With €77 billion in assets, DKB is one of Germany's top 20 banks, and a leading lender to local authorities and social infrastructure. Armin Hermann, head of treasury, explains the reasoning behind its Social Bond Programme and the bond that won Environmental Finance's 2019 Social Bond of the Year Award.
Environmental Finance: Deutsche Kreditbank (DKB) was the first German bank to issue both green and social bonds. Why did you decide to progress from green to social bond issuance?
Armin Hermann, DKB: Our business model is focused on clients with strong sustainability credentials, so it was a logical step to establish a sustainable funding strategy within our capital markets unit. We kicked off in 2016 with a green bond transaction, followed by another in 2017; but we also have a huge portfolio of socially related loans.
Interestingly, the urge to proceed with a social bond came from the client unit. They saw the success of the green bond, so they wanted to extend that with a social bond transaction.
EF: Prior to issuing the social bond, you drew up a social bond framework. Why did you decide to take that step?
AH: The Social Bond Framework describes the process of creating DKB's Social Bond Programme and for selecting the loans that can be refinanced using social bonds. It is based on the ICMA Social Bond Principles and, among other things, maps how they are aligned to the Sustainable Development Goals.
At first glance, we have very sustainability-driven assets: most of our lending is to social housing, local authorities, healthcare, education etc. But there are many different ways to approach sustainability. To design such a framework is helpful when it comes to communication with external partners, such as sustainability rating agencies, and it's also useful as a basis for developing a respective funding strategy.
EF: Measuring and reporting social impact is more complicated than disclosing green impact – how have you approached it?
AH: The big advantage of green bond projects is that you have one comparable number – CO2 avoidance. You don't have that number in the social bond universe. It's a different approach when you're calculating social impact.
We try to take an asset-driven approach. When investing in healthcare, for example, we show the capacity of hospitals and the number of beds. We also track and report on the regions within Germany in which our loans are made, showing how lending is directed towards more marginalised parts of the country.
This is an evolving area, which heavily depends on the availability of data. We're active in ICMA's Social Bond Working Group and the discussions that are going on there. I think over the next two or three years we will see different, enhanced reporting around social impact.
EF: What questions or concerns did investors raise when you were marketing the social bonds?
AH: We took our experts with us on our roadshow, the team leader of our municipality and social infrastructure unit, for example, people who do the business for us on the asset side every day. We had a very wide range of discussions – it wasn't the usual conversations about credit ratios or the funding strategy. We had questions about the categories of projects we chose, about hospitals in Germany, smart cities and about the grade of 'green-ness' within our social bond framework.
We were also discussing the development of the sustainability bond market, talking about impact reporting, the effects of the EU Action Plan and the High-Level Expert Group. This is another big difference with normal bond market activities.
EF: What advantages would you point to from going through the process of issuing a social bond?
AH: It acts as a catalyst for different ways of communicating your business model, both externally and internally. Obviously, it's a great opportunity for us to demonstrate our business model to the capital markets, but it also helps communicating with clients. A hospital manager knows that we lend to hospitals, but it might also be important for them to know their bank also lends to social housing and to support inclusion.
Beyond that, the social bond had benefits in terms of internal communications. We started a campaign for retail customers showing the sustainability we have on the business client side – they are two sides of the business that don't often talk to each other.
EF: What are your plans in terms of social bond issuance? What potential do you have for further issues?
AH: If you look at our business model and our loan portfolio, there's a lot more to come.
We have a 20 billion social housing portfolio, and our lending to local authority social infrastructure is almost 13 billion. We have a large deposit base, so we won't need to fund this lending entirely through social bonds, but there is huge potential.
Our target is to regularly issue sustainability bonds, whether social or green. We expect to issue a benchmark bond every year to maintain our profile with capital market investors.
We're also planning to develop other products driven by green and social bonds, to develop a wide range of sustainability products; we'd like to widen the investor base beyond institutional clients and into the retail market.
