With green bonds becoming an ever-greater part of NRW BANK's funding programme, the German lender is diversifying into social bonds, and is considering a move to a portfolio-based issuance programme. Frank Richter and David Marques Pereira explain
Environmental Finance: NRW BANK has now issued eight green bonds. How does green bond issuance fit in with the bank's broader funding programme?
Frank Richter, Head of Investor Relations: 
This year, we issued our eighth green bond. The green bond programme started, in 2013, as a small fraction of our overall funding, at around 2.5%. We were able to increase it to around 5% in the following years and, in 2020, I'm confident it will be closer to 10%.
We are looking to develop our green programme further; one major cornerstone is to trigger more volume by offering additional, interest rate-subsidised loans for green projects.
As of the start of December, we have established an internal green refinancing curve in the bank, which means that environmentally friendly projects identified by our loan department qualify to be re-financed by the green financing curve. This product offers additional interest rate subsidies, somewhere in the single digit basis point range.
EF: NRW BANK's green bonds refinance the bank's underlying green loans – what is the focus on and outlook for this lending?
FR: Our preference is to be on the dark green side in terms of Cicero's Shades of Green methodology. That means issuing green bonds against mostly dark green assets as much as possible, as well as including some medium-green assets to allow us to reach the critical threshold of €500 million of assets in each green bond pool. Alongside climate mitigation projects, we have an adaptation component in the green pool bond, usually water-related projects, with the most prominent one being the re-naturation of the River Emscher.
What is and is not green is a critical question. The development of the EU Taxonomy, which sets out a list of economic activities that can be judged to contribute to climate mitigation or adaptation, has proved very useful in this regard.
This process has led to a number of project categories being defined by the Commission's Technical Expert Group, which allows us to judge whether the project is green or not. For instance, regarding green energy, every form of generation is eligible assuming it emits less than 100 grams of carbon dioxide per kilowatt hour – that excludes coal, but can include biogas and all kinds of renewable energy.
We are talking to our business development team with a view to putting these criteria into a development bank lending programme based on the EU taxonomy.
EF: What is NRW BANK doing to grow its green lending portfolio?
FR: Green lending in general has substantially increased; there's growing demand for green investments, with the German government agreeing on a climate package that has recently passed the two houses of parliament which, among other things, will introduce a price on carbon in the transport and housing sectors. At the EU level, we have the Green New Deal from the new head of the European Commission. On the banking side, we are trying to follow this and give additional incentives in terms of our green re-financing.
EF: How, if at all, has the mix of underlying projects changed? Have you included new project types?
David Marques Pereira, ESG Specialist, Investor Relations: In the last couple of years, clean transport has become more prominent. We have seen municipalities in our region taking measures to respond to their citizens' concerns about local air pollution. We are involved in financing the vehicles – trams, electrified trains and electric buses. About 80% of the clean transport refinancing goes to the vehicles themselves, with the remainder financing charging stations.
We have seen, for the first time last year, financing by NRW BANK of the transmission grid that is being built to carry electricity generated by renewables in the north of Germany to areas of high demand in southern Germany. We have helped refinance these assets through our green bonds.
Finally, we have refinanced lending to a pumped storage plant in our state, which was refurbished to increase its electricity capacity from 690MW to 735MW. We have only two of these types of plant in North Rhine-Westphalia, and they will be essential for the energy transition in Germany – they provide the only option for large-scale storage of intermittent renewables.
EF: NRW BANK has been a leader in impact reporting – how is its approach to the issue evolving?
DMP: We have worked with the Wuppertal Institute since 2015 on our impact measurement. It calculates the carbon savings from our climate mitigation projects, based on the energy mix of our federal state, which makes sense since most electricity in our region is produced and consumed locally. During our last roadshow, some investors approached us and suggested that some other benchmarks would also be useful, so we talked to the Wuppertal Institute and decided that, for our 2019 bonds, we will also calculate CO 2 savings from two other electricity benchmarks – the electricity mix in Germany, and the mix across all 28 countries in the EU. The idea is that the investor can chose the benchmark that fits their approach best.
