16 February 2022
Berlin Hyp has put sustainable finance at the core of delivering its broader corporate sustainability strategy. Bodo Winkler-Viti explains
Environmental Finance: Increasingly, investors in sustainability-linked financial products want to see alignment between financing and the issuer's overall strategy. As an active issuer of sustainability-linked debt, how does Berlin Hyp's financing relate to strategy?
Bodo Winkler-Viti (BWV): Berlin Hyp is a mono-line institution. We have only one core business, providing finance for commercial real estate. The real estate sector as a whole is responsible for around one-third of the carbon emissions within the EU. All the participants in the real estate market, including financial institutions like us, play a crucial role in reaching the goal of the Paris Agreement through increasing the energy efficiency of buildings.
Here, the European real estate sector has some structural challenges: 75% of all buildings in Europe are energy inefficient and the annual renovation rate is only somewhere between 1% and 2%. That demonstrates why it is so important to provide green financial products and to help transform the sector, because on the one hand the sector is so crucial and on the other provides so many opportunities.
Meanwhile, Berlin Hyp refinances itself exclusively in the capital markets, initially with green use-of-proceeds bonds but, last year, we became the first bank to issue a sustainability- linked bond, related to the carbon intensity reduction rate of our overall loan portfolio.
EF: What are the bank's overall sustainability targets, and how did you decide on them?
BWV: In 2020, the bank published its sustainability agenda defining an overarching goal of our ESG Strategy, which is a commitment to the Paris Agreement and, linked to that, reaching climate neutrality within our lending portfolio no
EF: What role is green finance playing in delivering that strategy?
BWV: We aim for 40% of our capital market funding mix to consist of sustainable refinancing products by the end of 2025 – that is, green bonds, sustainability-linked bonds and, potentially in the future, also social bonds.
When we issued our first Green Pfandbrief in 2015, our Green Finance Portfolio was very small. However, it was so positively received by the market and was such a success that our board of directors decided we should issue more of them, which meant that we needed more underlying assets, and that we should set real goals to incentivise new green business. In 2016, we began offering price discounts for loans for energy- efficient green buildings and we were able to increase the size of that part of the portfolio by more than 1,000%.
Meanwhile, in 2019 we made the 'Green Pfanbriefe' brand available to the Association of German Pfandbrief Banks, to allow it to create a common definition and minimum standards for the entire market. It's been good to see a dynamically growing green covered bonds market develop internationally across a large number of jurisdictions.
Last year, the issuance of ESG covered bonds accounted for a double-digit percentage of the overall covered bond market for the first time. Inspiring others makes us proud and sharing our expertise with other market participants helps us reach our overarching ESG goals.
EF: How is your business shifting in response to sustainability pressures? What levers do you have to encourage your customers to improve their performance?
BWV: Building owners are increasingly accepting their responsibility to act on climate change and improve energy efficiency. Meanwhile, we have several levers to further encourage them. First, as a bank, we can use pricing. We incentivise green finance, showing our clients that it is economically attractive to invest in green buildings, or even EU Taxonomy-aligned buildings or construction activities, rather than non-green ones.
A second lever is a new product, an incentivised loan product where we offer clients relatively low-cost finance to fund renovations: our Transformationskredit (transformation loan). Energy-related refurbishments financed by it can be EU Taxonomy-aligned but they don't necessarily have to lead to a primary energy demand reduction of more than 30%.
The third lever is from the broader regulatory environment. In some countries, we are already seeing measures relating to real estate that are intended to be beneficial to governments' overall environmental goals. For instance, in the Netherlands, which is one of our biggest markets, it is no longer permitted to sell either a commercial or residential building, or part of a building, which has an EPC [Energy Performance Certificate] label below 'C'.
Meanwhile, we are being encouraged by regulators to provide financing to support increased energy efficiency, for example with new rules on green asset ratios. There is a very clear shift in the market.
EF: The bank has recently revised its Green Bond Framework to take into account the EU Taxonomy. Can you explain the thinking there?
