22 February 2019
NRW.BANK has pioneered the green bond market in Germany as both an issuer and investor. As it markets its seventh green bond, its investor relations specialists talk to Environmental Finance about the case for best practice in the green bond market
Environmental Finance: NRW.BANK has just placed its seventh green bond: why has the bank become an enthusiastic green bond issuer?
Frank Richter, Head of Investor Relations: We’re a German development bank, and Germans are very keen to fight climate change. NRW.BANK has been very engaged in financing environmentally friendly projects, such as renewable energy, etc. It was very natural for us, when we recognised that the green bond market was evolving, to get involved. We issued the first green bond in Germany, in 2013, and we have issued in total seven since then.
By issuing green bonds, we have been able to broaden our investor base; we have been able to attract investors who have not been involved in our regular funding programme. There is also a demonstration effect: we are committed to the green bond market, and we would love to encourage other issuers to follow us. That’s another important benefit.
EF: You’re marketing a new bond for 2019 – how has this issue evolved from previous green bonds from NRW.BANK?
FR: The green bond market is still emerging, and we try to be state-of-the-art with the bonds we issue. We issued the first bond in Germany with a second-party opinion and, since 2015, we have produced impact reports, quantifying the environmental benefits generated by each euro of lending.
David Marques Pereira, ESG Specialist, Investor Relations: Included in the reporting of our latest green bond, which was issued in the first quarter of 2019, will be a review of the bond by an auditor as part of NRW.BANK’s non-financial disclosure. Here, the auditor will look into the underlying green bond asset structure and will check that there is no green default during the lifetime of the bond. This review is recommended but not required by the Green Bond Principles, but since we have seen a growing interest in green audits by investors we are happy to include it in our reporting as an extra point of credibility for our investors.
In terms of the underlying asset pool, our previous green bonds were heavily based on wind energy in North Rhine- Westphalia; our latest one will for the first time (re)finance the transmission of green energy, helping to move electricity generated by wind farms to population and industrial centres in the south of the country. While the Asian Development Bank has issued a green bond to finance electric power grids in its region, we think this is the first European agency green bond to include transmission assets.
EF: What specific type of projects will the bond finance?
DMP: The underlying assets of the 2019 green bond are divided into two groups: climate mitigation and climate adaptation. For the former, we are talking about projects that aim to reduce carbon emissions in order to contribute to the 2° target of the Paris Agreement. Besides the already mentioned transmission of wind energy, the bond also refinances wind parks in North Rhine-Westphalia, of which the majority are citizen-owned.
Another asset class included is clean transportation. While our previous green bonds funded e-mobility projects, we will see for the first time the inclusion of hydrogen-fuelled public transportation.
Climate adaptation, meanwhile, refers to measures that try to deal with the already existing impacts of climate change. Here we are talking about a project that many of our investors love: the restoration of the river Emscher, which is the biggest fluvial project in the EU. The project consists of creating flooding areas for heavy rain events, as well as helping to bring back biodiversity into the Emscher and its tributaries.
EF: How are projects selected for NRW.BANK’s green bonds?
FR: We carry out a monthly review of our loan book to identify green assets. Our policy is to originate loans first, refinance them with money market operations and then, when we have reached a critical mass of €500 million, we seek approval from our asset and liability committee to enter the capital markets with a green bond to refinance the money market instruments.
However, the underlying assets must be fresh loans – that is, no older than 12 months before we begin the secondparty opinion process. Investors like to see that their money is going into new projects. This is a particular consideration given that green technology is a dynamic field. Were we to refinance five- or six-year-old projects, we might be financing projects that aren’t state-of-the-art, and thus we’d be reducing the environmental impact the green bond is delivering.
EF: What concerns are you hearing from investors who are considering buying green bonds in general, and NRW.BANK’s green bonds in particular?
DMP: In general, the biggest topic for discussion is around the term ‘additionality’. Many investors are concerned that if the green bond wasn’t placed, the project would still exist – there is no additionality, no creation of green projects.
But this is not true. We have to look at it from a macro level. By issuing green bonds, NRW.BANK and other issuers support the market from the issuing side. We are helping to develop the market, to get it more established, and are generating more and more momentum. This encourages other issuers to tap the market and more investors to enter the market on the demand side. This is exactly what we are seeing: creating awareness and visibility for green projects.
In addition, we have seen recently a pricing advantage to green bonds compared with conventional bonds. We pass through this pricing advantage on the green lending side. If you are able to offer cheaper loans, you trigger greater volumes.
We also see a great deal of attention paid to the ESG performance of the issuer; investors don’t only want the green bond itself to be green, they want the issuer itself also to be environmentally friendly. We’ve felt this effect at NRW.BANK – we’re greening our bank from the inside. As a result, NRW.BANK enjoys high ESG ratings.
We’ve been publishing a sustainability report since 2004. Last year we published sustainability guidelines that, for the first time, set rules on the lending side of the bank. We’ve also set up a green bond investment portfolio, initially targeting €200 million in assets by 2020 – but we’ve already hit that, and upper management has decided to raise the target to €300 million.
EF: What about challenges as an issuer? Are there issues in the market you would like to see addressed?
FR: The regulatory environment for the green bond market is moving very fast. The European Commission recognises that the market is an important vehicle for mobilising capital to fight climate change. One of the big challenges is the taxonomy that the Commission is developing. It’s on a tight timetable, and we have an eye on how these developments will affect us.
For the time being, we are comfortable with how the process is developing. It is important that the taxonomy differentiates between the various themes – green, social and sustainability – and maybe the UN Sustainable Development Goals will offer some guidelines in that respect.
EF: What are the next steps for NRW.BANKs’ green bond programme?
FR: As discussed, we’re a frequent issuer. Because we are entering the market quite early in 2019, we expect to also issue a second green bond this year. We’ve already started collecting assets into the green bond pool. To give some insights into those assets, we are seeing considerable lending activity around public e-mobility, as well lending to extremely energy-efficient hospitals.
Generally speaking, we are originating greater volumes of green loans than in the past, putting us closer to the position of issuing two green bonds in one year for the first time; the time between each green bond issued by NRW.BANK is getting shorter and shorter, because we are gathering more and more green assets.
This comes back to the additionality question. We are offering heavily interest-rate subsidised loans to green projects and, as mentioned, there is growing interest in reducing CO2 emissions from private transportation through improved public transport, so there are municipalities heavily investing in their transport systems.
EF: As you note above, NRW.BANK is also an investor in green bonds. What are your current investment criteria? Where do you see value/opportunity as an investor in green bonds?
FR: The idea with our green bond portfolio is to support the market from the buy side, as well from the point of view of an issuer. We have strict investment criteria. Bonds should be in line with the Green Bond Principles. We need a second-party opinion of course. We carry out aggregate accounting of CO2 savings for the green portfolio, therefore we have a preference for mitigation projects, and we need to see transparency around the carbon emissions reduced by each bond. We also prefer dark green, maybe medium green projects, according to Cicero’s Shades of Green methodology. We only buy euro-denominated bonds, but we buy from issuers anywhere around the world.
EF: Equally, where do you see challenges as an investor?
FR: The main challenge is that it isn’t easy as an investor to build a diversified portfolio. The market is getting broader and deeper, but it remains very hard to build a properly diversified book.
For example, there are still only four European sovereigns that have issued green bonds and, when it comes to corporates, the market remains dominated by power suppliers; we’d love to see more sectors participating, as well as a wider spread of credit ratings and maturities.