In addition, we will adapt our impact reporting to align it with the proposed framework from the EU Taxonomy and the EU Green Bond Framework. It will include more scientific figures, but the main advantage for the investor is that there will just be one standard template, so investors won't have to read across from different tables.
Around 20% of our underlying asset pool is in climate adaption projects, where we are working with the Emschergenossenschaft, the body responsible for the re- naturation of the Emscher river. It provides economic and ecological key performance indicators – such as the number of kilometres restored, the monetary value of prevented flooding damage, and the number of plant and animal species coming back into the river.
We have also started to publish the regional distribution of the projects we re-finance. It is not a requirement in the Green Bond Principles, but some of our Dutch investors suggested to publish a map of the projects we refinance – many of our Dutch colleagues travel through the state, mostly in winter for the skiing season, and they like to see which wind farms are refinanced by NRW BANK! It is also recommended by the EU Taxonomy at the country level – we are doing it at the regional level.
EF: Do you support the approach the EU has taken to developing its Taxonomy?
FR: Yes, we're happy with the EU Taxonomy. It's certainly not a problem for German institutions. Germany is highly regulated, and we tend to exceed the minimum requirements set by the EU Taxonomy. For example, it requires minimum energy efficiency standards for housing stock in line with the EU's 2014 Energy Efficiency Directive. We are currently working to the requirements of the 2016 directive, so all housing built now has to meet higher standards than are required by the EU Taxonomy. I don't have any concerns here.
EF: What about the social bond market – is NRW BANK planning any social bond issuance?
DMP: 
Alongside our internal efforts to strengthen our green lending programme, we also had a debate about the social assets that we have on our balance sheet, and whether we could refinance those. The answer was 'yes', and we are currently drafting a social bond framework. Based on this framework, we will issue a social bond later in 2020.
Going forward, we will therefore have two themes – green and social. It is important for us not to mix up both in one product, so we're not keen to do a sustainability bond. We see two separate groups of investors, and we don't see the benefit of attempting to mix them together: many investors have a clear green mandate.
With our framework, we are sticking closely to the Social Bond Principles. According to those principles, our social housing activities qualify, as does our lending to municipalities to enable them to provide basic services in the region. The third component is lending to small and medium-sized enterprises, as long as they are in line with our exclusion criteria, given that they are generating employment.
EF: Are there any challenges in structuring social bonds in comparison with green bonds?
FR: Most of the processes are already established in the bank. We will have intensive discussions with our business development department but, given that we have been issuing green bonds since 2013, we know how the internal processes work – it's just a question of adapting them slightly to social bonds.
EF: What are NRW BANK's views of the market from the point of view of a green bond buyer?
FR: The green bond market is improving. We're seeing new issuers and sectors entering the market, the sovereign market is growing well, and we expect to see the first German government green Bund this year. The market is developing quite nicely and we were able to increase our green bond investment portfolio this year by €100 million to about €300 million – we expect to grow it to €400 million by the end of 2020.
If you are an issuer, you love to see a 'greenium' in the market, allowing you to issue green debt with a slightly lower yield. From the buy side, of course, it is not so attractive! There's always a debate about prices. For us, supply and demand dynamics will determine the greenium.
EF: What's next for 2020 and beyond?
DMP: We are updating our green bond framework, and particularly we are excluding coal from our lending business. We also plan to sign the UN Principles for Responsible Investment and Responsible Banking.
Also, we are responding to investor demand for longer tenor bonds, given the general interest rate environment. Usually, we are limited to 10-year paper, due to a special call right of the underlying loans. That brings the yields of the bonds close to zero, or even, as with the last green bond, into negative territory. That's not something that investors appreciate.
So, we are planning to adjust our process going forward, moving away from the one-to-one approach where each bond refinances specific projects, instead issuing bonds on a portfolio basis. That will give us greater flexibility in terms of tenor and gives us the ability to offer green commercial paper, short-dated money market transactions linked to the green asset pool, as well as offering green debt in different currencies.
The first 2020 bond will probably be the last one based on the old regime, with projects linked directly to the bond. After that, our approach will change. We will commission a second party opinion based on the framework, and impact report at the end of each calendar year, reflecting the asset structure of the pool. That impact reporting will be relevant for all outstanding green bonds and commercial paper.