New sustainable investment approach for KfW’s liquidity portfolio

By signing the UN-supported Principles for Responsible Investments (PRI), KfW committed itself to integrate sustainability in its investment activities. Consequently, we have been applying a sustainable investment approach for our liquidity portfolio since 2008. The liquidity portfolio forms an essential part of KfW’s liquidity management. It is a pure fixed-income portfolio with a volume of around € 25bn (as per year end 2016). It is invested in bonds issued by sovereigns, supranational organisations, financials, covered bonds and ABS with at least investment grade ratings.

In our previous investment approach, the main objective was to encourage participants in the capital market to integrate sustainability aspects in their activities. Their sustainability performance was assessed by an external sustainability rating agency. Based on this assessment, all our issuers were ranked and categorized into three sustainability categories. The investment limit for issuers with a relatively low score was reduced by 10% or 30%, respectively. By actively communicating on our sustainable investment approach, we have been able to raise awareness among capital market participants about sustainability.

It is positive to observe the growing interest of capital market participants for “responsible finance”: New market segments, like for instance the Green Bond market, are developing quickly and ESG criteria are increasingly taken into account by investors and bond issuers.

In this context, at the beginning of 2017, KfW critically reviewed the sustainable investment approach for its liquidity portfolio and decided to modify it in order to achieve a higher impact.

The new investment approach is based on a so-called best-in-class approach. The eligible investment universe is still defined based on diversification criteria, rating of the issuer as well as its sustainability assessment. The sustainability assessments are provided by an external sustainability rating agency – currently, Sustainalytics. Companies are assessed based on several so-called ESG criteria (Environment, Social and Governance) which are differently weighted depending on the sector. Based on their sustainability scores, issuers present in our liquidity portfolio are ranked among their peers within their respective sector. Our new best-in-class approach stipulates that for the liquidity portfolio we will only invest in bonds of issuers whose sustainability score is among the best 80% of the respective sector.

This approach has the objective that only bonds of issuers with a relatively good sustainability rating within the respective sector are part of our liquidity portfolio universe. Besides, we aim at sending issuers a strong signal by indicating that sustainability is a decisive factor in our investment decisions.