BWV: Our view is that the EU Taxonomy is very helpful, in providing the market with common definitions and standardisation. Internally, we refer to it as a new common language for the entire European market. Historically, we at Berlin Hyp have been strongly focused on energy efficiency. However, the taxonomy goes far beyond that. It's not only about energy efficiency – it also includes 'do no significant harm' criteria, which provide a more holistic picture of the business. The complexity makes this new language not so easy to learn.
We have become one of the first banks to align our lending activities with the EU Taxonomy's requirements for buildings and construction activities. Our new Green Bond Framework now provides for two different green loan products. One focuses on energy efficiency and is in line with Berlin Hyp's existing approach. The other one is an innovation which is fully aligned with the EU Taxonomy's buildings climate change mitigation criteria.
For example, in line with the Taxonomy, new buildings must either have a Class A EPC or be in the top 15% of building stock in terms of primary energy demand, while renovations must lead to a decrease in energy use by at least 30%. They must also meet 'do no significant harm' criteria relating to water use, the circular economy, pollution prevention and biodiversity protection, and of course climate change adaptation.
We will offer these loans alongside each other during a transition period until the end of 2025 because, by then, the whole market should have learned to speak the new language of the EU Taxonomy. We want to start this journey early in order to give everybody time to prepare. And we want to make this journey together with our customers and our capital market investors.
Green finance portfolio
EF: What was behind the bank's decision to enter the sustainability-linked bond market?
BWV: The sustainability agenda that the bank issued in 2020 set out our commitment to climate neutrality in our lending business, but it does not require that each and every asset be eligible for green bond issuance. However, within this commitment, there is, in our view, a strong corporate-level KPI, namely our target of reducing portfolio-level carbon- intensity by 40% between 2020 and 2030, in line with the Federal Republic of Germany's target for the building sector. For us, issuing sustainability-linked bonds against this target was an obvious way to show not only the capital markets but also the wider public and other groups of stakeholders that this is a way to look at the bank holistically.
EF: How was your first SLB received by the market?
BWV: When we issued our first SLB, only corporates were active issuers in the market, so we gave investors the chance to invest in a different credit from a new sector. The bond itself was a big success economically. It was 10-year senior preferred and priced at mid-swap plus 35 basis points. That was the second-tightest pricing for that tenor and seniority at that point. It turned out very well for us.
Now comes the interesting part: we are 10 months on from issuance, which means we are preparing our first end-of-year reporting to show whether we're on the pathway to reaching our Sustainability Performance Target for the first year. At the moment, we're still collecting input data, but the data we collected for our interim calculation, in the middle of 2021, looked promising.
EF: Your Green Bond Framework talks about the importance of diversifying your investor base. Can you quantify the extent to which green bonds, Green Pfandbriefe and SLBs have helped you do so?
BWV: As discussed, we 100% refinance in the capital markets. Berlin Hyp is 150 years old and it is a household name in the German market. But when we look to raise money abroad, we are a relatively small bank, with just €35 billion of assets. Larger international investors have to undertake deep analysis before they can allocate investment limits to a new name, and they have told us in the past that, while they consider us an attractive credit, they could not justify that research given our limited fundraising in the conventional capital markets.
However, once we became a regular issuer in the green bond market, that changed. Given how many green mandates these investors have to fill, they became very keen to get hold of our green bonds, and therefore were motivated to undertake that analysis.That not only strengthened our investor base in relation to green bonds, but also when we issue conventional bonds, because once those investment limits are in place, portfolio managers can also use them for their conventional mandates. Therefore, within the last seven years, we added almost 200 investors to our investor base.
Carbon intensity reduction
EF: What are the next steps for Berlin Hyp's green financing programme?
BWV: For a relatively small bank, we have already achieved a great deal in terms of green finance. In terms of our target of raising 40% of funding from green financing by 2025, we are already at 28%. We have plans underway for new and interesting products but, at Berlin Hyp, we prefer to do the work first and then come to the market, rather than the other way round – watch this space!
Bodo Winkler-Viti is Head of Funding & Investor Relations, Treasury, at Berlin Hyp.
For more information on Berlin Hyp's sustainability strategy, see www.berlinhyp.de/en/sustainability/mission