Standalone climate strategy and integration of climate in overarching strategy

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Paris alignmentReasoning
Some progress KfW’s strategic framework to strengthen climate ambition falls short of what to expect from a transformational bank, as envisioned under German Climate Law. Most notably, net-zero emission ambition are not aligned with the government’s et-zero target by 2045.
Climate strategyOverarching strategy
KfW outlines its ambitions to align with the Paris Agreement in its Sustainable Finance Roadmap. Further details on the implementation are provided in reports. The Roadmap falls short in ambition, in particular with regards to  setting intermediary targets, indicators and a timeline to achieve a net-zero emission portfolio by 2050. .N/A There is no public information available on a general strategy for KfW.
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

Overarching strategy & Standalone Climate Strategy

The German Climate Law (Klimaschutzgesetz) has given KfW the mandate to become a “transformational bank” to support the transition in Germany and in international cooperation.

KfW sporadically publishes strategic documents that indicate what the bank aims to achieve in the coming years. Hence, the following assessment is based on reports, guidelines and statements. In 2021, KfW approved its Roadmap for Sustainable Finance with a primary focus on the Sustainable Development Goals. The roadmap does include considerations of Paris Alignment, setting out a pathway for a net-zero emission portfolio by 2050, in line with German and EU climate legislation (Please note, that since then, the German government hast updated its climate legislation, aiming now for net-zero emissions by 2050). As part of this process, KfW has updated its Sustainability Mission Statement.

KfW has defined four megatrends, in line with the SDGs, that it intends to finance:

  • Climate change & the environment
  • Globalization
  • Social change
  • Digitalization & innovation.

With regards to climate, the mission statement references KfW’s commitment to “help […] put the Paris Agreement into practice.” The statement further commits KfW to invest at least 35% of annual new business volume in its business field “climate and environment”. According to the most recent 2020 Sustainability Report, this figure is now 38%. This “megatrend” is not further broken down into climate-specific targets. The report also further specifies KfW’s strategy with regards to climate change:

  • The long-term goal is to achieve a climate-neutral portfolio by 2050.
  • The SDG contribution and Paris compatibility of KfW’s financing activities have been included in the bank’s 2025 strategic objectives (p.20) for all business sectors. The bank further plans to strengthen the systematic analysis of ESG risks in its risk management.

KfW has set up the implementation project tranSForm to achieve the goal of a core business aligned with SDGs and Paris climate targets. The project is expected to conclude in 2024. TranSForm consists of six subprojects:

  • Modernized sustainability governance: Establishing a high-level committee for overall management of KfW’s business with respect to sustainable finance and for supporting the Executive Board
  • Expansion of the impact assessment system: Building on SDG mapping (introduced 2019); implement a uniform group-wide understanding of impacts with definitions of up to 40 impact indicators for improved measurement and reporting on the sustainability effects of KfW projects
  • Ensuring the Paris compatibility of KfW’s financing activities: Technology-based sector guidelines for at least six particularly GHG intensive sectors, as well as the introduction of a GHG accounting system. According to a tranSForm presentation, these sectors include power generation, buildings, shipping, automotive, iron and steel as well as aviation.
  • Stricter inclusion of ESG risk factors in KfW’s risk management: Develop a uniform, group wide understanding of ESG risks, adapting the corresponding governance (e.g. by establishing a groupwide key account for ESG risks) and identifying and implementing ESG risk management procedures. In addition, KfW will develop further its current reporting (Such as Taskforce for Climate-related Financial Disclosure (TCFD) Reporting).
  • Forward-looking consideration of the EU taxonomy: Analyses the regulatory requirements in connection with the EU taxonomy while developing proactive approaches for the use of the EU taxonomy to formulate ambitious KfW sustainability targets in the future.
  • Implementation incubator: This element of tranSForm aims to translate the technical driven elements 2-5 into application cases and IT projects to ensure the picking up of the findings into the operations of KfW.

Recommendation: To date, KfW’s strategic approach has been focusing on defining limits in emission intensive sectors. What is lacking is an idea how climate will be hardwired into the Bank’s operations. The EIB’s Climate Bank Roadmap does give a good example on how climate can become an integral strategic element across an institution. KfW should publish a strategic document that outlines a timeline with clear intermediary targets and indicators to achieve a net-zero portfolio by 2050, as well as strategic adjustments in governance and operations that put climate at the heart of the bank.   This strategic approach should be made publicly available.

 

Last Update: January 2022

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