Integration of ESG criteria
Integration of ESG criteria in the investment approach for KfW’s liquidity portfolio: Best-in-Class-Approach
Since 2008, in addition to the credit assessment of the issuers, we have also been including their sustainability rating in our investment decisions for the liquidity portfolio.
The sustainability ratings for the issuers in the liquidity portfolio are provided by the sustainability rating agency , taking into consideration a variety of individual criteria, which are grouped into the so-called ESG criteria (Environment, Social und Governance).
When creating sustainability ratings, the sustainability rating agencies normally use a sector-specific weighting of the categories "environment", "social" and "governance". For non-governmental issuers in the financial sector, Sustainalytics applies a weighting of 30%-32%-38%, which we have adopted as well. The three ESG criteria for sovereign issuers are weighted as follows: environment 15%, social 35% and governance 50%. In the context of our investments in ABS transactions we also invest in ABS that relate to the automotive sector. The weightings of the ESG criteria for the automotive sector are as follows: environment 45%, social 30%, governance 25%. A sustainability rating, which is relative in comparison to the peers in the respective sector, is thus assigned to the issuers. The issuers of the liquidity portfolio are then ranked accordingly for each sector.
Best-in-Class-Approach since 2017:
At the beginning of the year 2017 we have developed our approach of ESG integration further by establishing a Best-in-Class approach. This 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 want to send out a powerful signal to the issuers, stating that an issuer‘s sustainability performance is a key criteria with regard to a potential bond investment for our liquidity portfolio.