Promotion of green finance

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Paris alignmentReasoning
Paris alignedKfW has been a key driver of mainstreaming green bonds in Germany. KfW Development Bank has been developing innovative instruments to promote sustainable businesses and finance in developing countries. KfW engagement to foster systemic change toward a sustainable financial system is limited.
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

Green Bonds

KfW Group is Germany’s largest issuer of green bonds. The Group had issued €31 billion in green bonds by 2020. With its first green bond issued in 2014, KfW Group has been a first mover in the German capital market. With €1.5 billion volume, the green bond was the largest issuance of its kind at the time. Projects that are financed by the green bonds have to make a quantifiable contribution to climate action through renewable energy or residential building efficiency. KfW also acts as an anchor investor in green bonds and has built a portfolio of €1.9 billion in green bonds.

KfW is also part of the working group for the “Green Bond Principles” (GBP) of the International Capital Markets Authority. It is also a member of the GBP executive committee and has acted as a coordinator of the Impact Reporting Working Group. Furthermore, it is a member of the Climate Transition Finance and Sustainability-linked Bonds Working Group.

At COP26 in Glasgow, KfW Development Bank has launched the Latin American Green Bond Fund. LAGreen will provide technical support in the preparation of green bonds, cooperating with local issuers and will act as an anchor investor – making initial investments to reassure the quality of the bond to capital markets. KfW has invested €74 million in the fund, covering higher risk tranches of the fund.

Greening the System

A majority of KfW’s domestic promotional funding is channelled through financial intermediaries. Energy efficiency loans for private housing units in Germany financed by KfW are a well-known and commonly used  financial support instrument. KfW is also supporting businesses in becoming more energy efficient and increasing their use of renewable energy.

KfW Development Bank has kick-started a range of instruments to promote green solutions in developing and emerging economies. These include the eco.business fund  which aims to invest in biodiversity and climate-friendly production methods in forest, agriculture and fishing businesses in Latin America. The fund is due to expand into African markets. Similar initiatives are the Caribbean Biodiversity Fund, co-led by World Bank and the African Risk Capacity, which aims to mitigate financial risks stemming from climate change and is part of the BMZ’s emergency support programme in response to the COVID-19 pandemic. 

Innovative instrument case study

Case Study:  Climate push for German SMEs

The EU Taxonomy for Sustainable Economic Activities functions as a guideline and label to distinguish sustainable from unsustainable economic activities for investors. The EU regulation that puts the taxonomy formerly in place will require companies with at least certain number of employees and turnover to disclose their activities against the criteria of the taxonomy.

The EU Taxonomy will put additional reporting requirements on SMEs in Germany.

As part of its domestic promotional business, KfW offers a lending instrument to accelerate German SME’s compliance with the EU Taxonomy’s provision for substantial climate contribution. The lending instrument focuses on climate-friendly production methods, energy generation, sustainable transport and green IT solutions.

Aligned with the criteria of the EU Taxonomy, KfW sets out a detailed list of activities for each area of investment. As an example, the criteria list for energy generation outlines thresholds and requirements for investment in electricity generation. Geothermal energy solutions, for instance, would have to prove and emission performance standard of less than 100g CO2/kWh while solar energy is financed without conditions.

The lending instrument, therefore, does not only function as an investment tool but also as an awareness tool to prepare SMEs for the impact of the EU Taxonomy.

Last Update: November 2022