The Reformed SSA Trader: Kreditanstalt Fossil Wiederaufbau?

5 minute read

Recent commitments to high-carbon companies and financing could be awkward for investors in Kreditanstalt für Wiederaufbau’s (KfW) green bonds, especially as they contain general corporate purpose language in their documentation.

On the back of a looming bailout of a major gas and coal company, gigatonne-significant liquefied fossil gas commitments and negative sentiment around the German government’s climate commitment at the recent G7 meeting, we suggest that green bond investors in KfW engage with the issuer, asking questions how KfW’s strategy is aligning with investors’ own climate and energy security views.

As a technical detail, KfW green bond proceeds are not specifically earmarked but have general corporate purpose use-of-proceeds (UOP) language with an offset mechanism: a physical dollar invested in a KfW green bond may be used to, for example, bail out a heavy carbon company, and then later has to be offset by an investment into something green bond framework-eligible.

We believe the recent developments put investors in KfW green bonds in a potentially awkward position, as the agency has become (or looks likely to become) a key financier and partner in/with high-carbon exposed companies.

Our advice would be to engage with the issuer to ensure alignment of strategies or consider other options if that is not possible.