German bank KfW's transparency and impact-measurement programme when it comes to green bonds have set it apart in the euro, US dollar and Australian dollar markets. Given this success, it extended its remit to the quieter sterling market in July, with impressive results.

Green bonds are one of the fastest growing areas of the capital markets. Issuance tripled to $36bn in 2014, and is expected to hit $100bn this year. Designed to raise money for environmentally sound projects, transparency and impact measurement have become key issues for serious investors, amid concerns that some borrowers are simply jumping on the green bandwagon.

The German state-owned development bank KfW allays any such fears. The group is the first to use external validation of the environmental and social impact of its green bonds, and states clearly that every €1m invested results in an annual carbon dioxide reduction of 800 tonnes, creates nine jobs per year and reduces Germany’s energy bill by €68,000. “This is the first time that capital markets investors can see a measured and certified impact of their investment in green bonds,” says Petra Wehlert, head of new issues at KfW.

The bank’s first green transaction, for €1.5bn, was issued in July 2014, but the group has since issued in dollars and Australian dollars, and in July launched a debut sterling bond for £500m (€702.9m). “Sterling is an important market for us, it is our fourth funding currency after euros, dollars and Australian dollars. Also, professional fund managers running green portfolios like to access bonds in a range of different currencies,” says Ms Wehlert.

Assessing investor interest 

Ms Wehlert and her team began talking to HSBC about a sterling green bond several months ago, assessing whether there was sufficient interest among domestic and international investors. “We’ve been preparing the ground with HSBC for a while, and in June we held a conference in London where we brought along members of our renewable energy team and our capital markets team so they could talk to investors and other interested parties,” says Ms Wehlert. 

London may be a global financial capital but, when it comes to green bonds, the city lags behind other jurisdictions, so KfW was unsure what kind of reception it might have in the UK. “The UK investor base is growing slowly. It is a bit behind other markets, but our hope is that if issuers lead the way with liquid products, the investor base will follow and build portfolio strategies around our issuance. This is what happens in other markets, so we are hoping that it will happen here,” says Otto Weyhausen-Brinkmann, the vice-president of new issues at KfW.

Early conversations were encouraging, and KfW also saw considerable interest from global investors. However, the bank believes that investors are becoming more discerning in their allocation of capital to the green market. “Investors need to know the strategy and aims behind the issuance of a green bond. Then you have to find eligible assets. And increasingly, investors demand detailed information on how the proceeds of the bond are being used.” says Ms Wehlert. 

Forward-looking institution

This is where KfW comes into its own. In keeping with its credentials as a forward-looking institution, the bank has a dedicated renewable energy programme, lending money to thousands of borrowers for use in wind, solar, biomass and hydrocarbon projects.

“Our programme is very granular. Last year, we made about 10,000 individual loans for institutions and private individuals in Germany and across Europe,” says Mr Weyhausen-Brinkmann. 

The renewable energy programme, KfW’s impact measurement reporting and its reputation as a liquid issuer all stood the bank in good stead as it watched the sterling market through June and July, waiting for an appropriate moment to issue. While waiting, the group talked to a range of potential bookrunners who could work on the sterling issue when the time was right. “We talked to active parties in the market, looking for lead managers with access to investors, and offered attractive pricing,” says Ms Wehlert.

Sterling launch

Ultimately, KfW mandated Barclays and RBS as joint bookrunners with HSBC, and on July 22 the group announced that it would be launching a sterling green bond the following day.

“On July 23, the books opened at 9am, and by 10.30am we had already received orders for £300m – which was our original target size. By 11.30am, the book had swollen to more than £500m, so we increased the issue size to £500m. The dynamics were much better than we expected,” says Ms Wehlert.

The bond has a five-year maturity, a re-offer price of 99.785% and a coupon of 1.625% – providing a yield of 1.672%. “We priced the bond with reference to the secondary market. We are one of the few issuers providing really liquid transactions in the green bond sector, so we felt it was a fair price and there was a good response to it," says Ms Wehlert.

Although more than 70% of the bonds were placed in the UK, only 20% of the £500m bond went to asset managers. The rest went to banks and central banks. “Clearly there was interest from UK asset managers but there is room for improvement,” says Ms Wehlert.

Looking ahead, KfW’s green bond issuance is intrinsically linked to the needs of its renewable energy programme, which is expected to amount to about €3bn this year. “The green bond market is limited to our renewable energy programme,” says Ms Wehlert. “I would expect it to be about €3bn over the year, and we have to split it up into different products. So far this year we have issued A$600m [€396m] and £500m. Next we will probably return to our core euro and dollar markets, and then we will have to see.”

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