With the creation of its social programme last year, Berlin Hyp has added another dimension to its ESG strategy. Bodo Winkler-Viti describes the firm's ESG journey that led it to this point
Environmental Finance: Could you outline what you have achieved with your social bond programme?
Bodo Winkler-Viti: With creating our social programme in 2022 we have added the missing link to our ESG strategy. Until then, we only focused on the 'E' in ESG. We began our ESG journey with the issuance of a green covered bond – our Green Pfandbrief – in 2015. From there, we created a family of labelled lending products that focused on environmental aspects. Then, in 2021, we issued our inaugural sustainability-inked bond, which also focused on an environmental strategic performance target. Adding the 'S' to our ESG allows us to be a holistic sustainable financier of commercial real estate.
EF: What was your experience issuing social versus green?
BWV: The preparation took a lot longer for our social issuances. Perhaps our experience with green bonds also made it more difficult for us to create a Social Bond Framework because we had to take a holistic view on eligible assets in affordable housing. We wanted to create a social bond that takes environmental aspects into consideration by making sure that the social assets eligible under our framework were not harmful for the environment. We also wanted to make sure that we didn't spoil the good reputation we already had with our environmental products. It took approximately two years to get all of that in place.
In some ways, there have been several similarities between our first green bond and our first social bond. Both were covered bonds and rather long dated; seven years for the first green covered bond and 10 years for the first social covered bond. They both offered very attractive pricing in the market as well. The first green bond came in at a record mid-swap rate of -16, while the social bond mid-swap rate came in at +2 which, at the time, was very good rate as 2022 was a difficult year for the issuance of long-dated bonds.
Both were heavily oversubscribed – four times oversubscribed in both cases. The inaugural green bond had an order book of €2 billion ($2.2 billion) for a €500 million bond, while the order book of the first social bond had an order book of €3 billion, convincing us to do a €750 million transaction instead of a €500 million transaction to satisfy the interest that we saw on the product.
EF: Have you experienced a 'greenium' or any other benefits?
BWV: In 2015, discussions around the 'greenium' were relatively new and we didn't have enough evidence to claim one at that point. However, when we look at pricing indications ahead of issuing a conventional bond versus ESG bonds now we see one or two basis points of funding advantage for our covered green bonds. With our senior unsecured products – preferred and non-preferred – the funding advantage is as high as three to five basis points. With our social bond, assuming you still call it a greenium for a social bond, we have also experienced a pricing benefit.
With ESG bonds in general we feel we experience more execution security, making the whole execution process much easier for the issuer. That is a key benefit.
Berlin Hyp's green finance portfolio
EF: How are you preparing to report on your social bond? What are the challenges in impact reporting on social versus green?
BWV: Our aim is to provide our first allocation and impact reporting on our social bond programme by the end of March 2023. Allocation reporting on green versus social is similar.
However, when it comes to impact reporting there are big differences. Our eligibility category for our social bond is affordable housing in Germany and the Netherlands. We have spoken to many investors about what they expect us to report on. They want to hear how many beneficiaries per million invested there are, how big the region is that has been financed, and how many units of affordable housing there are. Data availability is a challenge – as it is with some environmental project categories as well – especially if you want to benchmark it alongside another metric e.g., average rents in a specific area. You have to get hold of a lot of different data sources to provide something that is meaningful and provides a baseline that is beyond doubt.
EF: How has your ESG journey evolved since you first issued a green bond? Has it fundamentally changed the business in any way?
BWV: It has changed the business in a profound way. In 2015, there were no blueprints for us as we were one of the first commercial banks to issue a green bond. Plus, it was the first ever green covered bond.
At the time, any asset that had a sustainability certification at a certain level we deemed an eligible asset. We learned very quickly that while investors appreciated our efforts to take our first steps with a green bond, our lending criteria were not precise enough.
Our board had such a good experience with the first green bond our discussions around green loan offerings led to the inception of our green price advantage for clients of Berlin Hyp. Since 2016, Berlin Hyp has offered a price invective of 10 basis points to finance green buildings. This pricing scheme was extended in 2022 when we launched a new environmental loan product – our taxonomy loan. It is more than a regular energy efficiency loan because it includes all relevant technical screening criteria and the applicable Do No Significant Harm (DNSH) criteria and minimum social safeguards of the EU taxonomy. Social loans are incentivised, too.
All these incentives highlight that the bank feels it is important to support ESG activities. And it made us more competitive in the market. As a consequence, we increased our green finance portfolio from €657 million in 2015 to almost €9 billion. Likewise, on the social side, we started with an affordable housing portfolio of just over €2 billion at the end of 2021 and we will soon report a positive development in 2022.
Another very important development has been the inclusion of specific ESG targets in our corporate strategy. It began in 2017 with a goal for 20% of loans for green buildings in our overall loan book by 2020. We achieved this early, and we then came up with a more comprehensive ESG vision. This included alignment with the Paris Agreement and a net-zero commitment for our lending portfolio by 2050. This formed the basis for further sustainability targets in our lending activities. For example, between 2020 and 2040 we plan to reduce the carbon intensity in the portfolio by 40%. We have also increased the targeted proportion of green loans in our overall loan book to be a third by 2025. We also set a target that, by the end of 2023, energy performance certificate (EPC) data must be recorded for all the buildings that we finance so that we can ensure accurate data for our loan monitoring system, rather than using a proxy. We are 65% of the way there as of January 2023. We have also set a target that 40% of Berlin Hyp's refinancing should come from ESG bonds by 2025, be it green, social or sustainability-linked.
The ESG elements in our corporate strategy have also had an effect on the remuneration system at Berlin Hyp. Bonus payments are linked to reaching ESG targets and everyone has a stake in reaching those targets – from the board to the department heads to staff all along the value chain.
The above shows how important ESG products and decarbonisation of the whole business have become for a bank like ours.
EF: What lessons have you learned since you issued your first green bond?
BWV: We have learned that the journey to increasingly sustainable product offerings will likely never end. You must constantly work to create new products and improve existing frameworks and make them more robust. We are in a constant dialogue with investors to learn what they expect from us and to hear how the market is evolving. As a result, we have revised our criteria for green bonds several times.
And we are undertaking more and more detailed reporting. Our social bonds framework isn't even one year old yet and we have already come up with a second iteration, which we will publish with our first impact report. We want to be a state-of-the-art issuer and reflect that in our framework by keeping it up to date.
EF: Given that we've been living in a high-interest rate and high-inflation environment, how has that impacted Berlin Hyp's work in affordable housing?
BWV: The German Housing Benefits Act was updated in 2022 to partially compensate people for rising energy prices. That means our social bond target population increased as the pool of housing benefit beneficiaries grew. We have updated our social bond framework to reflect that and now the affordable housing product can serve a much wider target population than it was originally designed to reach.
EF: What are your plans for future ESG issuances?
BWV: At the beginning of this year we issued our first dual-tranche ESG bond consisting of a three-year social bond and a 10-year green bond. This was very exciting. We expect we will come to the market again this year with either a green or a social bond.
We now have three ESG categories we can offer in the market and in the near future we may start to look at other ideas for ESG bonds. We will certainly have to come to the market with issuances regularly if we are to reach our 40% target of ESG refinancing by 2025. In the meantime, we will continue to focus on being successful in what we are doing already and continue to improve our offerings.
Bodo Winkler-Viti is head of funding & investor relations at Berlin Hyp. Email: email@example.com
For more information, see: www.berlinhyp.de/en/sustainability/mission.