Water

KfW does not have a dedicated water strategy. Apart from the development bank branch, the Bank has no dedicated services, products or activities in the water sector. The development branch has published a position paper on water and climate, outlining three action areas: 

1) Improve networks and access to water in cities,

2) optimize resources usage and efficiency, and

3) increase resilience and make use of rainfall as additional resource.

Cities

KfW’s support for cities is not subject to a specific, publicly available strategy. The domestic branch offers a range of climate related financial products for municipalities, focusing on energy efficiency, adaptation and mitigation in various city-related sectors and specific projects for renewable-based energy systems.

The development branch invests in urban projects in developing and emerging economy. Climate is a dedicated section, focusing on improved energy efficiency of buildings, as well as public transport. Other elements include sustainable waste management and improving the resilience of cities against the impacts of climate change.

Last Update: January 2022

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